ECONOMY Lecture (1st Slide for 3rd Term)

8/7/2019 ECONOMY Lecture (1st Slide for 3rd Term)

1/26

Click to edit Master subtitle style

1/21/11

Microeconomics:Lecture 1

Henry Prudente


2/26

1/21/11

Introduction

Macroeconomics: examines eitherthe economy as a whole or its basic

subdivisions or aggregates, such asthe government, household orbusiness sectors.An aggregate is a collection ofspecific economic units treated as ifthey were one unit. Ex. Consumers


3/26

1/21/11

Introduction

Microeconomics: looks at specific economicunits. At this level of analysis, the economistobserves the details of an economic unit or a

very small segment of the economy.In microeconomics, we talk of an individualindustry, firm or household. We measure theprice of a specific product, the number of

workers of a specific firm, the revenue orexpenditures of a particular firm,government entity or household


4/26

1/21/11

Th e Economizing Problem

Economics is the social science concernedwith the problem of using scarce resources toattain the maximum fulfillment of societys

unlimited wants.There are two main parts to this problem:

Economic wants are virtually unlimitedand insatiable

G oods or services that providepleasure or satisfaction or utilityNecessities and luxuries

Economic resources - the means of


5/26

1/21/11

R esource Categories

Land - includes all natural resources that areused in the production processLabor includes all the physical and mentaltalents of individuals available and useableon producing goods and servicesCapital includes all manufactured aids usedin producing consumer goods and servicesEntrepreneurial Ability takes the initiativein combining the resources of land, labor andcapital to produce a good or a service;innovator, risk taker, makes strategicbusiness decisions


6/26

1/21/11

R esource Categories

R esource payments the income receivedfrom supplying raw materials and capitalequipment is called rental income and

interest income. The income accruing tothose who supply labor is called wages .Entrepreneurial income is called profits .Relative scarcity: the four factors of

production have one thing in common, theyare scarce or limited in supply .


7/26

1/21/11

Employment and Efficiency

Economics is the social science that examinesefficiency the best use of scarce resources.Full employment: the use of all availableresources; not all resources can be consumedFull production: all employed resources mustbe used so that they provide the maximumpossible satisfaction of our economic wants.Productive efficiency: the production of anyparticular mix of goods and services in theleast costly way.Allocative efficiency: the least-costproduction of that particular mix of goods


8/26

1/21/11

Production Possibilities T able /

curveBecause resources are scarce, a full-employment full-production economy cannothave an unlimited output of goods and

services, which means people must choosewhich to choose and which to forgo.Assumptions to the model:

Full employment and productive efficiency

Fixed resourcesFixed technologyTwo goods: consumer goods and capital goods


9/26

1/21/11

Production Possibilities T able /

curveProduction Possibilities TableLooks at the combinations of two products thatcan be produced with a specific set of resources

and with full employment and productiveefficiency.

The curve is a frontier because it shows thelimits of attainable outputs.

Points lying on the curve are attainable andefficiently achieved.Points inside the curve are attainable but showsinefficiency

Points outside the curve are unattainable.


10/26

1/21/11

Law of increasing opportunity

costO pportunity cost: the amount of otherproducts that must be forgone or sacrificedto obtain 1 unit of a specific good.

The more of a product is being produced, thegreater is its opportunity cost.

The rationale here is that economicresources are not completely adaptable toalternative uses .


11/26

1/21/11

Allocative Efficiency

Economic decisions center on comparisons ofmarginal benefits and marginal costsAllocative efficiency requires that theeconomy produce at the most valued oroptimal point on the production possibilitiescurve.Any economic activity should be expanded aslong as marginal benefit exceeds marginalcost and reduced if marginal cost exceedsmarginal benefit.O ptimal amount: M B = MC


12/26

1/21/11

Th e ppc wit h Unemployment

and economic Growth

If we scrap the first three assumptions, therewill be some changes:

If unemployment is present, then there will be

productive inefficiency, thus more points withinthe curve will be present.If there is an increase in resource supplies, theability to increase the production of goods andservices will grow, thus pushing out the curve.If there are advances in technology, there will benew and better goods and improved services andbetter ways of producing them.

Economic G rowth: the ability to produce alarger total output as a result of increases in


13/26

1/21/11

Applications

U nemployment and Productive InefficiencyRecessions, economic crises

Tradeoffs and O pportunity CostsLogging and mining or parks and wilderness?Allocate resources to the justice system oreducation?

Shifts in the Production Possibilities CurveMore women are now working because of higherwages, thus there are less home-bound women.Improved technology


14/26

1/21/11

Economic systems

Economic system : a particular set ofinstitutional arrangements and a coordinatingmechanism made to respond to the

economizing problem.Market System

Characterized by private ownership of resourcesand the use of markets and prices to coordinate

and direct economic activity.Each participant acts in his or her own self-interest; each individual or business seeks tomaximize its satisfaction or profit through itsdecisions regarding consumption and production.Prices are used to communicate value and


15/26

1/21/11

Economic systems

Command SystemAlso known as socialism or capitalism.G overnment owns most property resources and

economic decision making occurs through acentral economic plan.A central planning board makes all the decisionsconcerning the use of resources composition anddistribution of output, organization ofproduction, ownership of businesses etc.


16/26

1/21/11

CIR CULAR flow model

The Circular flow model suggests a complex,interrelated web of decision making andeconomic activity involving households and

businessesDecision Makers: Household and BusinessesMarkets:

Resource market- the place where resources orthe services of resources suppliers are boughtand sold.Product- the place where goods and servicesproduced by businesses are bought and sold.

Real flow-counterclockwise; economic


17/26


18/26

1/21/11

Demand

Rationale for the law of demand:People buy less when the price is high becauseprice is an obstacle to purchasing a product.

Consumption is subject to diminishing marginalutility.Income effect: a lower price increases thepurchasing power of a buyers money income,enabling the buyer to purchase more of theproduct.Substitution effect: at a lower price, buyers havethe incentive to substitute what is now a lessexpensive product for similar products that are

now relatively more expensive.


19/26

1/21/11

Ch ange in demand

Tastes: A favorable change in consumertastes for a product means more will bedemanded at each price. New products may

affect demand Ex. CDs, healthconsciousness, digital cameras, DVDs.Number of Buyers: increase in the number ofbuyers in a market will increase demand. Ex.Reduced trade barriers, improvedcommunications for investments.Income: Demand changes when incomechanges; normal good- demand variesdirectly with money income; Inferior good-


20/26

1/21/11

Ch ange in demand

Prices of related goods: a change in the priceof a related good may either increase ordecrease the demand for a product

Substitutes: a good that can be used in place ofanother good. Price of one and demand for theother move in the same direction.Complements: a good that can be used togetherwith another good. Price of one and demand forthe other move in opposite directions.

Expectations: Changes in consumerexpectations may shift demand. Ex.Expecting price increases or decreases,ex ectin future su l chan es chan es in


21/26

1/21/11

Supply

A schedule or curve showing the amounts ofa product that producers are willing and ableto make available for sale at each of a series

of possible prices.Law of supply: as price rises, the quantitysupplied rises, as price falls, the quantitysupplied falls.

To buyers, price is an obstacle, to suppliers,price represents revenues.


22/26

1/21/11

Ch anges in supply

Resource prices: Higher resource prices raiseproduction costs and assuming a particularproduct price, it may reduce profits and vice

versa.Technology: Improvements in technologyenable firms to produce units of output withfewer resources.

Taxes and subsidies: Businesses treat taxes ascosts, thus when production costs go up,supply goes down.


23/26

1/21/11

Ch anges in supply

Prices of other goods: substitution inproductionPrice expectations: Changes in expectations

about the future price of a product mayaffect the producers current willingness tosupply that product.Number of Sellers: the larger the number ofsuppliers, the greater the market supply andvice versa.


24/26

1/21/11

Supply and demand: marketequilibrium

Bringing together supply and demand allowsus to see how the buying decisions ofhouseholds and the selling decisions of

businesses interact to determine the price ofa product and the quantity actually boughtand soldSurplus: excess supply

Shortage: excess demandEquilibrium price: the price at which there isno shortage or surplus; the market-clearingpriceRationing Function of Prices: the ability of


25/26

1/21/11

Ch anges in supply, demandand equilibriumChange inSupply

Change inDemand

Effect onEquilibriumPrice

Effect onEquilibriumQuantity

Increase Decrease Decrease Indeterminate

Decrease Increase Increase Indeterminate

Increase Increase Indeterminate

Increase

Decrease Decrease Indeterminate

Decrease


26/26

1/21/11

applications

Price Ceiling: sets the maximum legal price aseller may charge for a product or service.

May result in a rationing problem, leading to a

shortageBlack markets may crop upRent controls

Price Floor: a minimum price fixed by the

government.May lead to a surplus because sellers are willingto supply more than buyers actually demand atthe price floor.

Will lead to higher prices; force the government

ECONOMY Lecture (1st Slide for 3rd Term)

Documents

Transcript of ECONOMY Lecture (1st Slide for 3rd Term)