Week1 Slo Ch1-2

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PowerPointto accompany

Chapters1&2

EconomicIssues & Market

Demand andSupply Analysis

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Sloman: Principles Of Economics 3e 2010 Pearson Australia

Learning Objectives

1 The economic problem What iseconomics all about?

2 Dividing up the subject What ismeant by macroeconomics andmicroeconomics?

3 Modelling economic relationshipsHow can diagrams be used to illustrateeconomic issues?

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The Economic Problem What is economics all about?

production and consumption: satisfyinghuman needs with available resources

scarcity, the central economic problem:potentially unlimited human needs andlimited resources

demand and supply: help solve scarcity

by reconciling resources and needs

Back to Learning Objectives

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Dividing Up The Subject

Macroeconomic issues managing demand and supply aggregates

encouraging national economic growth

minimising inflation

managing the balance of trade

managing cyclical economic fluctuations

minimising unemployment

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Dividing Up The Subject Microeconomic issues

the choices to be made:

what to produce?

how to produce? for whom to produce?

the concept of opportunity cost

making rational decisions

marginal benefits vs marginal costs

the social implications of choice


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Production Possibility Curve:Modelling Economic Relationships

Diagrams

represent models in economics

illustrate basic economic relationships

simplify and explain economic issues

Production possibility curve (PPC)

a fundamental economic model

illustrates societys production choices

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Production Possibility Curve

Derivation of a ProductionPossibility Curve

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Unitsoffood

(millions) x

w

Units of clothing (millions)

A Production Possibility Curve [Figure 1.1]

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ModellingEconomic Relationships

An economist uses diagrams to illustrateeconomic issues

These diagrams are called models

The production possibility curve (PPC)

what the curve demonstrates

microeconomics and the PPC:

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Modelling Economic Relationships

Using diagrams to illustrate economicissues


what the curve shows


choice creates opportunity cost

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Using diagrams to illustrate economicissues




choice creates opportunity cost

opportunity cost increases

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Opportunity Cost and the PPC

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U

nitsoffood(m

illions)

x

y

Z

Units of clothing (millions)

Increasing Opportunity Costs [Figure 1.2]

1

1

2

1

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Using diagrams to illustrate economic issues



microeconomics and the PPC

macroeconomics and the PPC

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microeconomics and the PPC

macroeconomics and the PPC:

production within the curve

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Resource Use and the PPC

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V

X

Y

O

F

ood

Clothing

Making a Fuller Use of Resources[Figure 1.3]

Production inside theproduction possibility

curve

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macroeconomics and the PPC:

production within the curve

shifts in the curve

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Shifts in the PPC

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O

F

ood

Clothing

Growth in Potential& Actual Output

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O

F

ood

Clothing

Growth in Potential Output[Figure 1.4]

Now

5 years time

x

x1

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O

F

ood

x

Clothing

Growth in Actual Output

x1

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Circular Flow of Goods and Income:Modelling Economic Relationships

The circular flow of goods and incomes

firms and households

what is a market?

goods markets

real flows: goods and services

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Goods & services

Circular Flow of Goods and Incomes - I

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Goods & services

$Consumer

expenditure

Circular Flow of Goods and Incomes - II

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The circular flow of goods and incomes

firms and households

what is a market?

goods markets

real flows: goods and services

money flows: consumer expenditure

factor markets

Circular Flow of Goods and Incomes

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Goods & services

$Consumer

expenditure

The services of the factors ofproduction

Circular Flow of Goods and Incomes - III

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Goods and services

$Consumer

expenditure

The services of the factors of production

Wages, rent,dividends, and so on

$

[Figure 1.5]

Circular Flow of Goods and Incomes - IV

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The circular flow of goods and incomes(cont.)

macroeconomic issues

the size of total flows

microeconomic issues

individual markets

choices within goods and factor markets

Circular Flow of Goods and Incomes


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Learning Objectives

2.1 Economic systems How do countries differ in theway their economies are organised?

2.2 Demand How much will people buy of any item?

2.3 The free market economy How well does it

serves us? 2.4 The determination of price How much of any

item will actually be bought and sold, and at what price?

2.5 The free market economy How well does it

serves us?

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Types of economy

classification by degree of governmentcontrol

command economies

free-market economies

mixed economies

Economicsystems

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Economic systems

The free-market economy

free decision making by individuals

firms seek to maximise profits

consumers seek value for money frompurchases

workers seek to maximise wages

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The price mechanism shortages and surpluses

shortage price rises

surplus price falls

equilibrium price

where demand equals supply

equilibrium

a position of balance

Economic systems

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The effect of changes in demand and supply a change in demand

a change in supply

Interdependence of markets

effect of a rise in demand

in the goods market in the factor market

Economic systems

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Goods Market

Dg shortage(Dg> Sg)

PgSg

Dg

until Dg = Sg

Factor Market

Sg

Sf

Df until Df = SfDf shortage

(Df> Sf)Pf

The price mechanism:The effect of a rise in demand

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Interdependence of markets

effect of a rise in demand

in the goods market

in the factor market

the interdependence of different goods

markets

interdependence and the public interest

Competitive markets

perfectly competitive markets

everyone is aprice taker

Economic systems

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Demand

The relationship between demand and price

law of demand

income effect

substitution effect

The demand curve

assumptions

the axes

illustrates how much would be demanded ateach price

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(1) (2) (3) (4)

Price($ per kg)

Tracey'sdemand

(kg)

Darren'sdemand

(kg)

Total marketdemand

(tonnes: 000s)

A 0.40 28 16 700

B 0.80 15 11 500

C 1.20 5 9 350

D 1.60 1 7 200

E 2.00 0 6 100

The demand curve:The demand for potatoes (monthly)

Market demand for potatoes (Monthl )

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0

0.4

0.8

1.2

1.6

2

0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

Price($ per kg)

0.40

Market demand(tonnes 000s)

700A

Point

Demand

Market demand for potatoes (Monthly)

APrice($per

kg)


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0

0.4

0.8

1.2

1.6

2

0 100 200 300 400 500 600 700 800


Price($ per kg)

0.40


700A

Point

Demand


APrice($per

kg)

B 0.80 500

B

Market demand for potatoes [Fi 2 1]

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0

0.4

0.8

1.2

1.6

2

0 100 200 300 400 500 600 700 800


Price($ per kg)

0.40


700A

Point

Demand

Market demand for potatoes [Fig. 2.1]

APrice($per

kg)

B 0.80 500

B

C 1.20 350

C

D

D 1.60 200

E

E 2.00 100

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Other determinants of demand

tastes

number and price of substitute goods

number and price of complementary goods

income

distribution of income

expectations of future price changes

Movements along and shifts in the demandcurve

Demand

An increase/Shift in demand [Fig 2 2]

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D1

P

O Q0 Q1 Quantity

D0

Price

An increase/Shift in demand [Fig 2.2]

An decrease in demand

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D0

P

O Q1 Q0 Quantity

D1

An decrease in demand

Price


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Supply

Supply and price

as price rises, firms supply more

it is worth incurring the extra unit costs

they switch from less profitable goods

in the long run, new firms will be encouraged toenter the market

The supply curve

assumptions

the axes

illustrates how much would be supplied at eachprice

The Supply Curve:

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Price ofpotatoes($ per kg)

Farmer X'ssupply(tonnes)

Total Marketsupply

(tonnes: 000s)

a 0.40 50 100

b 0.80 70 200

c 1.20 100 350

d 1.60 120 530

e 2.00 130 700

The Supply Curve:The Demand for Potatoes (Monthly)

Market supply for potatoes (Monthly)

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0

0.4

0.8

1.2

1.6

2

0 100 200 300 400 500 600 700 800

Supply

a

P

0.40

Q

100a


Price($perkg)



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0

0.4

0.8

1.2

1.6

2

0 100 200 300 400 500 600 700 800

Supply

a

P

0.40

Q

100a


Price($perkg)


b

b 0.80 200

c

c 1.20 350

d

d 1.60 530

e

e 2.00 700

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Other costs of production determinants of supply

profitability of alternative products

profitability of goods in joint supply

nature, random shocks and other unpredictableevents

aims of producers

expectations of future price changes the number of suppliers

Movements along and shifts in the supply curve

Shift in Supply

Shifts in the supply curve [Fig 2 4]

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P

QO

S0

Shifts in the supply curve [Fig 2.4]S1S2

Increase in

supply

Decrease insupply


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The determination of price

Equilibrium price and output

response to shortages and surpluses

market clearing

significance of equilibrium

demand and supply curves

Equilibrium price and output:

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Price of Potatoes ($per kilo)

Total Market Demand(Tonnes: 000s)

Total Market Supply(Tonnes: 000s)

0.40 700 (A) 100 (a)

0.80 500 (B) 200 (b)

1.20 350 (C) 350 (c)

1.60 200 (D) 530 (d)

2.00 100 (E) 700 (e)

Equilibrium price and output:Market demand and supply of potatoes

(monthly) [Table 2.3]

Determination of market equilibrium [Fig 2 5]

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0 100 200 300 400 500 600 700 800

E

D

C

A

a

c

d

e

Supply

Demand

Bb

2.00

1.60

1.20

0.80

0.40


Determination of market equilibrium [Fig 2.5]

Price

($perkg)

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Significance of Equilibrium price and output

response to shortages and surpluses

market clearing

demand and supply curves

effect of price being above equilibrium

surplus

price falls effect of price being below equilibrium

shortage price rises

equilibrium: where D = S

The determination of price


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0 100 200 300 400 500 600 700 800

E

C

B

Aa

b

c

e

Supply

Demand

D dSURPLUS

(330 000)

2.00

1.60

1.20

0.80

0.40


q [ g ]

Price($pe

rkg)


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0 100 200 300 400 500 600 700 800

E

D

C

Aa

c

d

e

Supply

Demand

Bb

2.00

1.60

1.20

0.80

0.40


q

Price($perkg)


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0 100 200 300 400 500 600 700 800

E

D

C

B

A

a

b

c

d

e

Supply

Demand

SHORTAGE

(300 000)

2.00

1.60

1.20

0.80

0.40


q [ g ]

Price($perkg)


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Sloman: Principles Of Economics 3e 2010 Pearson Australia0 100 200 300 400 500 600 700 800

D d

Qe

E

B

Aa

b

e

Supply

Demand

2.00

1.60

1.20

0.80

0.40


q [ g ]

Price($pe

rkg)

Effect of Shift in demand

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Effect of Shift in demandcurve

Movement to a new equilibrium

movement along S curve and new D curve

rise in demand (rightward shift) P rises

fall in demand (leftward shift) P falls

Effect of a shift in the demand curve [Fig 2.6]

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P

QO

Pe1

Qe1

S

D1

D2

g

[ g ]

Effect of a shift in the demand curve [Fig 2.6]

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P

QO

Pe1

Qe1

S

g h

D1

D2

Pe2

Qe2

i

[ g ]

Effects of shifts in the supply curve

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movement along D curve and new S curve

rise in supply (rightward shift) P falls

fall in supply (leftward shift) P rises

Effects of shifts in the supply curvef price

Effect of a shift in the supply curve [Fig 2.7]

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P

QO

Pe1

Qe1

D

S1

S2

g

pp y [ g ]

Effect of a shift in the supply curve [Fig 2.7]

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P

QO

Pe1

Qe3Qe1

D

S1

S2

j g

k

pp y [ g ]

Pe2



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The free market economy

Advantages of a free-market economy

transmits information between buyers and sellers

no need for costly bureaucracy

incentives to be efficient

competitive markets respond to consumer wishes

Problems with a free-market economy

competition may be limited

inequality

environment and social goals may be ignored


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The free market economy

The mixed economy

types of intervention

use of taxes, subsidies and benefits legislation and regulation

direct provision by the government

Week1 Slo Ch1-2

Documents

Transcript of Week1 Slo Ch1-2