Economics 111.3 Winter 14 January 15 th, 2014 Lecture 4 Ch. 2
and Ch. 3
Slide 2
Allocative efficiency implies producing goods & services
most wanted by society Decide on allocative efficiency by comparing
Marginal (extra) Cost (MC) to Marginal Benefit (MB) Marginal
Benefit is the extra benefit associated with consuming one more
unit Marginal Cost is the extra opportunity cost of that extra
unit
Slide 3
The line through the points shows the marginal benefit from a
pizza. Using Resources Efficiently Copyright 2013 Pearson Canada
Inc., Toronto, Ontario
Slide 4
Slide 5
Slide 6
Slide 7
A Growing Economy : Shifts in the Production Possibility Curve
1.Capital accumulation, including all new investment in land,
physical equipment, and human resources through improvements in
health, education, and job skills 2.Growth in population
3.Increases in the natural resource base. 4.Technological
progress
Slide 8
Biased Technological Change Shifts in the Production
Possibility Curve 0 B A DVDs Burgers C
Slide 9
If more inputs are available for the production of X and Y
equally, the PPC shifts out along both X and Y axes. If fewer
inputs are available for the production of X and Y equally, the PPC
shifts in along both X and Y axes. If more inputs are available for
good X only, the PPC shifts out on the X axis only. If more inputs
are available for good Y only, the PPC shifts out on the Y axis
only. Examples of Shifts in the Production Possibility Curve
Slide 10
Ch. 3 Supply and Demand
Slide 11
Characteristics of Competitive Market: Many buyers and sellers
Buyers and sellers are price takers Goods being offered for sale
are all the same quality
Slide 12
Demand, Demand Schedule, Demand Curve: a schedule or a curve
that shows the various amounts consumers are willing and able to
purchase at each of a series of possible prices, during some
specified period of time. Graphically, it refers to the entire
demand curve.
Slide 13
Quantity Demanded: refers to a specific amount that will be
demanded per unit of time at a specific price, other things
constant. Graphically, it refers to a specific point on the demand
curve.
Slide 14
Law Of Demand: The claim that, all else equal, the quantity
demanded for a good falls when the price of the good rises and
vice-versa Rationale: diminishing marginal utility income effect
substitution effect
Slide 15
*Real income consumers income measured in terms of the goods it
can buy Income Effect: the change in consumption resulting from an
increase in the consumers real income*. In other words, when the
price of a good or service rises relative to income, people cannot
afford all the things they previously bought, so the quantity
demanded of the good or service decreases Substitution Effect: the
change in consumption resulting from a change in the price of one
good relative to the price of the other good. In other words, when
the relative price (opportunity cost) of a good or service rises,
people seek substitutes for it, so the quantity demanded of the
good or service in question decreases.
Slide 16
Shifts in Demand Versus Movements Along a Demand Curve When
price of the product changes, there is a movement along the demand
curve When any other determinant of demand changes, there is a
shift in the demand curve
Slide 17
Change in Quantity Demanded Versus a Change in Demand Quantity
Price D1D1 D2D2 Decrease in quantity demanded Increase in quantity
demanded D0D0 Increase in demand demand Decrease in demand
demand
Slide 18
Slide 19
Increase means shift to the RIGHT Decrease means shift to the
LEFT
Slide 20
Study question From the following list of variables, circle
those that change as we move along the market demand curve for
pencils, and cross out those that are assumed to be fixed:
A.Quantity of pencils; B.Number of potential consumers; C.Price of
pencils; D.Price of pens; E.Consumer Income.
Slide 21
Study question From the following list of variables, circle
those that change as we move along the market demand curve for
pencils, and cross out those that are assumed to be fixed:
A.Quantity of pencils; B.Number of potential consumers; C.Price of
pencils; D.Price of pens; E.Consumer Income.
Slide 22
Demand Shifters are changes in: tastes (preferences) number of
buyers money (nominal) income prices of related goods expectations
Change in Demand
Slide 23
3. Changes in money incomes: when income increases demand for
NORMAL goods increases demand for INFERIOR goods decreases Normal
good a good, for which, all else equal, an increase in income leads
to an increase in quantity demanded Inferior good a good, for
which, all else equal, an increase in income leads to a decrease in
quantity demanded Change in Demand, contd