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- 1. Some Econ Concepts
- 2. Definition of economics <ul><li>the study of how individuals and societies use limited resources to satisfy unlimited wants. </li></ul>
- 3. Fundamental economic problem <ul><li>scarcity. </li></ul><ul><li>Economics is the study of how individuals and economies deal with the fundamental problem of scarcity. </li></ul><ul><li>As a result of scarcity, individuals and societies must make choices among competing alternatives. </li></ul>
- 4. Opportunity Cost <ul><li>Economics is all about trade offs </li></ul><ul><li>Because of scarcity our choices require that in order to get something we must give something up </li></ul><ul><li>What you give up to get something else is your opportunity cost. </li></ul>
- 5. Rational self-interest <ul><li>When an individual makes a choice they go through a cost-benefit evaluation </li></ul><ul><li>This is the idea that an individual compares the opportunity costs to the benefits and chooses the option which benefits them most ( rationality) </li></ul>
- 6. Positive and normative analysis <ul><li>positive economics </li></ul><ul><ul><li>attempt to describe how the economy functions </li></ul></ul><ul><ul><li>relies on testable hypotheses </li></ul></ul><ul><li>normative economics </li></ul><ul><ul><li>relies on value judgements to evaluate or recommend alternative policies. </li></ul></ul>
- 7. Economic methodology <ul><li>scientific method </li></ul><ul><ul><li>observe a phenomenon, </li></ul></ul><ul><ul><li>make simplifying assumptions and formulate a hypothesis, </li></ul></ul><ul><ul><li>generate predictions, and </li></ul></ul><ul><ul><li>test the hypothesis. </li></ul></ul>
- 8. Efficiency <ul><li>Economists strive to achieve 100% efficiency known as Parato Efficiency </li></ul><ul><li>In Parato Efficiency society is 100 $ efficient and there is no way to improve on persons well being without reducing another ones. </li></ul>
- 9. Microeconomics
- 10. Microeconomics vs. macroeconomics <ul><li>microeconomics - the study of individual economic decisions and choices and how they effect individual markets </li></ul><ul><li>Macroeconomics - brings all the individual markets together and observes the behavior of the entire market </li></ul>
- 11. Algebra and graphical analysis <ul><li>direct relationship </li></ul>
- 12. Direct relationship
- 13. Inverse relationship
- 14. Linear relationships <ul><li>A linear relationship possesses a constant slope, defined as: </li></ul>
- 15. Demand and Supply
- 16. Markets <ul><li>In a market economy, the price of a good is determined by the interaction of demand and supply </li></ul><ul><li>A market for a good is comprised of all the buyers and sellers of that particular good </li></ul>
- 17. Demand <ul><li>A relationship between price and quantity demanded in a given time period </li></ul><ul><li>The quantity demanded is the amount of good buyers are willing to purchase at a set price </li></ul>
- 18. Demand schedule
- 19. Demand curve
- 20. Law of demand <ul><li>An inverse relationship exists between the price of a good and the quantity demanded in a given time period, </li></ul><ul><li>Reasons: </li></ul><ul><ul><li>Related goods </li></ul></ul><ul><ul><li>Income </li></ul></ul><ul><ul><li>Tastes </li></ul></ul><ul><ul><li>Expectations </li></ul></ul><ul><ul><li>Number of buyers </li></ul></ul>
- 21. Income <ul><li>If someone's income is lowered they will be less willing to spend money on goods and vice versa </li></ul><ul><li>Normal goods </li></ul><ul><li>Inferior goods </li></ul>
- 22. Income and demand: normal goods <ul><li>A good is a normal good if an increase in income results in an increase in the demand for the good. </li></ul>
- 23. Income and demand: inferior goods <ul><li>A good is an inferior good if an increase in income results in a reduction in the demand for the good. </li></ul>
- 24. Price of Related Goods <ul><li>Substitutes – a good which causes a decline in the demand of another good if its price declines </li></ul><ul><li>Complement – a good which causes an increase in the demand of another good if its price declines </li></ul>
- 25. Change in the price of a substitute good <ul><li>Price of coffee rises: </li></ul>
- 26. Change in the price of a complementary good <ul><li>Price of DVDs rises: </li></ul>
- 27. Tastes <ul><li>The idea that if an buyers perception of benefits from buying a good changes so will the buyers willingness to purchase the good </li></ul>
- 28. Expectations <ul><li>A higher expected future price will increase current demand. </li></ul><ul><li>A lower expected future price will decrease current demand. </li></ul><ul><li>A higher expected future income will increase the demand for all normal goods. </li></ul><ul><li>A lower expected future income will reduce the demand for all normal goods. </li></ul>
- 29. Number of Buyers <ul><li>The market demand curve consists of all the individual demand curves put together </li></ul><ul><li>So if there are more consumers in the market the market demand will increase </li></ul>
- 30. Change in quantity demanded vs. change in demand Change in quantity demanded Change in demand
- 31. Market demand curve <ul><li>Market demand is the horizontal summation of individual consumer demand curves </li></ul>
- 32. Supply <ul><li>the relationship that exists between the price of a good and the quantity supplied in a given time period </li></ul><ul><li>Quantity supplied is the amount that a seller is able to produce for a set price </li></ul>
- 33. Supply schedule
- 34. Demand curve
- 35. Law of supply <ul><li>A direct relationship exists between the price of a good and the quantity supplied in a given time period </li></ul>
- 36. Reason for law of supply <ul><li>The law of supply is the result of the law of increasing cost . </li></ul><ul><ul><li>As the quantity of a good produced rises, the marginal opportunity cost rises. </li></ul></ul><ul><ul><li>Sellers will only produce and sell an additional unit of a good if the price rises above the marginal opportunity cost of producing the additional unit. </li></ul></ul>
- 37. Change in supply vs. change in quantity supplied Change in supply Change in quantity supplied
- 38. Individual firm and market supply curves <ul><li>The market supply curve is the horizontal summation of the supply curves of individual firms. (This is equivalent to the relationship between individual and market demand curves.) </li></ul>
- 39. Determinants of supply <ul><li>Price received by supplier </li></ul><ul><li>Input price </li></ul><ul><li>technology </li></ul><ul><li>the expectations of producers </li></ul><ul><li>the number of producers </li></ul><ul><li>Relative Goods </li></ul>
- 40. Price Received by Supplier <ul><li>This is the law of supply </li></ul><ul><li>The more money the supplier receives for the good he’s selling the more willing he/she will be to sell it </li></ul>
- 41. Price of resources (Input Price) <ul><li>Inputs are the goods the supplier has to purchase in order to produce the supply </li></ul><ul><li>As the price of a resource rises, profitability declines, leading to a reduction in the quantity supplied at any price. </li></ul>
- 42. Technological improvements <ul><li>Technological improvements (and any changes that raise the productivity of labor) lower production costs and increase profitability. </li></ul>
- 43. Expectations and supply <ul><li>An increase in the expected future price of a good or service results in a reduction in current supply. </li></ul><ul><li>The supplier will hold off on selling his goods if he can sell them for a greater profit later. </li></ul>
- 44. Increase in the Number of Sellers
- 45. Prices of other goods <ul><li>More than one firm produces and sells the same good or a relative good </li></ul><ul><li>Because of this firms compete with each other to sell more goods and in order to do so they have to lower their prices below that of their competition </li></ul><ul><li>Without this effect all markets would be monopolistic and we would all be screwed </li></ul>
- 46. Equilibrium…the fun never stops
- 47. Market equilibrium
- 48. Price above equilibrium <ul><li>If the price exceeds the equilibrium price, a surplus occurs: </li></ul>
- 49. Price below equilibrium <ul><li>If the price is below the equilibrium a shortage occurs: </li></ul>
- 50. Consumer and Producer Surplus <ul><li>Consumer surplus – the utility (or level of satisfaction) a buyer receives by being able to purchase a product for a price less then the maximum they were willing to pay </li></ul><ul><li>Producer surplus – the amount that producers benefit by selling at a market price which is greater than the minimum they would be willing to sell for </li></ul>
- 51. Consumer/Producer Surplus Visualized
- 52. Consumer surplus <ul><li>Individuals buy an item only if they receive a net gain from the purchase ( i.e., total benefit exceeds opportunity cost.) </li></ul><ul><li>This net gain is called “consumer surplus.” </li></ul>
- 53. Example <ul><li>Suppose that an individual buys 10 units of a good when the price is $5 </li></ul>
- 54. Benefits and cost of first unit <ul><li>Benefit = blue + green rectangles (=$9) </li></ul><ul><li>Cost = green rectangle (=$5) </li></ul><ul><li>Consumer surplus = blue rectangle (=$4) </li></ul>
- 55. Total benefit to consumer
- 56. Total cost to consumer
- 57. Consumer surplus
- 58. Demand rises
- 59. Demand falls
- 60. Supply rises
- 61. Supply falls
- 62. Price ceiling <ul><li>Price ceiling - legally mandated maximum price </li></ul><ul><li>Purpose: keep price below the market equilibrium price </li></ul>
- 63. Price ceiling (continued)
- 64. Price floor <ul><li>price floor - legally mandated minimum price </li></ul><ul><li>designed to maintain a price above the equilibrium level </li></ul>
- 65. Price floor (continued)
- 66. Elasticity
- 67. Elasticity <ul><li>A measure of the responsiveness of one variable (quantity demanded or supplied) to a change in another variable (price) </li></ul><ul><li>Most commonly used elasticity: price elasticity of demand, defined as: </li></ul>Price elasticity of demand =
- 68. Price elasticity of demand <ul><li>Demand is said to be: </li></ul><ul><ul><li>elastic when Ed > 1, </li></ul></ul><ul><ul><li>unit elastic when Ed = 1, and </li></ul></ul><ul><ul><li>inelastic when Ed < 1. </li></ul></ul>
- 69. Perfectly elastic demand
- 70. Perfectly inelastic demand
- 71. Elasticity & slope <ul><li>a price increase from $1 to $2 represents a 100% increase in price, </li></ul><ul><li>a price increase from $2 to $3 represents a 50% increase in price, </li></ul><ul><li>a price increase from $3 to $4 represents a 33% increase in price, and </li></ul><ul><li>a price increase from $10 to $11 represents a 10% increase in price. </li></ul><ul><li>Notice that, even though the price increases by $1 in each case, the percentage change in price becomes smaller when the starting value is larger. </li></ul>
- 72. Elasticity along a linear demand curve
- 73. Elasticity along a linear demand curve
- 74. Determinants of price elasticity <ul><li>Price elasticity is relatively high when: </li></ul><ul><li>close substitutes are available </li></ul><ul><li>the good or service is a large share of the consumer's budget (necessities) </li></ul><ul><li>a longer time period is considered (time horizon) </li></ul>
- 75. Price elasticity of supply
- 76. Perfectly inelastic supply
- 77. Perfectly elastic supply
- 78. Determinants of supply elasticity <ul><li>Ease of Entry and Exit </li></ul><ul><li>Scarce Resources </li></ul><ul><li>Time Horizon </li></ul>
- 79. Elasticity and total revenue <ul><li>Total revenue = price x quantity </li></ul><ul><li>What happens to total revenue if the price rises? </li></ul>Price elasticity of demand =
- 80. Elasticity and TR (cont.) <ul><li>A reduction in price will lead to: </li></ul><ul><ul><li>an increase in TR when demand is elastic. </li></ul></ul><ul><ul><li>a decrease in TR when demand is inelastic. </li></ul></ul><ul><ul><li>an unchanged level of total revenue when demand is unit elastic. </li></ul></ul>Price elasticity of demand =
- 81. Elasticity and TR (cont.) <ul><li>In a similar manner, an increase in price will lead to: </li></ul><ul><ul><li>a decrease in TR when demand is elastic. </li></ul></ul><ul><ul><li>an increase in TR when demand is inelastic. </li></ul></ul><ul><ul><li>an unchanged level of total revenue when demand is unit elastic. </li></ul></ul>Price elasticity of demand =
- 82. … ...Let’s Stick to the Non-confusing Example
- 83. Everyone's Favorite…Taxes!!!!
- 84. Tax incidence <ul><li>distribution of the burden of a tax depends on the elasticities of demand and supply. </li></ul><ul><li>When supply is more elastic than demand, consumers bear a larger share of the tax burden. </li></ul><ul><li>Producers bear a larger share of the burden of a tax when demand is more elastic than supply. </li></ul>
- 85. Costs and production
- 86. Production possibilities curve <ul><li>Assumptions: </li></ul><ul><ul><li>A fixed quantity and quality of available resources </li></ul></ul><ul><ul><li>A fixed level of technology </li></ul></ul>
- 87. Specialization and trade <ul><li>Adam Smith – economic growth is caused by increased specialization and division of labor. </li></ul>
- 88. Specialization and trade <ul><li>As noted by Adam Smith, specialization and trade are inextricably linked. </li></ul><ul><li>Adam Smith used this argument to support free trade among nations. </li></ul>
- 89. Absolute and comparative advantage <ul><li>Absolute advantage – an individual (or country) is more productive than other individuals (or countries). </li></ul><ul><li>Comparative advantage – an individual (or country) may produce a good at a lower opportunity cost than can other individuals (or countries). </li></ul>
- 90. Example: U.S. and Japan <ul><li>Suppose the U.S. and Japan produce only two goods: CD players and wheat. </li></ul>
- 91. Absolute advantage? <ul><li>Who has an absolute advantage in producing each good? </li></ul>
- 92. Comparative advantage? <ul><li>Who has a comparative advantage in producing each good? </li></ul>
- 93. Gains from trade <ul><li>Opportunity cost of CD player in U.S. = 2 units of wheat </li></ul><ul><li>Opportunity cost of CD player in Japan = 4/3 unit of wheat </li></ul><ul><li>If Japan produces and trades each CD player to the U.S. for more than 4/3 of a unit of wheat but less than 2 units of wheat, both the U.S. and Japan gain from trade and can consume more goods than they could produce by themselves. </li></ul>
- 94. Gains from trade (continued) <ul><li>Note that the U.S. has a comparative advantage in producing wheat. </li></ul><ul><li>Countries always expand their consumption possibilities by engaging in trade (since they acquire goods at a lower opportunity cost than if they produced them themselves). </li></ul>
- 95. Free trade? <ul><li>If each country specializes in the production of those goods in which it possesses a comparative advantage and trades with other countries, global output and consumption is increased. </li></ul>
- 96. Robinson and Crusoe? Really USAD……Really?
- 97. Profit Motive and Behavior of Firms <ul><li>Profit = total revenue – total cost </li></ul><ul><li>(costs will likely only include only monetary expenses) </li></ul><ul><li>Total cost is comprised of expenses plus all monetary opportunity costs </li></ul>
- 98. Different Costs <ul><li>The costs that do not depend on production and can’t change in the short run are called fixed costs </li></ul><ul><li>However costs that can be varied in the short run are called variable costs </li></ul>
- 99. Marginal Cost <ul><li>Notice in figure 23 that when you go down 1 row there are 50 more loaves of bread produced; however, there is an additional cost for producing more goods </li></ul><ul><li>This increase in cost when producing an additional unit of output is called the marginal cost </li></ul>
- 100. How to find marginal cost <ul><li>(increase in total cost) </li></ul><ul><li>MC = ------------------------------------- </li></ul><ul><li>(increase in quantity produced) </li></ul>
- 101. Law of Diminishing Returns <ul><li>Next notice that the maximum profit is made when marginal cost is equal to marginal revenue </li></ul><ul><li>Think of the marginal cost as the opportunity cost for making an extra unit of good and the marginal revenue as the profit for making that extra unit </li></ul>
- 102. Law of Diminishing Returns <ul><li>as the level of a variable input rises in a production process in which other inputs are fixed, output ultimately increases by progressively smaller increments </li></ul><ul><li>So this means that at some point it’s no longer productive to make that extra unit of good </li></ul>
- 103. Imperfect Markets
- 104. Monopolies <ul><li>A monopoly is an extreme case in which there is a market with only one producer </li></ul><ul><li>Ownership Monopolies </li></ul><ul><li>Government-Created Monopolies </li></ul><ul><li>Natural Monopolies </li></ul>
- 105. Why Monopolies Are Bad? <ul><li>Because the supplier can charge whatever amount he/she wants for the product and there is no competition to force the supplier to lower the prices on goods </li></ul>
- 106. Price discrimination <ul><li>different customers are charged different prices for the same product, due to differences in price elasticity of demand </li></ul><ul><li>higher prices for those customers who have the most inelastic demand </li></ul><ul><li>lower prices for those customers who have a more elastic demand. </li></ul>
- 107. Price discrimination (cont.) <ul><li>customers who are willing to pay the highest prices are charged a high price, and </li></ul><ul><li>customers who are more sensitive to price differentials are charged a low price. </li></ul>
- 108. Next up…Oligopolies <ul><li>An oligopoly is a market with very few suppliers </li></ul><ul><li>Not quite as bad as a monopoly but still </li></ul><ul><li>Example: OPEC (Organization of Petroleum Exporting Countries) </li></ul>
- 109. Creative Destruction <ul><li>A term coined by the Australian economist Joseph Schumpeter </li></ul><ul><li>“ creative destruction” states that as new industries surged, older industries grow more slowly, stagnate, and shrink </li></ul>
- 110. Market failures <ul><li>Not all markets are perfect and sometimes a market failure will occur when externalities or breakdowns in the system of private property cause markets to deviate from the socially efficient outcome </li></ul>
- 111. Oh the Government <ul><li>Pork Barrel Politics – elected officials introduce projects that steer money into their of pockets </li></ul><ul><li>Logrolling – vote trading within legislation </li></ul>

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