Reviewing some key concepts from year 1 micro Dr Helena Lenihan Department of Economics Email: helena.lenihan@ul.ie Room: KB3-35

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Relevant chapters????

The Economic Problem Core of the Economic Problem: use of scarce resources to satisfy unlimited wants Scarcity and Choice Economic Activity: Production, Consumption and Exchange Factors of production

Core of the Economic Problem: use of scarce resources to satisfy unlimited wants

Scarcity and Choice

Economic Activity: Production, Consumption and Exchange

Factors of production

Economic way of thinking A logical framework for organising your thoughts and understanding economics

A logical framework for organising your thoughts and understanding economics

Basic Economic Questions What? How? For Whom? Goods or Services are produced

Concept of opportunity cost: the best alternative sacrificed for a chosen alternative. Marginal analysis: an examination of the effects of additions to and subtractions from a current situation.

Concept of opportunity cost: the best alternative sacrificed for a chosen alternative.

Marginal analysis: an examination of the effects of additions to and subtractions from a current situation.

Economic Science: Methodology Positive and normative statements Laws of Economics general tendencies of behaviour

Positive and normative statements

Laws of Economics

general tendencies of behaviour

Production Possibility Frontier Production transforms inputs into outputs [factors of production into goods and services] Goods - Tangible Services - Intangible Capital (Producer) Goods Consumer Goods Durable Non-Durable

Production transforms inputs into outputs

[factors of production into goods and services]

Goods - Tangible

Services - Intangible

Capital (Producer) Goods

Consumer Goods

Durable

Non-Durable

Limitations on Output Output is limited by: Quantity (and quality) of Resources State of Technology PPF marks the boundary between attainable and unattainable combinations of goods

Output is limited by:

Quantity (and quality) of Resources

State of Technology

PPF marks the boundary between attainable and unattainable combinations of goods

PCs(000s) TV Sets (000s) Y . X . PPF B PPF O A D C

Summary Efficient output combinations on PPF (=productive efficiency) Efficiency implies it is not possible to produce more of one good without less of the other Combinations outside not possible ( i.e. X) Combinations inside are inefficient (i.e.Y)

Efficient output combinations on PPF (=productive efficiency)

Efficiency implies it is not possible to produce more of one good without less of the other

Combinations outside not possible ( i.e. X)

Combinations inside are inefficient (i.e.Y)

Efficiency of Resource Use Resource use is efficient when we produce goods and services we value most highly…choice is made at the margin by comparing the additional costs with the additional benefits When resources are used efficiently we cannot produce more of one good without giving up units of a good we value more highly

Resource use is efficient when we produce goods and services we value most highly…choice is made at the margin by comparing the additional costs with the additional benefits

When resources are used efficiently we cannot produce more of one good without giving up units of a good we value more highly

Economic Growth Increased productive capabilities Outward shift of PPF caused by either [1] Capital accumulation, or [2] Technological progress,or [3] Both

Increased productive capabilities

Outward shift of PPF

caused by either

[1] Capital accumulation, or

[2] Technological progress,or

[3] Both

Military Goods Civilian Goods PPF1 PPF 2 Figure 8: Economic Growth and the PPFs O

Law of Demand 1 Demand (in Economics) refers to: willingness and ability of buyers to purchase: (a) Different quantities of a good (b) at different prices (c ) during a specific time period Quantity demanded of a good may differ from actual amount bought

Demand (in Economics) refers to:

willingness and ability of buyers to purchase:

(a) Different quantities of a good

(b) at different prices

(c ) during a specific time period

Quantity demanded of a good may differ from actual amount bought

Law of Demand 2 Consumers buy more at a Lower Price Law of Demand: As the price of a good rises, the quantity demanded of the good falls and vice versa, ceteris paribus

Consumers buy more at a Lower Price

Law of Demand: As the price of a good rises, the quantity demanded of the good falls and vice versa, ceteris paribus

Factors influencing change in Demand 1. Income Normal goods Inferior goods 2. Price of related goods substitutes complements 3. Preferences/tastes/fashions 4. Population structure/ number of buyers 5. Future price expectations

1. Income

Normal goods

Inferior goods

2. Price of related goods

substitutes

complements

3. Preferences/tastes/fashions

4. Population structure/ number of buyers

5. Future price expectations

Change in Demand .V. Change in Quantity Demanded Change in quantity demanded of a good arises when the price of a good changes while all other variables affecting demand are unchanged = movement along the demand curve Change in Demand means a shift in the demand curve arising from a change in those factors which influence demand = shift of demand curve

Change in quantity demanded of a good arises when the price of a good changes while all other variables affecting demand are unchanged = movement along the demand curve

Change in Demand means a shift in the demand curve arising from a change in those factors which influence demand = shift of demand curve

Supply and Law of Supply Supply refers to: willingness and ability of firms to produce for sale (a) quantities of a good (b) at different prices (c) during a specific time period Law of Supply: Positive P-Q Relationship

Supply refers to:

willingness and ability of firms to produce for sale

(a) quantities of a good

(b) at different prices

(c) during a specific time period

Law of Supply: Positive P-Q Relationship

Factors Influencing Supply Prices of Factors of Production Prices of Other Goods supplied Substitutes in Production Complements in production Expected Future Prices Number of Suppliers Technology Change Taxes, Subsidies, Regulations

Prices of Factors of Production

Prices of Other Goods supplied

Substitutes in Production

Complements in production

Expected Future Prices

Number of Suppliers

Technology Change

Taxes, Subsidies, Regulations

Change in Quantity Supplied vs. Change in Supply Movement Along the Supply Curve (Change in Qs at a different Price on the Curve) Change in Supply (Change in Qs at all Prices = shift of entire Supply Curve)

Movement Along the Supply Curve (Change in Qs at a different Price on the Curve)

Change in Supply (Change in Qs at all Prices = shift of entire Supply Curve)

Figure 6: Market Equilibrium S S D D 3 6 0 Q 1 2 4 5 P 5 3 4 6 Surplus Shortage Equilibrium E

Market Equilibrium No surplus or shortage exists - the market ‘clears’ Opposing forces of buyers and sellers are balanced At the equilibrium price, Qs = Qd Positions above or below the equilibrium price lead to behavioural changes by producers and consumers which lead to a return to E (=stable equilibrium)

No surplus or shortage exists - the market ‘clears’

Opposing forces of buyers and sellers are balanced

At the equilibrium price, Qs = Qd

Positions above or below the equilibrium price lead to behavioural changes by producers and consumers which lead to a return to E (=stable equilibrium)