EC4004 Economics for Business Lecture 2

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Here's a guest lecture by Dr Helena Lenihan on aspects of microeconomics you might have seen from last year.

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EC4004 Economics for Business Lecture 2

  1. 1. Reviewing some key concepts from year 1 micro Dr Helena Lenihan Department of Economics Email: helena.lenihan@ul.ie Room: KB3-35
  2. 2. Text:???? <ul><li>Relevant chapters???? </li></ul>
  3. 3. The Economic Problem <ul><li>Core of the Economic Problem: use of scarce resources to satisfy unlimited wants </li></ul><ul><li>Scarcity and Choice </li></ul><ul><li>Economic Activity: Production, Consumption and Exchange </li></ul><ul><li>Factors of production </li></ul>
  4. 4. Economic way of thinking <ul><li>A logical framework for organising your thoughts and understanding economics </li></ul>
  5. 5. Basic Economic Questions What? How? For Whom? Goods or Services are produced
  6. 6. <ul><li>Concept of opportunity cost: the best alternative sacrificed for a chosen alternative. </li></ul><ul><li>Marginal analysis: an examination of the effects of additions to and subtractions from a current situation. </li></ul>
  7. 7. Economic Science: Methodology <ul><li>Positive and normative statements </li></ul><ul><li>Laws of Economics </li></ul><ul><ul><li>general tendencies of behaviour </li></ul></ul>
  8. 8. Production Possibility Frontier <ul><li>Production transforms inputs into outputs </li></ul><ul><ul><li>[factors of production into goods and services] </li></ul></ul><ul><li>Goods - Tangible </li></ul><ul><li>Services - Intangible </li></ul><ul><li>Capital (Producer) Goods </li></ul><ul><li>Consumer Goods </li></ul><ul><ul><li>Durable </li></ul></ul><ul><ul><li>Non-Durable </li></ul></ul>
  9. 9. Limitations on Output <ul><li>Output is limited by: </li></ul><ul><ul><li>Quantity (and quality) of Resources </li></ul></ul><ul><ul><li>State of Technology </li></ul></ul><ul><li>PPF marks the boundary between attainable and unattainable combinations of goods </li></ul>
  10. 10. PCs(000s) TV Sets (000s) Y . X . PPF B PPF O A D C
  11. 11. Summary <ul><li>Efficient output combinations on PPF (=productive efficiency) </li></ul><ul><li>Efficiency implies it is not possible to produce more of one good without less of the other </li></ul><ul><li>Combinations outside not possible ( i.e. X) </li></ul><ul><li>Combinations inside are inefficient (i.e.Y) </li></ul>
  12. 12. Efficiency of Resource Use <ul><li>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 </li></ul><ul><li>When resources are used efficiently we cannot produce more of one good without giving up units of a good we value more highly </li></ul>
  13. 13. Economic Growth <ul><li>Increased productive capabilities </li></ul><ul><li>Outward shift of PPF </li></ul><ul><ul><li>caused by either </li></ul></ul><ul><li>[1] Capital accumulation, or </li></ul><ul><li>[2] Technological progress,or </li></ul><ul><li>[3] Both </li></ul>
  14. 14. Military Goods Civilian Goods PPF1 PPF 2 Figure 8: Economic Growth and the PPFs O
  15. 15. Law of Demand 1 <ul><li>Demand (in Economics) refers to: </li></ul><ul><ul><li>willingness and ability of buyers to purchase: </li></ul></ul><ul><ul><li>(a) Different quantities of a good </li></ul></ul><ul><ul><li>(b) at different prices </li></ul></ul><ul><ul><li>(c ) during a specific time period </li></ul></ul><ul><li>Quantity demanded of a good may differ from actual amount bought </li></ul>
  16. 16. Law of Demand 2 <ul><li>Consumers buy more at a Lower Price </li></ul><ul><li>Law of Demand: As the price of a good rises, the quantity demanded of the good falls and vice versa, ceteris paribus </li></ul>
  17. 17. Factors influencing change in Demand <ul><li>1. Income </li></ul><ul><ul><li>Normal goods </li></ul></ul><ul><ul><li>Inferior goods </li></ul></ul><ul><li>2. Price of related goods </li></ul><ul><ul><li>substitutes </li></ul></ul><ul><ul><li>complements </li></ul></ul><ul><li>3. Preferences/tastes/fashions </li></ul><ul><li>4. Population structure/ number of buyers </li></ul><ul><li>5. Future price expectations </li></ul>
  18. 18. Change in Demand .V. Change in Quantity Demanded <ul><li>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 </li></ul><ul><li>Change in Demand means a shift in the demand curve arising from a change in those factors which influence demand = shift of demand curve </li></ul>
  19. 19. Supply and Law of Supply <ul><li>Supply refers to: </li></ul><ul><ul><li>willingness and ability of firms to produce for sale </li></ul></ul><ul><ul><li>(a) quantities of a good </li></ul></ul><ul><ul><li>(b) at different prices </li></ul></ul><ul><ul><li>(c) during a specific time period </li></ul></ul><ul><li>Law of Supply: Positive P-Q Relationship </li></ul>
  20. 20. Factors Influencing Supply <ul><li>Prices of Factors of Production </li></ul><ul><li>Prices of Other Goods supplied </li></ul><ul><ul><li>Substitutes in Production </li></ul></ul><ul><ul><li>Complements in production </li></ul></ul><ul><li>Expected Future Prices </li></ul><ul><li>Number of Suppliers </li></ul><ul><li>Technology Change </li></ul><ul><li>Taxes, Subsidies, Regulations </li></ul>
  21. 21. Change in Quantity Supplied vs. Change in Supply <ul><li>Movement Along the Supply Curve (Change in Qs at a different Price on the Curve) </li></ul><ul><li>Change in Supply (Change in Qs at all Prices = shift of entire Supply Curve) </li></ul>
  22. 22. 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
  23. 23. Market Equilibrium <ul><li>No surplus or shortage exists - the market ‘clears’ </li></ul><ul><li>Opposing forces of buyers and sellers are balanced </li></ul><ul><li>At the equilibrium price, Qs = Qd </li></ul><ul><li>Positions above or below the equilibrium price lead to behavioural changes by producers and consumers which lead to a return to E (=stable equilibrium) </li></ul>

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