2. Wants:
• Human wants are numerous—Unlimited!
• This presents us with the option of knowing our
NEEDS and WANTS—due to SCARCITY.
• Limited Resources implies scarcity.
• Scarcity of resources leads to making a
CHOICE between alternatives.
• Thus: the alternative forgone is again referred to
as THE OPPORTUNITY COST of our
choices.
3. Production Possibility Curve (Frontier)
(PPC/PPF)
The PPC/PPF is the boundary between those combination
of goods and services that can be produced and those that
cannot.
Inefficient
. X
Unattainable
• If the recording
studio chooses to be
at point R on the
curve, then it is
seeking to produce
OA1 albums and
OS1 singles per year
= Efficient point
4. Important Notes:
• The PPF illustrate SCARCITY
• Points outside the PPF are unattainable
• Points on the PPF are efficient and attainable
• Points inside the PPF are attainable but inefficient
• Inefficient Production results either due to unused or
misallocation!
• Along the PPF, choices involves TRADEOFFs
• All tradeoffs involves OPPORTUNITY COSTS
• Opportunity costs of a good rises when more of such
good/service is produced
• Remember!!! Life generally involves lots of opportunity costs.
• This also includes business decisions and projects…
• To gain is to loose… that’s the dynamics of the planet.
5. Demand Curves and Functions
• Demand is the QUANTITY (Q) of a product (good or service)
consumers are willing and able to purchase at a given PRICE (P).
• Demand is a flow concept, relating quantity to time (e.g. CDs per
month).
• ‘effective demand’ indicates desire supported by the means of
purchase a good
• Demand Curves - a visual representation of Q consumers are
willing and able to purchase at different prices.
• The demand curve (D) slopes downwards from left to right
• This implies (ceterus paribus) that when the price of X falls, more of
product X is demanded, but when the price of X rises, less of
product X is demanded.
• changes in the price of the X will result in movements along the
demand curve, either an expansion (movement down and to the
right) or a contraction (movement up and to the left).
6. Movements along the Demand Curve
• If the price of CDs
falls from P1 to P2,
the demand for CDs
will expand from Q1
to Q2 (other things
equal)
• because CDs will
now be cheaper than
other substitutes in
consumption (e.g.
cassettes, mini disks,
vinyl records etc.).
7. Conditions of demand
• Of course, other things may not remain equal!
• This brings us to the conditions of demand which refer
to the factors that cause the demand curve for product X
to shift either to the right or to the left.
A shift to the right from D1 to D2
(increase) means more of product
X is demanded at any given price.
For example, at price P1 demand
increases from Q1 to Q2.
■ A shift to the left from D2 to D1
(decrease) means less of product X is
demanded at
any given price. For example, at price
P1 demand decreases from Q2 to
Q1.
8. • Variables within the ‘conditions of demand’ include:
• the price of other products (Po),
• the real income of households (Y),
• the tastes of households (T),
• advertising expenditure on product X and so on
• Expected future prices
• Expected future income and credit
• Population
• Preferences
9. Useful terminology in demand analysis
■ Substitutes in consumption. Used when two (or more) products
are seen by consumers as alternatives, possessing broadly similar
characteristics, e.g. different brands of washing powder.
■ Complements in consumption. Used when two (or more)
products are seen by consumers as fitting together, in the sense that
purchasing one product will usually involve purchasing the other(s).
Personal computers and printers are obvious examples of
complements in consumption, as are tennis rackets and tennis balls.
■ Real income refers to the actual purchasing power of the
consumers.
■ Normal products refer to goods or services for which demand
tends to consistently increase (shift to the right) as the real income of
the consumer rises, and decrease (shift to the left) as the real income
of the consumer falls.
■ Inferior products refer to goods or services which are cheaper but
poorer quality substitutes for other goods or services.
10. Demand function
• demand function expresses the relationship between the quantity
of product X demanded per unit of time (Qx) and a number of
possible variables
Qx = F(Px, Po, Y, T, Ax ...)
• This can be read as meaning that the quantity demanded of
product X (Qx) depends upon its own price (Px), the price of other
products (Po), real household income (Y), household tastes (T),
advertising expenditure on product X (Ax) and so on.
• ALWAYS REMEMBER:
■ Any change in the product’s own price Px (other things equal)
will result in a movement along a demand curve.
■ Any change in a variable within the ‘conditions of demand’
will cause a shift in a demand curve.
11. Three other Variables that could shift the demand
curve:
• Technology (Tn)
• Advertising (Ax, As, Ac): Advertising expenditure
on product X itself (Ax), on a substitute in
consumption for X (As) and or a complement in
consumption for X (Ac) may all contribute to a
shift in the demand curve for product X.
• Credit availability (CA) and price (CP)
12. Supply curves and functions
• The supply curve is a visual representation of
how much of the product sellers are willing and
able to supply at different prices.
• The supply curve slopes upwards from left to right,
suggesting that at a higher price more will be
supplied, and at a lower price less will be supplied.
• For example, suppose product X is CDs, if the
price of CDs rises from P1 to P2, the supply of
CDs will expand from Q1 to Q2 (other things equal)
because producers of CDs will now be making
higher profits and so will have both the incentive
and the ability to buy in the extra resources to raise
output---See the following Figure.
13. Movement Along Supply Curve
If the price of CDs falls
from P2 to P1 then, for the
opposite reasons, we can
expect the supply of CDs to
contract from Q2 to Q1
(other things equal).
Changes in the price of the
product will (other things
equal) result in movements
along the supply curve,
either an expansion
(movement up and to the
right) or a contraction
(movement down and to the
left).
14. Conditions of supply
• the conditions of supply which refer to the factors
that cause the supply curve for product X to shift either
to the right or to the left.
■ A shift to the right from S1 to S2 (increase) means more
of product X is supplied at any given price.
• For example, at price P1 supply increases from Q1 to Q2.
■ A shift to the left from S2 to S1 (decrease) means less of
product X is supplied at any given price.
• For example, at price P1 supply decreases from Q2 to Q1.
15. Shifts in a Supply Curve
Variables within the
‘conditions of supply’
include:
• the price of other
products (Po),
• the costs of
production (C),
• tax rates (Tx),
• tastes of producers
(Tp) and so on.
16. Useful terminology in supply analysis
■ Substitutes in production. Used when another product (O)
could have been produced with the same resources (land,
labour, capital, raw materials, etc.) as those used for product
X.
■ Complements in production. Used when the process of
production for X yields a byproduct. These complements in
production are also known as jointly supplied products
■ Lump-sum tax is a tax of a constant absolute amount per
unit, e.g. £1 a unit.
■ Ad valorem tax is a tax which varies in absolute amount at
different prices. A percentage tax such as VAT is an ad
valorem tax as 17.5% of a higher price will give a greater
absolute amount in tax revenue.
17. The Supply Function
• The supply function expresses the relationship
between the quantity of product X supplied per unit of
time (Qx) and a number of possible variables.
• These include the own price of product X (Px), and a
number of other variables known collectively as the
‘conditions of supply’.
»Qx = F(Px, Po, C, Tn, Tx, Tp ...)
• This can be read as meaning that the quantity supplied
of product X (Qx) depends
• upon its own price (Px), the price of other products (Po),
costs of production (C), technology (Tn), tax rates (Tx),
tastes of producers (Tp) and so on.
