AS Micro: Introductory Economic Concepts

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A version of the AS micro revision workshop considers some important introductory concepts in micro

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AS Micro: Introductory Economic Concepts

  1. 1. 7:49:36
  2. 2. Session 1 7:49:36 Resource Allocation and the Price Mechanism in Competitive Markets
  3. 3. Resource allocation What is the fundamental economic problem? 7:49:36 Unlimited wants, limited resources Scarcity… Choices… What? How? For Whom?
  4. 4. Different needs/wants What are the different needs/wants of employees in the construction industry, the construction companies and the Government (with regards to construction within the UK)? Workers Construction Companies The Government Good pay Safe environment Maximised Profit Timely completion Environment Quality
  5. 5. Trade-offs 3:11:33 Because of scarcity… choices have to be made… Every choice made, means another choice NOT made: So a trade-off OPPORTUNITY COST: the value of the next best alternative foregone Resource allocation
  6. 6. 3:11:33 OPPORTUNITY COST: the value of the next best alternative foregone Opportunity Cost The risk of government INACTION has a cost to it too!
  7. 7. Production Possibility Diagram 3:11:57 PPF1 Indicate on the diagram: a)The opportunity cost of building more ‘capital goods’ b)Where the economy is working below its capacity c)Where the production of both consumer and capital goods becomes more efficient X YZ PPF2 Capital Goods Consumer Goods What does a PPF show? Alternative combinations of g/s that can just be attained if all factors of production are efficiently used in a given period of time. W
  8. 8. PPF Production Possibility Diagram 3:11:57 Which one of the following statements is correct? The opportunity cost of producing one garden chair is A. greater at X than at Y. B. lower at X than at Y. C. the same at both X and Y. D. zero at both X and Y. X Y Garden Chairs Garden Tables Why? Diminishing marginal returns…
  9. 9. 3:11:57 How to distribute them? Unlimited wants, limited resources Scarcity… Choices… What? How? For Whom?
  10. 10. How to distribute resources? A free market economy…
  11. 11. How to distribute resources? A free market economy…
  12. 12. How to distribute resources? A free market economy…
  13. 13. How to distribute resources? A free market economy…
  14. 14. How to distribute resources? A free market economy…
  15. 15. The Price Mechanism 3:11:57 In an economy like that of the UK, many decisions on how to resolve the issues of opportunity cost and trade-offs are resolved by prices. The Price Mechanism acts as a signal for consumers to purchase or as a means of excluding some consumers (and rationing the scarce resource).
  16. 16. Xbox One 7:49:36 On November 22nd 2013, Microsoft launched the latest generation of its Xbox game console (entitled Xbox One). It replaces the Xbox 360 – however the Xbox 360 remains on sale for the time being and versions of new games will be created for Xbox 360 users for at least a further two years.
  17. 17. Xbox One 7:49:36 D Price of Xbox One Games QD Xbox One Games S P Q Price of Xbox 360 Games QD of Xbox 360 Games D S P Q Label axes (meaningfully!) Label equilibria ACE diagrams
  18. 18. Xbox One 7:49:36 Why are prices higher for Xbox One games compared to those for the Xbox 360? Reflection of demand – more people want the new games as they are better than the old games Reflection of supply – new games cost more to develop because of newer technology
  19. 19. Markets in Action: Gas and Electricity Prices in the UK 3:15:09 0 20 40 60 80 100 120 140 160 180 200 2005 2006 2007 2008 2009 2010 2011 2012 IndexValue UK Consumer Price Index Gas and Electricity Components (2005 = 100), 2005 - 2012 Gas Electricity Source: Department of Energy and Climate Change
  20. 20. Markets in Action: Gas and Electricity Prices in the UK 3:15:09 Fuel prices move when there are changes in one or more of the conditions of supply and demand. Complete the table and illustrate each of the market changes using supply and demand diagrams. Change in Market Conditions for Gas Shift in Demand or Supply? Severe winter weather conditions Change in Government Tax on Fuel Increase in exchange rate between the UK and supplier of gas Demand Supply Supply
  21. 21. Markets in Action: Gas and Electricity Prices in the UK 3:15:09 Price of Domestic Gas in the UK Quantity Demanded of UK Domestic Gas D S P Q Severe winter weather conditions D1 P1 Q1 During periods of severe weather conditions households will require more fuel to heat their homes Explain why Refer to YOUR diagram to support your written text Data reference Demand for gas has increased from D to D1 ACE diagrams
  22. 22. Markets in Action: Gas and Electricity Prices in the UK 3:15:09 Price of Domestic Gas in the UK Quantity Demanded of UK Domestic Gas D S P Q D1 P1 Q1 Explain why the equilibrium will changeExcess demand A-B Price mechanism: allocating; rationing; signalling; profit incentive A B ACE diagrams
  23. 23. Markets in Action: Gas and Electricity Prices in the UK 7:49:36 Price of Domestic Gas in the UK Quantity Demanded of UK Domestic Gas D S P Q Change in Government Tax on Fuel If Government increase level of tax on fuel, it will make it more expensive to supply fuel at any given level. S1 P1 Q1 Increase in tax Higher costs of production… shifts S curve left/up from S to S1… Creates excess demand… Price rises… to new equilibrium to ration this out… until market clears… A B
  24. 24. Markets in Action: Gas and Electricity Prices in the UK 7:49:36 Price of Domestic Gas in the UK Quantity Demanded of UK Domestic Gas D S P Q Increase in exchange rate between the UK and supplier of gas S1 Increase in exchange rate makes foreign gas less expensive leading to lower prices P1 Q1 A B Excess supply… QS > QD ACE diagrams Excess stock signals to firms to lower prices… until S1 = D
  25. 25. Assessment Objectives 7:49:36 • Knowledge • UnderstandingAO 1 • ApplicationAO 2 • AnalysisAO 3 • EvaluationAO 4
  26. 26. Demonstrating Knowledge 7:49:36 Phrase Definition Opportunity Cost Specialisation Diseconomies of scale The value of any choice in terms of the next best alternative foregone. Write succinct definitions for these phrases: A method of production where a business or person area focuses on a specific task, or a specific product Increase in long-run average cost from an increase in the scale of production
  27. 27. A B C D E F 1 2 3 4 5 Economics Grid Reference In your booklet you have been given 10 definitions of Economic concepts. In pairs, you have 3 minutes to name the 10 Economic concepts and then identify where they lie on the grid that you are about to be shown. 7:49:36
  28. 28. A B C D E F 1 2 3 4 5 Indirect tax Positive externalities Inelastic demand Normative statements Private benefit Productivity Division of labour Minimum price Diminishing returns Free market Social benefit Profit Substitutes Equilibrium Derived demand Government spending Land Monopoly Market failure Subsidy Price elasticity of demand Merit good Effective demand Economic efficiency Diversification Production possibility frontier Economy of scale Information failure Normal goods Excess demand 7:49:36
  29. 29. No. Definition Concept Grid Reference 1 When the author expresses an opinion about what ought to be. Normative statements A4 2 When the competitive outcome of markets is not efficient from the point of view of the economy as a whole. Market failure D4 3 When people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially ‘wrong’ choices. Information failure F3 4 Payments by the government to suppliers that reduce their costs. Subsidy D5 5 Goods which have a positive income elasticity of demand. Normal goods F4 6 Reductions in long-run average cost from an increase in the scale of production. Economy of scale F2 7 Only when a consumers' desire to buy a product is backed up by an ability to pay for it. Effective demand E3 8 Goods in competitive demand and act as replacements for another product. Substitutes C3 9 The rewards to individuals, firms or consumers from consuming or producing goods and services. Private benefit A5 10 The demand for a product X might be strongly linked to the demand for a related product Y. Derived demand C57:49:36 Examples of these?

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