ECON 1113 1st Edition Lecture 3 Outline of Last Lecture I Production Possibilities Analysis A Assumptions B Production Possibilities Table C Production Possibilities Curve D Explanation of Production Possibilities Curve E Relaxing the Assumptions Outline of Current Lecture I Production Possibilities Curve Extrapolation A Current Choices and Future Possibilities B China vs USA Example II The Circular Flow of Income in the Economy III Price Determination in Competitive Markets A Demand B Supply Current Lecture I Production Possibilities Curve PPC Extrapolation A Current choices affect future possibilities B China vs USA Example China PPC USA PPC Current PPC Capital Goods K Capital Goods K Current PPC Consumer Goods C Consumer Goods C These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute II 1 Assume the PPC of each nation is approximately the same and also that each nation has near full employment as seen on graph 2 One must choose a point on the graph thereby sacrificing through decision 3 Generally the more capital goods produced the higher the rate of future economic growth a Thus the Chinese economy will grow faster because of their relatively higher production of capital goods overtaking the USA b The current depiction of the PPCs would shift outward from their present location in a parallel manner however China s PPC would shift further than USA s PPC on the graph The Circular Flow of Income in the Economy households households households households economic resources land labor capital entreprenuership consumer goods and services services outputs outputs firms firms III consumer consumer spending spending money payments payments for money for outputs outputs money money flow flow payments wages payments wages rent rent profits profits interest interest firms firms A Households basic consuming units B Firms basic producing units C Resource Market 1 Households supply resources 2 Firms demand resources 3 Together they yield resource prices D Output goods Market 1 Households demand goods 2 Firms supply goods 3 Together they yield goods prices Price Determination in Competitive Markets A Demand the quantities of outputs or resources people are willing and able to buy during some time period 1 Referred to as a flow variable which is a variable measured over some time period B Determinants of Demand six listed C D E F 1 Price of the output good or service or the price of the resource outputs costing more lower the demand and outputs costing less heighten the demand 2 Buyers income high incomes can purchase more outputs 3 Tasks psychological biological religious or other reason people desire to buy an output or resources 4 Number of buyers in the market 5 Buyers expectations about future prices and income 6 Prices of related outputs or resources a Compliments outputs or resources used together i Example labor and capital ii Example golf balls and golf clubs b Substitutes outputs or resources that fulfill the same need i Difficult to find perfect substitutes ii Example Coke and Pepsi c Some goods are simply unrelated All determinants change simultaneously at the same time Simplifying Assumption ceteris paribus Latin meaning all other things be constant 1 Let one single determinant change 2 Make all other determinants constant 3 Analyze one change at the time to observe how it affects demand The Law of Demand as the price of the output or resource market increases the quantity demanded of the output or resource decreases and vice versa ceteris paribus Example eggs homogenous qualities which is a simplifying factor Price of Eggs in dollars dozen Quantity of Eggs Demanded in dozens week 1 dozen 3 dozen week 2 dozen 2 dozen week 3 dozen 1 dozen week
View Full Document
Unlocking...