ECON 1113 1st Edition Lecture 3 Outline of Last Lecture I. Production Possibilities AnalysisA. AssumptionsB. Production Possibilities TableC. Production Possibilities CurveD. Explanation of Production Possibilities CurveE. Relaxing the AssumptionsOutline of Current Lecture I. Production Possibilities Curve ExtrapolationA. Current Choices and Future PossibilitiesB. China vs. USA ExampleII. The Circular Flow of Income in the EconomyIII. Price Determination in Competitive MarketsA. DemandB. SupplyCurrent LectureI. Production Possibilities Curve (PPC) ExtrapolationA. Current choices affect future possibilitiesB. China vs. USA ExampleChina PPCCurrent PPCConsumer Goods (C)Capital Goods (K) USA PPCCurrent PPCConsumer Goods (C)Capital Goods (K)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.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 decision3. Generally, the more capital goods produced, the higher the rate of future economic growtha. Thus, the Chinese economy will grow faster because of their relatively higher production of capital goods, overtaking the USAb. 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 graphII. The Circular Flow of Income in the Economy A. Households: basic consuming unitsB. Firms: basic producing unitsC. Resource Market1. Households supply resources2. Firms demand resources3. Together, they yield resource pricesD. Output (goods) Market1. Households demand goods2. Firms supply goods3. Together, they yield goods pricesIII. Price Determination in Competitive MarketsA. Demand: the quantities of outputs or resources people are willing and able to buy during some time period1. Referred to as a flow variable, which is a variable measured over some time periodB. Determinants of Demand (six listed)householdshouseholdseconomic resources: land, labor, capital, entreprenuershipeconomic resources: land, labor, capital, entreprenuershipfirmsfirmsconsumer goods and services (outputs)consumer goods and services (outputs)householdshouseholdsconsumer spending (money payments for outputs)consumer spending (money payments for outputs)firmsfirmsmoney flow (payments): wages, rent, profits, interestmoney flow (payments): wages, rent, profits, interest1. 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 tobuy an output or resources4. Number of buyers in the market5. Buyers’ expectations about future prices and income6. Prices of related outputs or resourcesa. Compliments: outputs or resources used togetheri. Example: labor and capitalii. Example: golf balls and golf clubsb. Substitutes: outputs or resources that fulfill the same need i. Difficult to find perfect substitutesii. Example: Coke and Pepsic. Some goods are simply unrelatedC. All determinants change simultaneously at the same timeD. Simplifying Assumption: ceteris paribus, Latin meaning “all other things be constant”1. Let one single determinant change2. Make all other determinants constant3. Analyze one change at the time to observe how it affects demandE. 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 paribusF. 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