ECON 100 1st Edition Lecture 4Outline of Last Lecture I. Production Possibilities Frontier A. Production Efficiency B. Trade-off Along PPF1. Marginal Cost vs. Marginal BenefitII. Marginal Benefit CurveA. Production EfficiencyB. Allocative EfficiencyIII. Economic GrowthA. Technological Change vs. Capital AccumulationB. Opportunity CostC. Trade1. Comparative Advantage2. Absolute Advantage Outline of Current Lecture I. Economic CoordinationA. Central Economic PlanningB. Decentralized Economic Planning1. Firms2. Markets3. Property Rights4. MoneyII. Markets and PricesA. Competitive Market III. DemandA. Law of DemandB. Quantity Demanded C. Demand Curve1. Willingness-and-ability-to-pay curveD. Change in DemandCurrent Lecture- Economic CoordinationThese 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.- Central Economic Planning – economic planners don’t know peoples’ production possibilities and preferences  production ends up inside PPF and the wrong things are produced- Decentralized Coordination  Requires 4 complimentary social institutions1. Firms – economic unit that hires factors of production and organizes themto produce and sell goods/services 2. Markets – any arrangement of buyers and sellers to get information and to do business with each other 3. Property Rights – social arrangements that govern the ownership, use, and disposal or anything that people valuea. Real Property – land, buildings, durable goodsb. Financial Property – stocks, bonds, moneyc. Intellectual Property – creative effort4. Money – any commodity or token that is generally acceptable as a means of payment  Markets coordinate decisions through price adjustments  Circular flows in market economy (Figure 2.7 pg 45)- Markets and Prices- 2 sides to a market (buyers & sellers) - Competitive Market – market that has many buyers and many sellers so that no single buyer or seller can influence the price  Sale only when price is high enough to cover opportunity cost Price and Opportunity Cost a. Money Price – amount of money needed to buy a goodb. Relative Price – the ratio of a good’s money price to the money price of the next best alternative good (a goods opportunity cost)c. Price Index  “basket”- Demand- If you demand something you1. Want it2. Can afford it3. Have made a definite plan to buy it- Wants – unlimited desires and wishes Demand reflects decision about which wants to satisfy- Quantity Demanded of a good/service is the amount consumers plan to buy during aparticular time period and at a particular price- The Law Of Demand  “Other things remaining the same, the higher the price of a good, the smalleris the quantity demanded; and the lower the price of a good, the greater is the quantity demanded.”- Higher price reduces quantity demanded because…1. Substitution effect – relative price/opportunity cost of a good increases, people seek substitutes for it2. Income effect – price of a good rises relative to income, people can’t afford all the things they previously bought - Demand Curve – shows relationship of quantity demanded of a good and its price when all other factors remain constant Demand – entire relationship between price of a good and quantity demanded of that good  Quantity Demanded – a point on a demand curve (quantity demanded at a particular price)  Rise in price  decrease in QD; Fall in price  increase in QD Demand Schedule – list of quantities demanded at each price Demand Curve is also called a ‘willingness-and-ability-to-pay” curvea. Willingness to pay measures marginal benefitb. Smaller quantity available, higher price that someone is willing to pay for another unit- Change in Demand – when some influence on buying plans other than the price of the good changes, there is a change in demand for that good Quantity of the good that people plan to buy changes at each and every price(new demand curve)  Demand increase, curve shifts right; demand decrease, curve shifts left- 6 Factors Change Demand1. Prices of related goods a. Substitute good that can be used in place of another (price of substitute increases, demand for other good increases)b. Compliment good that is used in conjunction with another (price of compliment decreases, demand for other good increases)2. Expected Future Prices a. If price is expected to rise in the future, current demand increases3. Income a. Increase in income, increase in demand for most goodsb. Normal Good – demand increases as income increasesc. Inferior Good – demand decreases as income increases 4. Expected future income and credita. Income expected to increase or credit is easy to obtain  demand increases now5. Population a. The larger the population, the greater the demand for all goods6. Preferences a. People with the same income have different demands if they have different preferences - Change in Demand vs. Change in Quantity