ECON 100 1st Edition Lecture 4 Outline of Last Lecture I Production Possibilities Frontier A Production Efficiency B Trade off Along PPF 1 Marginal Cost vs Marginal Benefit II Marginal Benefit Curve A Production Efficiency B Allocative Efficiency III Economic Growth A Technological Change vs Capital Accumulation B Opportunity Cost C Trade 1 Comparative Advantage 2 Absolute Advantage Outline of Current Lecture I Economic Coordination A Central Economic Planning B Decentralized Economic Planning 1 Firms 2 Markets 3 Property Rights 4 Money II Markets and Prices A Competitive Market III Demand A Law of Demand B Quantity Demanded C Demand Curve 1 Willingness and ability to pay curve D Change in Demand Current Lecture Economic Coordination 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 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 institutions 1 Firms economic unit that hires factors of production and organizes them to 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 value a Real Property land buildings durable goods b Financial Property stocks bonds money c Intellectual Property creative effort 4 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 good b 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 you 1 Want it 2 Can afford it 3 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 a particular time period and at a particular price The Law Of Demand Other things remaining the same the higher the price of a good the smaller is 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 it 2 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 curve a Willingness to pay measures marginal benefit b 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 Demand 1 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 increases 3 Income a Increase in income increase in demand for most goods b Normal Good demand increases as income increases c Inferior Good demand decreases as income increases 4 Expected future income and credit a Income expected to increase or credit is easy to obtain demand increases now 5 Population a The larger the population the greater the demand for all goods 6 Preferences a People with the same income have different demands if they have different preferences Change in Demand vs Change in Quantity Demanded