Econ 4001 1st Edition Lecture 2Outline of Last Lecture I. Review of SyllabusII. Introduction into Intermediate EconomicsIII. Definition of EconomicsOutline of Current Lecture II. EconomicsA. DefinitionB. Two branchesIII. Explanation of Economic Agentsa. Consumersb. Workersc. FirmsIV. Role of PricesV. Positive vs. Normative analysisVI. Market BackgroundVII. Introduction to Supply and Demanda. Factors that affect demand curveb. Factors that affect supply curveVIII. Real vs. Nominal PricesCurrent Lecture- Economicso Definition: the study of the choices people make about what to buy, where and how much to work, where to live, and what to do given limited resourceso Definition 2: allocation and use of scarce resourceso Two branches Micro: deals with individual economic units, their markets, and government action on these units Macro: deals with aggregate variables (such as national output and unemployment)o There is a circular flow in the markets of goods and services and markets for factors of production- Behavior of Economic AgentsThese 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.o Consumers: want to maximize their well-being by consuming goods and services they value, but they have a limited budgeto Workers: have choices to work full or part time at any number of jobs for which they are qualified BUT must sacrifice leisure time in order to worko Firms: can chose which products to make and services and output quantities to maximize profits BUT constrained by resources and costs- Role of Priceso Prices are determined by interactions between buyers and sellers (in market economies)o We do not observe this “interaction” only the resulting priceo Purchases/sales of product and services are the way goods are allocated in the economyo This course will not cover command economies, which occur when government allocates the resources and sets prices- Theories and Modelingo Theories are an attempt to explain outcomes based on assumptions and ruleso Models, based on theories, are mathematical constructs used to represent markets, firms, etc.- Positive vs. Normative Analysiso Positive: the description of how things areo Normative: the description of how things ought to be- Market Backgroundo A meeting of buyers and sellers at which prices are determined a quantities exchangedo Market definition is critical: it may include product features, place, and time of the goodo Examples: airline tickets, fresh vegetables, meals, houses, etc.- Competition and the law of one priceo Extent of competition affects equilibrium price Perfect competition is often discussed/rarely observed Imperfect competition is more of the normo In many markets, multiple prices exist simultaneously Competitors may have different total and marginal costs Imperfect competitors may seek to increase market share- Importance of Market Definition- Antitrusto Good example of an antitrust dispute in text book with a corn syrup company Antitrust division of DOJ sued to prevent ADM from buying rival  ADM argued market definition and won- Prices: Real vs. Nominalo Nominal Price: actual price paid by the buyer, also called current dollar priceo Real Price: adjusted for inflationo CPI measures inflation as well as GDP and PPI How are these measures determined?o Federal Reserve threshold for inflation is 2%- Introduction to Supply and Demando Supply Curve: relationship between quantity supplied of a good or service and price of the good or service Traces out the cost to the firm or producing the product, as long as firms are competitive Supply curve is upward sloping Algebraically, we write quantity as a function of price: QS=QS(P)o Demand Curve: relationship between quantity demanded of a good and price of the good Traces out the willingness to pay by consumers for quantities of the good Demand curve is downward sloping Algebraically, we write quantity as a function of price: QD=QD(P)- Factors that affect the Supply and Demand Curveso Factors that affect the supply curve: Number of sellers Technology Input costs Expectations Interest changeso Factors that affect the Demand Curve Income Number of buyers Tastes Prices of substitutes Price of complements Expectations- Equilibrium: the intersection of supply and