01 30 2014 ECON201 competing uses Lecture 1 Introduction And Economic Models Economics The study of how best to allocate scarce resources among Microeconomics The study of how households and firms make decisions and how they interact in markets Macroeconomics The study of economy wide phenomena including inflation unemployment and economic growth Assumptions Models Assumptions simplify the complex world make it easier to understand Example When studying international trade we might assume the world consists of two countries and two goods Economists use models to study economic issues A model is a highly simplified representation of a more complicated reality The Economist As Scientist Economists play two roles Scientists Try to explain the world Policy Advisors Try to improve it In the first role economists employ the scientific method the dispassionate development and testing of theories about how the world works As scientists economists make positive statements how the world should be which attempt to describe the world as it is The Economist As Policy Advisor As policy advisors economists make normative statements which attempt to prescribe how the world should be The Circular Flow Diagram Circular Flow Diagram A visual model of the economy shows how dollars flow through markets among households and firms Includes two types of actors Households Firms Includes two markets The market for goods and services The market for factors of production Factors Of Production You need land labor capital Wood steel Hammer nail Worker Place 2 4 The Production Possibilities Frontier Production Possibilities Frontier A graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology Example Two Goods Computers and Wheat One Resource Labor measured in hours Economy has 50 000 labor hours per month available for production Unemployment is a point under the possibilities production frontier Points on the PPF are Possible Efficient All resources are fully utilized Points under the PPF Possible Not Efficient Some resources underutilized o Examples Workers Unemployed Factories Idle Points above the PPF Not Possible item of one good to the other THE PPF And Opportunity Cost The opportunity cost of an item is what must be given up to obtain that Moving along a PPF involves shifting resources labor from the production Society faces a tradeoff Getting more of one good requires sacrificing The slope of the PPF tells you the opportunity cost of one good in terms of some of the other the other The Shape Of The PPF The PPR could be a straight line or bow shaped Depends on what happens to opportunity cost as economy shifts resources from one industry to the other If opportunity cost remains constant PPR is a straight line If opportunity cost of a good rises as the economy produces more of the good PPF is bow shaped Why the PPF Might Be Bow Shaped As the economy shifts resources from beer to mountain bikes PPF becomes steeper Opportunity cost of mountain bikes increases Lecture 2 Goods Market 2 6 Demand Demand comes from the behavior of buyers The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase at alternative prices Law of Demand The claim that the quantity demanded of a good falls when the price of the good rises other things equal The Demand Schedule a good and the quantity demanded Demand Schedule A table that shows the relationship between the price of Price of lattes Quantity of lattes demanded 0 00 1 00 2 00 3 00 4 00 5 00 6 00 16 14 12 10 8 6 4 Market Demand Versus Individual Demand The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price Demand Curve Shifters Of Buyers An increase in number of buyers increase in demand Income Demand for a normal good is positively related to income o An increase in income causes increase in quantity demanded at each price shifting the D curve to the right Demand for an inferior good is negatively related to income o An increase in income shifts D curve for inferior goods to the left Prices Of Related Goods Two goods are substitutes if an increase in the price of one causes an increase in demand for the other o Example Pizza and Hamburgers An increase in the price of pizza increases demand for hamburgers shifting hamburger demand curve to the right o Other Examples Coke Pepsi laptops desktop computers compact discs music downloads Two goods are complements if an increase in the price of one causes a fall in demand for the other o Example Computers and Software If price of computers rises people buy fewer computers and therefore less software Software demand curve shifts left o Other Examples College tuition textbooks bagels cream cheese eggs bacon Tastes Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right o Example The Atkins diet became popular in the 90s caused an increase in demand for eggs shifted the egg demand curve to the right Expectations Expectations affect consumers buying decisions o Examples If people expect their incomes to rise their demand for meals at expensive restaurants may increase now o If the economy turns bad and people worry about their future job security demand for new autos may fall now The Demand Function A general equation representing the demand curve QX d Quantity demand of good X d f Px PY M H o QX o PX Price of good X o PY Price of a related good Y Substitute good Complement good o M Income Normal good Inferior good o H Any other variable affecting demand Supply Supply comes from the behavior of sellers The quantity supplied of any good is the amount that sellers are willing and able to sell at alternative prices Law Of Supply The claim that the quantity supplied of a good rises when the price of the good rises other things equal The Supply Schedule good and the quantity supplied Supply Schedule A table that shows the relationship between the price of a Price Quantity of lattes of lattes supplied 0 00 1 00 2 00 3 00 4 00 5 00 6 00 0 3 6 9 12 15 18 Market Supply Versus Individual Supply The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price Supply Curve Shifters being equal The supply curve shows how price affects quantity supplied other things These other things are non price determinants of supply Changes in them shift the S curve Input Prices
View Full Document
Unlocking...