UMD ECON 201 - Lecture 1 – Introduction And Economic Models

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ECON201*Lecture 1 – Introduction And Economic Models*Economics: The study of how best to allocate scarce resources among competing usesMicroeconomics – The study of how households and firms make decisions and how they interact in marketsMacroeconomics – The study of economy-wide phenomena, including inflation, unemployment, and economic growthAssumptions & Models- Assumptions simplify the complex world, make it easier to understandExample: 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 realityThe Economist As Scientist- Economists play two roles:Scientists: Try to explain the worldPolicy 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 isThe Economist As Policy Advisor- As policy advisors, economists make normative statements, which attempt to prescribe how the world should beThe Circular-Flow DiagramCircular-Flow Diagram: A visual model of the economy, shows how dollars flow through markets among households and firms- Includes two types of “actors”…HouseholdsFirmsIncludes two markets…The market for goods and servicesThe market for “factors of production”Factors Of Production- You need land, labor, capitalWood, steelHammer, nailWorkerPlace2/4The Production Possibilities FrontierProduction 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 WheatOne 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…PossibleEfficient: All resources are fully utilized- Points under the PPFPossibleNot Efficient: Some resources underutilizedExamples: Workers, Unemployed, Factories Idle- Points above the PPFNot PossibleTHE PPF And Opportunity Cost- The opportunity cost of an item is what must be given up to obtain that item- Moving along a PPF involves shifting resources (labor) from the production of one good to the other- Society faces a tradeoff: Getting more of one good requires sacrificing some of the other- The slope of the PPF tells you the opportunity cost of one good in terms of the otherThe 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 otherIf opportunity cost remains constant, PPR is a straight lineIf opportunity cost of a good rises as the economy produces more of the good, PPF is bow-shapedWhy the PPF Might Be Bow-Shaped- As the economy shifts resources from beer to mountain bikes:PPF becomes steeperOpportunity cost of mountain bikes increases*Lecture 2 – Goods Market*2/6Demand- 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 equalThe Demand Schedule- Demand Schedule: A table that shows the relationship between the price of a good and the quantity demandedPrice of lattesQuantity of lattes demanded$0.00161.00142.00123.00104.0085.0066.004Market Demand Versus Individual Demand- The quantity demanded in the market is the sum of the quantities demanded by all buyers at each priceDemand Curve Shifters:- # Of BuyersAn increase in number of buyers = increase in demand- IncomeDemand for a normal good is positively related to incomeAn increase in income causes increase in quantity demanded at each price, shifting the D curve to the rightDemand for an inferior good is negatively related to incomeAn increase in income shifts D curve for inferior goods to the left- Prices Of Related GoodsTwo goods are substitutes if an increase in the price of one causes an increase in demand for the otherExample: Pizza and Hamburgers. An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the rightOther Examples: Coke & Pepsi, laptops & desktop computers, compact discs & music downloadsTwo goods are complements if an increase in the price of one causes a fall in demand for the otherExample: Computers and Software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts leftOther Examples: College tuition & textbooks, bagels & cream cheese, eggs & bacon- TastesAnything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the rightExample: The Atkins diet became popular in the ‘90s, caused an increase in demand for eggs, shifted the egg demand curve to the right- ExpectationsExpectations affect consumers’ buying decisionsExamples: If people expect their incomes to rise, their demand for meals at expensive restaurants may increase nowIf the economy turns bad and people worry about their future job security, demand for new autos may fall nowThe Demand Function- A general equation representing the demand curveQXd = f(Px ; PY , M, H)QXd = Quantity demand of good XPX = Price of good XPY = Price of a related good YSubstitute goodComplement goodM = IncomeNormal goodInferior goodH = Any other variable affecting demandSupply- 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 equalThe Supply Schedule- Supply Schedule: A table that shows the relationship between the price of a good and the quantity suppliedPrice of lattesQuantity of lattes supplied$0.0001.0032.0063.0094.00125.00156.0018Market Supply Versus Individual Supply- The quantity supplied in the market is the sum of the quantities supplied by all sellers at each priceSupply Curve Shifters:- The supply curve shows how price affects quantity supplied, other things being equal- These “other things” are non-price determinants of supply-


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UMD ECON 201 - Lecture 1 – Introduction And Economic Models

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