Econ 1202 1st Edition Lecture 4 Outline of Last Lecture I. Production Possibilities Frontiers and Opportunity Costsa. Opportunity Costsb. Economic GrowthII. Comparative Advantage and Tradea. Absolute Advantage b. Comparative Advantage Outline of Current Lecture I. Market System II. Free MarketIII. Role of Entrepreneur IV. Common Misconceptions to AvoidV. Determinants of Price of TabletsVI. Demand Side of the MarketVII. Changes in DemandCurrent LectureI. Market Systema. Basic Model of the Economya) Two key groups participate in the modern economy:1. Households consist of individuals who provide the factors of production: labor (all types of work), capital (physical capital used to produce other goods), natural resources (land, water, oil, ore, raw materials, etc.), and entrepreneurial ability (ability to bring together factors of production)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.2. Firms supply foods and services to product markets, households, firms, & factor marketsi. Households provide factors of production to firmsii. Firms provide goods and services to householdsiii. Firms pay money to households for the factors of productioniv. Households pay money to firms for the goods and services.II. A free market is one with few government restrictions on how a good or service can be produced or sold, or on how a factor of production can be employeda) Countries that come closest to free market benchmark have been more successful than those with centrally planned economies in providing their people with rising living standardsb) This concept is not new: Adam Smith argued for free markets in his 1776 treatise, An Inquiry into the Nature and Causes of the Wealth of Nations1. Invisible Hand concept:c) It is not immediately obvious that markets will do better than centrally-planned systems for satisfying human desires1. After all, individuals are acting only in their own rational self-interestIII. Role of the Entrepreneura. Entrepreneurs bring together the factors of production, combing them into useful products for consumers.b. Best entrepreneurs create products that consumers never even knew they wanted.c. Entrepreneurs make a vital contribution to economic growthd. In a free market, government does not restrict how firms produce and sell goods,or how they employ factors of productione. However governments must provide a sound legal environment that will allow the market system to succeed:IV. Common Misconceptions to Avoida. Production Possibilities Frontier (PPF) should never bow inwardsb. PPF tells us what can be produced, not what should be producedc. Just because someone is better or worse at everything, doesn’t mean trade with them cannot be beneficiala) The basis for trade is comparative advantage, not absolute advantaged. Free markets raise the standard of living; but that doesn’t mean there is no role for governments a) Governments must provide a sound legal environment to allow the market system to succeedCHAPTER 3: Where Prices Come FromV. What determines the price of tablet computers?a) Demand for tablets (express desires of buyers)1. How many tablets do consumers want to buy?i. Affected by price of tabletsii. Affected by other factors, including price of other goodsb) Supply of tablets (express the desires of suppliers)1. How many tablets are producers willing to sell?i. Affected by price of tabletsii. Affected by other factors, including prices of other goodsVI. Demand Side of the Marketa) Demand Schedule: table showing how many of a produce will be purchased at various pricesc) Demand Curve: graphical representation of demand schedule. 1. Price of Y-axis2. Quantity demanded of X-axisd) Law of Demand: as price changes, quantity demanded changes in opposite direction, ceteris paribus 1. Implication: demand curve slopes downwarde) Changes in Demand1. A change in something other than price that affects demand causes the entire demand curve to shif2. A shift to the right is an increase in demand; left is decrease in demandb. What would cause a change in demand?a) Income of consumers: increase in income increases demand if product isnormal, decreases in demand if product is inferior b) Price of related goods: increase in price of related goods increases demand if produces are substitutes, decreases demand if products are complementsc) Tastes and preferencesd) Population and demographics e) Expected future pricesVI. Changes in demand: consumer incomesa. Normal Goods: goods for which the demand increases as income rises, and decreases as income fallsa) i.e. clothingb) Restaurant mealsc) Vacationsb. Inferior goods: goods for which the demand decreases as income rises, and increases as income fallsa) Second-hand clothingb) Ramen noodlesc) Canned