Download BUS 111 - Micro Economics

BUS 111 – Micro Economics
Lesson One
Introduction, Markets and
Demand
Peter Rumble
Bangor Transfer Abroad Programme
BUS 111 - Micro Economics
What I want you to be able to do by 21st
October
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Understand Economic news In Context
Example – What is going on in Shanghai – Stock
Exchange??
Example – what is going on in Europe? In Greece?
India and China = same population but different in
what ways?
What is economics? – Human article…
BUS 111 - Micro Economics
What you need to do..
Be able to understand economic terms
 Discuss economic matters
 One handed economist….so there is no
right answer as long as well argued..
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BUS 111 - Micro Economics
Economics Introductory Thoughts
What is Economics?
 Micro – Economics
 Macro – Economics
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BUS 111 - Micro Economics
Economics Introductory Thoughts
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Micro Economics
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This is concerned with the individual parts – the
demand and supply of goods and services
Focuses on households (consumer expenditure) and
firms (organisations)
How markets work.
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BUS 111 - Micro Economics
Economics Introductory Thoughts
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Macro Economics
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This is concerned with the economic aggregate demand
and supply – the grand totals of households /individuals
and firms activities.
The impact nationally of prices- inflation, employment
and savings/ investments
Governments & International aspects.
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BUS 111 - Micro Economics
It’s the economy - stupid
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"It's the economy, stupid" is a slight variation of the
phrase "The economy, stupid" which James Carville
had coined as a campaign strategist of Bill Clinton's
successful 1992 presidential campaign against sitting
president George H. W. Bush.
Carville's original phrase was meant for the internal
audience of Clinton's campaign workers as one of the
three messages to focus on, the other two messages
being "Change vs. more of the same" and "Don't
forget health care.”
BUS 111 - Micro Economics
Economics?

Handling scarce resources
Factors of production..
Labour
Land
Capital
Enterpreneurial skill
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Maximising Wealth – Well being
BUS 111 - Micro Economics
Maximising Wealth
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Economic Choices – Production
Possibilities Frontiers
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Rice or Wheat?
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Computers or Cars? Page 26
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Computers or Rice?
BUS 111 - Micro Economics
The Circular Flow
The simple circular flow model of
the economy is designed to
understand the basic operations
of the economy
BUS 111 - Micro Economics
8
Markets for
factors of
production
5
1
2
Households
Businesses
3
7
4
Markets
for good
and
services
6
BUS 111 - Micro Economics
The simple circular flow
In the simple circular flow model two
players of the economic game: Households
and Businesses.
Households are: sellers of all inputs, or
factors of production, and buyers of all
output of good and services.
Businesses are: buyers of all inputs and
sellers of all output.
BUS 111 - Micro Economics
Flow 1 – Households sell their land , labour and capital in the
market as factors of production.
Flow 2 – Businesses buy these factors of production and use
them to make goods and services.
Flow 3 – Businesses sell the goods and services made.
Flow 4 - Households buy the goods and services.
So, when we start at the households and go counterclockwise
from 1 to 4 we will follow the flows of what are called “real”
things – the resources and the goods and services made. These
are what are really important in the economy because these
are the items used to create our standard of living.
BUS 111 - Micro Economics
So, when we start at the households and go
counterclockwise from 1 to 4 we will follow
the flows of what are called “real” things –
the resources and the goods and services
made. These are what are really important in
the economy because these are the items used
to create our standard of living
Consumption
BUS 111 - Micro Economics
Next we look at flows 5 through 8 and these are financial
flows and we see a connection between spending, revenues,
and income.
Flow 5 – The households payment after selling resources in
the factor markets is called income.
Flow 6 – When the households buy stuff they pay for it and
the term used in the national economy sense to represent
this buying is spending or consumption expenditure. The
households buy from businesses in the markets for output of
good and services.
Flow 7 – When the businesses sell goods and services to
household the businesses bring home revenue. (So, if we
ignore government for now, expenditure = revenue).
BUS 111 - Micro Economics
Flow 8 – When businesses take in revenue from
sales then they use the money to pay for the
resources they have purchased in the markets for
factors of production. Here we talk about costs of
business
So the flows 5 through 8 are the financial flows
that correspond to our “real” flows.
The simple circular flow model is a simple model
of the day to day operations of the economy.
BUS 111 - Micro Economics
Flows 1 through 4 are flows of inputs (resources) and
output (goods and services).
Flows 5 through 8 are flows of money.
The flow of money is one way we account for the flow of
resources and goods and services.
BUS 111 - Micro Economics
Analogy – A grocery store Denis
We look at the revenue of a grocery store to get a feel
for the output amount – but we know the output is
made up of items like milk, noodles , drinks etc…
We look at expenses to get a feel for amount of inputs
used – but we know the inputs are hours of labor
(wages), electricity used, rents paid and ?.
BUS 111 - Micro Economics
Final
thought
The economy is large and complex. Each individual business
has a pretty decent grip on what resources are being used and
can probably make a list of what those resources are on a
sheet of paper – you know, labor, cash registers, etc
Each individual household knows what goods and services
are being bought and can probably make a list of those items
on a sheet of paper – you know, noodles, milk, electricity.
In large complex economies it would be difficult to get these
lists from businesses and households. But we have come up
with ways to get at the money flows. Often our focus will be
on money flows when we really want to talk about the lists.
BUS 111 - Micro Economics
The Circular Flow
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Basic model but in reality it is more
complex – Government Trade
Advertising, The Invisible Hand,
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Not complicated…. Just complex
Quick break….
BUS 111 - Micro Economics
1
Ten Principles of Economics
BUS 111 - Micro Economics
Economy. . .
. . . The word economy comes from a
Greek word for “one who manages a
household.”
BUS 111 - Micro Economics
TEN PRINCIPLES OF
ECONOMICS
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A household and an economy
face many decisions:
Who will work?
What goods and how many of them should
be produced?
What resources should be used in
production?
At what price should the goods be sold?
BUS 111 - Micro Economics
TEN PRINCIPLES OF
ECONOMICS
Society and Scarce Resources:
The management of society’s resources is
important because resources are scarce.
Scarcity. . . means that society has limited
resources and therefore cannot produce all the
goods and services people wish to have.
BUS 111 - Micro Economics
TEN PRINCIPLES OF
ECONOMICS
Economics is the study of how society
manages its scarce resources.
BUS 111 - Micro Economics
TEN PRINCIPLES OF
ECONOMICS
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How people make decisions.
People face tradeoffs.
The cost of something is what you give up to
get it.
Rational people think at the margin.
People respond to incentives.
BUS 111 - Micro Economics
TEN PRINCIPLES OF
ECONOMICS

How people interact with each other.
Trade can make everyone better off.
Markets are usually a good way to organize
economic activity.
Governments can sometimes improve
economic outcomes.
BUS 111 - Micro Economics
TEN PRINCIPLES OF
ECONOMICS

The forces and trends that affect how the
economy as a whole works.
The standard of living depends on a
country’s production.
Prices rise when the government prints too
much money.
Society faces a short-run tradeoff between
inflation and unemployment.
BUS 111 - Micro Economics
Principle #1: People Face Tradeoffs.
“There is no such thing as a free lunch!”
BUS 111 - Micro Economics
Principle #1: People Face Tradeoffs.
To get one thing, we usually have to give up
another thing.
Guns v. butter
Food v. clothing
Leisure time v. work
Efficiency v. equity
Making decisions requires trading
off one goal against another.
BUS 111 - Micro Economics
Principle #1: People Face Tradeoffs
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Efficiency v. Equity
Efficiency means society gets the most that it
can from its scarce resources.
Equity means the benefits of those resources
are distributed fairly among the members of
society.
BUS 111 - Micro Economics
Principle #2: The Cost of Something Is
What You Give Up to Get It.
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Decisions require comparing costs and
benefits of alternatives.
Whether to go to college or to work?
Whether to study or go out on a date?
Whether to go to class or sleep in?
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The opportunity cost of an item is what you
give up to obtain that item.
BUS 111 - Micro Economics
Principle #2: The Cost of Something Is
What You Give Up to Get It.
LA Laker basketball
star Kobe Bryant chose
to skip college and go
straight from high
school to the pros
where he has earned
millions of dollars.
BUS 111 - Micro Economics
Principle #3: Rational People Think at
the Margin.
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Marginal changes are small, incremental
adjustments to an existing plan of action.
People make decisions by comparing
costs and benefits at the margin.
BUS 111 - Micro Economics
Principle #4: People Respond to
Incentives.
Marginal changes in costs or benefits
motivate people to respond.
 The decision to choose one alternative
over another occurs when that
alternative’s marginal benefits exceed its
marginal costs!
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BUS 111 - Micro Economics
Principle #5: Trade Can Make Everyone
Better Off.
People gain from their ability to trade
with one another.
 Competition results in gains from
trading.
 Trade allows people to specialize in what
they do best.
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BUS 111 - Micro Economics
Principle #6: Markets Are Usually a
Good Way to Organize Economic
Activity.
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A market economy is an economy that
allocates resources through the
decentralized decisions of many firms
and households as they interact in
markets for goods and services.
Households decide what to buy and who to
work for.
Firms decide who to hire and what to
produce.
BUS 111 - Micro Economics
Principle #6: Markets Are Usually a
Good Way to Organize Economic
Activity.
 Adam Smith made the observation that
households and firms interacting in markets
act as if guided by an “invisible hand.”
Because households and firms look at prices
when deciding what to buy and sell, they
unknowingly take into account the social costs of
their actions.
As a result, prices guide decision makers to
reach outcomes that tend to maximize the
welfare of society as a whole.
BUS 111 - Micro Economics
Principle #7: Governments Can
Sometimes Improve Market Outcomes.
 Market failure occurs when the market fails
to allocate resources efficiently.
 When the market fails (breaks down)
government can intervene to promote
efficiency and equity.
BUS 111 - Micro Economics
Principle #7: Governments Can
Sometimes Improve Market Outcomes.
 Market failure may be caused by
an externality, which is the impact of one person
or firm’s actions on the well-being of a
bystander.
market power, which is the ability of a single
person or firm to unduly influence market
prices.
BUS 111 - Micro Economics
Principle #8: The Standard of Living
Depends on a Country’s Production.

Standard of living may be measured in
different ways:
By comparing personal incomes.
By comparing the total market value of a
nation’s production.
BUS 111 - Micro Economics
Principle #8: The Standard of Living
Depends on a Country’s Production.
 Almost all variations in living standards are
explained by differences in countries’
productivities.
 Productivity is the amount of goods and
services produced from each hour of a
worker’s time.
BUS 111 - Micro Economics
Principle #8: The Standard of Living
Depends on a Country’s Production.

Standard of living may be measured in
different ways:
By comparing personal incomes.
By comparing the total market value of a
nation’s production.
BUS 111 - Micro Economics
Principle #9: Prices Rise When the
Government Prints Too Much Money.
Inflation is an increase in the overall level
of prices in the economy.
 One cause of inflation is the growth in the
quantity of money.
 When the government creates large
quantities of money, the value of the
money falls.
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BUS 111 - Micro Economics
Principle #10: Society Faces a Shortrun Tradeoff Between Inflation and
Unemployment.
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The Phillips Curve illustrates the tradeoff
between inflation and unemployment:
Inflation  Unemployment
It’s a short-run tradeoff!
BUS 111 - Micro Economics
Summary
When individuals make decisions, they
face tradeoffs among alternative goals.
 The cost of any action is measured in
terms of foregone opportunities.
 Rational people make decisions by
comparing marginal costs and marginal
benefits.
 People change their behavior in response
to the incentives they face.

BUS 111 - Micro Economics
Summary
Trade can be mutually beneficial.
 Markets are usually a good way of
coordinating trade among people.
 Government can potentially improve
market outcomes if there is some market
failure or if the market outcome is
inequitable.

BUS 111 - Micro Economics
Summary
Productivity is the ultimate source of
living standards.
 Money growth is the ultimate source of
inflation.
 Society faces a short-run tradeoff
between inflation and unemployment.

BUS 111 - Micro Economics
Markets
A
market is a group of buyers and sellers
of a particular good or service.
 The terms supply and demand refer to the
behaviors of people . . . as they interact
with one another in markets.
 And Economics, especially
Microeconomics is about how supply and
demand interact in markets.
BUS 111 - Micro Economics
Market Types or Structures
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Competitive Markets
Products are the same,price takers
Monopoly
 Monopolistic Competition
 Oligopoly
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BUS 111 - Micro Economics
Demand Curve
Price of
Milk Tea
$3.00
2.50
2.00
1.50
1.00
0.50
0 1
2 3 4 5 6 7 8 9 10 11 12
Cups
consumed?
BUS 111 - Micro Economics
Why does the Demand
Curve Slope Downward?

Law of Demand
Inverse relationship between price and
quantity.
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Law of Diminishing Marginal Utility.
Utility is the extra satisfaction that one
receives from consuming a product.
Marginal means extra.
Diminishing means decreasing.
BUS 111 - Micro Economics
Market Demand
Market
demand refers to the sum of
all individual demands for a
particular good or service.
Graphically, individual demand
curves are summed horizontally to
obtain the market demand curve.
BUS 111 - Micro Economics
Ceteris Paribus
Ceteris paribus is a Latin phrase that
means all variables other than the
ones being studied are assumed to be
constant. Literally, ceteris paribus
means “other things being equal.”
The demand curve slopes downward
because, ceteris paribus, lower prices
imply a greater quantity demanded!
BUS 111 - Micro Economics
Two Basic Rules for
Movements vs. Shifts

Rule One
 When an independent variable changes and that
variable does not appear on the graph, the curve on
the graph will shift.
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Rule Two
 When an independent variable does appear on the
graph, the curve on the graph will not shift, instead
a movement along the existing curve will occur.

Let’s apply these rules to the following cases of
supply and demand!
BUS 111 - Micro Economics
Change in Quantity Demanded
versus Change in Demand
Change in Quantity Demanded
 Movement
along the demand curve.
 Caused by a change in the price of
the product.
BUS 111 - Micro Economics
Price of
Cigarettes
per Pack
Changes in Quantity
Demanded
A tax that raises the
price of cigarettes
results in a movement
along the demand
curve.
C
2 rmb
A
1 rmb
D1
0
12
20
Number of Cigarettes
Smoked per Day
BUS 111 - Micro Economics
Change in Quantity Demanded
versus Change in Demand
Change in Demand
A
shift in the demand curve, either
to the left or right.
 Caused by a change in a
determinant other than the price.
BUS 111 - Micro Economics
Determinants of Demand
 Market
price
 Consumer income
 Prices of related goods
 Tastes
 Expectations
 What are some examples?
BUS 111 - Micro Economics
Consumer Income
Price of
Ice-Cream
Cone
Normal Good
$3.00
An increase in
income...
2.50
Increase
in demand
2.00
Hotter
temperatures
1.50
1.00
0.50
D1
0 1
2 3 4 5 6 7 8 9 10 11 12
D2
Quantity of
Ice-Cream
Cones
BUS 111 - Micro Economics
Consumer Income
Inferior Good
Price of
Beer
$3.00
An increase
in income...
2.50
2.00
Decrease
in demand
1.50
1.00
0.50
D2
0 1
D1
2 3 4 5 6 7 8 9 10 11 12
Quantity of
Beer.
BUS 111 - Micro Economics
Prices of Related Goods
Substitutes & Complements

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When an increase in the price of one good increases the demand for
another good, the two goods are called substitutes. Tea and
Coffee….Bread and Cake???
When a fall in the price of one good increases the demand for
another good, the two goods are called complements. Petrol and Cars
And vice versa….
Check page 68.
BUS 111 - Micro Economics
Change in Quantity Demanded
versus Change in Demand
Variables that
Affect Quantity
Demanded
A Change in
This Variable . . .
Price
Represents a movement
along the demand curve
Income
Shifts the demand curve
Prices of related
goods
Shifts the demand curve
Tastes
Shifts the demand curve
Expectations
Shifts the demand curve
Number of
buyers
Shifts the demand curve