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Welcome To Avia 3040 Aviation Economics Faculty: Dr. Munir Mahmud Office: Hazy 342 Phone: (435)652-7626 E-mail: [email protected] Office Hours: MWF 11–12:45 pm. & By Appointments Text Book: Principles of Economics, 6th Edition, 2010 – South Western Cengage Learning. ISBN: 978-1-426-64835-9 Prerequisites: None Grading: 4 Take Home Assignments. 4 In-Class Exams. Final Take Home Exam. Make-UP Policy: Unless there is a compelling reason, no “Make-up” exam will be given. Late assignments will be subject to a 30% point deduction. Distribution of Points: Take Home Assignments (4) 10% each In-Class Exams (4) 10% each Final Take home Assignment 20% ----------------------------------------------------------Total 100% How would the point grade be converted into a letter grade? General Rule: 100-90 = A 89-87 = A86-83 = B+ 82-80 = B 79-77 = B76-73 = C+ 72-70 = C 69-67 = C66-64 = D+ 63-60 = D 59-57 = DBelow 57 = F Academic Integrity: All students are expected to act with civility, personal integrity; respect other students' dignity, rights and property; and help create and maintain an environment in which all can succeed through the fruits of their own efforts. An environment of academic integrity is requisite to respect for self and others and a civil community. Academic integrity includes a commitment to not engage in or tolerate acts of falsification, misrepresentation or deception. Such acts of dishonesty include cheating or copying, plagiarizing, submitting another persons' work as one's own, using Internet sources without citation, fabricating field data or citations, "ghosting" (taking or having another student take an exam), stealing examinations, tampering with the academic work of another student, facilitating other students' acts of academic dishonesty, etc. Academic dishonesty violates the fundamental ethical principles of the University community and compromises the worth of work completed by others. A student should avoid academic dishonesty when preparing work for any class. Sanctions for breaches of academic integrity may range (depending on the severity of the offense) from F for the assignment to F for the course. In severe cases of academic dishonesty, including, but not limited to, stealing exams or "ghosting" an exam, students may be expelled from the college. Disability: "If you are a student with a medical, psychological, or learning disability or think you might have a disability and would like accommodations, contact the Disability Resource Center (652-7516) in the Student Services Center. The Disability Resource Center will determine eligibility of the student requesting special service and determine the appropriate accommodations related to their disability. It is encouraged that students requesting accommodation do so within the first two weeks of classes, so that, once identified, a reasonable accommodation can be implemented in a timely manner. Your Rebel Mail Account: Important class and college information will be sent to your Rebel mail email account. This information includes your DSC bill, financial aid/scholarship notices, notification of dropped classes, reminders of important dates and events, and other information critical to your success in this class and at DSC. All DSC students are automatically assigned a Rebelmail email account. If you don’t know your user name and password, go to www.dixie.edu and select “Rebelmail,” for complete instructions. You will be held responsible for information sent to your Rebelmail email, so please check it often. Lecture: 1 Chapter 1: Introduction Natural Resources: The land, water, metals, minerals, animals, and other gifts of nature that are available for producing goods and services. Renewable Natural Resources: Our supply of forests. Sea and land animals. Water and Grasses. Question: Are renewable natural resources inexhaustible? Nonrenewable Natural Resources: Metal and Mineral Resources. Insatiable Wants: Want Things we desire. Need Things we require. Demand Wants that are backed by purchasing power. Scarcity and Economics What is Economics? Economics is the study of how we work together to transform scarce resources into goods and services to satisfy the most pressing of our unlimited wants, and how we distribute these goods and services among ourselves. Economics as a part of Social Science: Sociology, Anthropology, Political Science and Psychology Consumer Sovereignty: The ability of consumers to exercise complete control over what goods and services the economy produces (or does not produce) by choosing what goods and services to buy (or not buy). Economics Focuses on 4 Central Issues: 1. Who produces what? 2. How it is produced? 3. Who consumes? 4. Who decides? Economic Model: It is a simplified representation of complex economic relationships. Sometimes to untangle the complexities of the relationship, economists have to abstract from reality. The Assumption of Ceteris Paribus: It means, “Everything else is remaining the same”. The Circular Flow Model: Wages, Rent, Interest & Profit Resource Market Labor, Land, Capital & Entrepreneurship. Goods and Services. Product Market Consumer spending for goods & services Micro and Macro Economics Microeconomics: It studies the behavior of an individual household, firm or even industry. Macroeconomics: It focuses on the behavior of the economy as a whole. Positive and Normative Economics: Positive Economics: A subset of Economics that analyzes the way economy actually operates (a factual statement). Normative Economics: A subset of Economics founded on value judgements and leading to assertions of what ought to be. Chapter 2 Production Possibilities and Opportunity Costs This chapter discusses principles associated with Absolute Technological and Change Division of Labor and The Law of Production Opportunity Possibilities Costs Factors of Production Comparative and EconomicAdvantage Growth Specialization Increasing Costs What are the Factors of Production? Labor Capital Land Entrepreneurship What is Labor? The physical and intellectual effort of people engaged in producing goods and services What is Capital? Manufactured goods used to make and/or market other goods and services What is Human Capital? The knowledge and skills acquired by labor, principally through education and training What is Land? A natural-state resource such as real estate, grasses and forests, and metals and minerals Who is an Entrepreneur? A person who alone assumes the risks and uncertainties of a business He is also the person who takes the initiative and comes up with the essential idea of the business. What is Production Possibilities? In order to understand what is meant by PPF, we would first consider a hypothetical economy. Production Possibilities Frontier Robinson Crusoe’s Production Possibilities: Consumption Goods 6 Capital Goods 5 1 3 2 0 3 0 Consumption Goods 6 Capital Goods 5 1 3 2 0 3 0 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 Capital Goods Production Possibilities? The combinations of goods that can be produced when resources and technology are used fully & efficiently 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 Capital Goods Consumer Goods Production Possibilities Curve Unattainable Inefficient Capital Goods 34 What is true along the Production Possibilities Curve? available resources are used fully most efficient combination of resources What choices are made along the Production Possibilities curve? To have more of one product, units of the other product have to be given up Opportunity Cost: The quantity of other goods that must be given up to obtain a good Law of Increasing Costs: The opportunity cost of producing a good increases as more of the good is produced 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 Capital Goods How do we have more of everything? By increasing our resources Consumer Goods Increased Resources Capital Goods 41 What other ways can we increase our PPF? Innovations - an idea that takes the form of new applied technology Technology - an improvement in capital Consumer Goods Innovations Capital Goods 43 Once Rich it is Easier to Get Richer Once Poor it is Easy to Stay Poor Poor Country Rich Country 9 8 9 8 7 7 6 6 5 4 3 2 5 4 3 2 1 1 0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8 Capital Goods The Indestructible Nature of Ideas 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 Capital Goods Specialization of labor : The division of labor into specialized activities. Does division of labor increase productivity? Yes. People become more proficient in one activity which results in greater output per person Adam Smith: “One man draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations, to put it on is a peculiar business, ...........” The reason for such division of labor, he noted, is that these 10 people could make as many as 48,000 pins in a day. If they had each worked separately and independently, they could not have produced more than 200. Example 1: Production of Fish & Shirts per 8-hour Day Production of Production of Fish Shirts 2 8 Crusoe Island Yakamaya Island 8 2 Absolute Advantage: A country’s ability to produce a good using fewer resources than the country with which it trades The Theory of Absolute Advantage states that a country should completely specialize and produce the good in which it has absolute advantage. Example 2: Production of Fish & Shirts per 8-hour Day Production of Production of Fish Shirts 8 1S 8 1F Crusoe Island Yakamaya Island 8 1/4 S In Crusoe Island, 1 Fish = 1 Shirt 2 4F & 1 Shirt = 1 Fish In Yakamaya, 1 Fish = 2/8 = 1/4 Shirt & 1 Shirt = 4 Fish International Exchange Rate, 1 Shirt = 2 Fish Comparative Advantage: A country’s ability to produce a good at a lower opportunity cost than the country with which it trades The Theory of Comparative Advantage states that a country should completely specialize and produce the good in which it has comparative advantage. What should a country specialize in producing? In those goods and services in which it has a comparative advantage Should a country produce that with which it has an Absolute Advantage? No! Not unless it also has a comparative advantage in those goods and services Why? Because by so doing its opportunity costs may be too high Example 3: Production of Fish & Shirts per 8-hour Day Production of Production of Fish Shirts 10 .4 S 4 2.5 F Crusoe Island Yakamaya Island 8 .25 S 2 4F In Crusoe Island, 1 Fish = .4 Shirt & 1 Shirt = 2.5 Fish In Yakamaya, 1 Fish = 2/8 = 1/4 Shirt & 1 Shirt = 4 Fish International Exchange Rate, 1 Shirt = 3 Fish Chapter 3 Demand and Supply What is the Law of Demand? When price increases the quantity demanded decreases What is a Demand Schedule? Shows the specific quantity of a good or service that people are willing and able to buy at different prices Price Quantity Demanded $10 0 $9 1 $8 2 $7 3 $6 4 $5 5 What is a Demand Curve? Graphically depicts the relationship between price and quantity demanded Price P1 P2 Q1 Q2 Quantity Individual Demand Curves for Fish Claudia’s Demand for Fish Price 10 9 8 7 6 5 4 3 2 1 Quantity Demanded 0 1 2 3 4 5 6 7 8 9 10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 Individual Demand Curves for Fish Chris’s Demand for Fish Price 10 9 8 7 6 5 4 3 2 1 Quantity Demanded 1 3 5 7 9 11 13 15 17 19 10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 What is Market Demand? The horizontal sum of all individual demands in a market Market Demand Curve: Individual 1 P1 Market Demand Individual 2 P1 P1 P2 Q1 Q2 Q1+Q2 Market Demand Curve Claudia’s Demand 10 Chris’s Demand 10 9 9 8 8 7 7 6 6 5 4 3 2 5 4 3 2 1 1 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 Quantity Market Demand Curve 10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 Quantity Individual Demand Curves for Fish Gottheil 2e Comprehensive (Exhibit 3.1), Micro (Exhibit 3.1), Macro (Exhibit 3.1) ©2000 South-Western College Publishing 8 The Market Demand Curve Gottheil 2e Comprehensive (Exhibit 3.2), Micro (Exhibit 3.2), Macro (Exhibit 3.2) ©2000 South-Western College Publishing 9 What is a Supply Schedule? Shows the specific quantity of a good or service that suppliers are willing and able to provide at different prices Price Quantity Supplied $5 0 $6 1 $7 2 $8 3 $9 4 $10 5 What is a Supply Curve? Depicts the relationship between price and quantity supplied Price S P2 P1 Q1 Q2 Quantity What is Market-Day Supply? A market situation in which the quantity of a good supplied is fixed, regardless of price Market-Day Supply Curve for Fish Supply Schedule for Fish for the Market-Day Price 10 9 8 7 6 5 4 3 2 1 Quantity Supplied 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 Quantity (1,000) P2 Supply Curve P1 S Q 76 Market Demand Curve for Fish Demand Schedule & Curve for Fish: Price 10 9 8 7 6 5 4 3 2 1 Quantity Demanded 3500 4000 4500 5000 5500 6000 6500 7000 7500 8000 Excess Supply 10 9 8 7 6 Equilibrium 5 4 3 2 1 0 1 2 Demand 3 4 5 Excess 6 7 8 9 10 Quantity (1,000) What is Equilibrium Price? The price that equates the quantity demanded and the quantity supplied Market-Day, Short-Run and Long-Run Supply 10 9 8 7 6 5 Short-Run Supply Market-Day Supply Long-Run Supply 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 Quantity Short-Run: The time interval during which suppliers are able to change the quantity of some but not all the resources they use to produce goods and services. Long-Run: The time interval during which suppliers are able to change the quantity of all the resources they use to produce goods and services. Or Excess Supply P1 Surplus Or Excess Demand P3 P2 S Shortage Q3 D 81 Fish Market with change in Demand: Price Quantity Supplied 10 9 8 7 6 5 4 3 2 1 8500 8000 7500 7000 6500 6000 5500 5000 4500 4000 Initial Quantity Demanded 3500 4000 4500 5000 5500 6000 6500 7000 7500 8000 Market Demand Curve S 10 9 8 7 6 5 4 3 2 1 0 D 1 2 3 4 5 6 7 8 9 10 Quantity Fish Market with change in Demand: Price Quantity Supplied 10 9 8 7 6 5 4 3 2 1 8500 8000 7500 7000 6500 6000 5500 5000 4500 4000 Initial Increase in Quantity Quantity Demanded Demanded 3500 5500 4000 6000 4500 6500 5000 7000 5500 7500 6000 8000 6500 8500 7000 9000 7500 9500 8000 10000 Increase in Demand: S 10 9 8 7 6 5 4 3 2 D' 1 0 D 1 2 3 4 5 6 7 8 9 10 Quantity (1,000s) Fish Market with change in Demand: Price Quantity Supplied 10 9 8 7 6 5 4 3 2 1 8500 8000 7500 7000 6500 6000 5500 5000 4500 4000 Initial Increase in Decrease in Quantity Quantity Quantity Demanded Demanded Demanded 3500 5500 1500 4000 6000 2000 4500 6500 2500 5000 7000 3000 5500 7500 3500 6000 8000 4000 6500 8500 4500 7000 9000 5000 7500 9500 5500 8000 10000 6000 Decrease in Demand: S 10 9 8 7 6 5 4 3 2 D" D 1 0 1 2 3 4 5 6 7 8 9 10 Quantity (1,000s) Change in Quantity Demanded: A change in quantity demanded of a good that is caused solely by a change in the price of that good. Change in Demand: A change in quantity demanded of a good that is caused by factors other than the price of that good. Factors that cause changes in Demand: Changes in Income. Changes in Taste. Changes in the Prices of Other Goods. Substitute Goods: Goods that can replace each other. When the price of one increases (decreases), the demand for the other increases (decreases). Complementary Goods: Goods that are generally used together. When the price of one increases (decreases), the demand for the other decreases (increases) Factors that cause changes in Demand: Changes in Income. Changes in Taste. Changes in the Prices of Other Goods. Changes in the expectations about future prices. Changes in the population size. Price Change in Quantity Demanded P1 P2 0 Q1 Q2 Quantity Price Change in Demand P1 D 0 Q1 Q2 D1 Quantity Fish Market with change in Supply: Price Quantity Demanded 10 9 8 7 6 5 4 3 2 1 3500 4000 4500 5000 5500 6000 6500 7000 7500 8000 Initial Quantity Supplied 8500 8000 7500 7000 6500 6000 5500 5000 4500 4000 Increase in Quantity Supplied 9500 9000 8500 8000 7500 7000 6500 6000 5500 5000 Increase in Supply: S S' 10 9 8 7 6 5 4 3 2 1 0 D 1 2 3 4 5 6 7 8 9 10 Quantity (1,000s) Factors that cause changes in Supply: Changes in Technology. Changes in Resource Price. Changes in the Prices of Other Goods. Changes in the Number of Suppliers. Increase in Demand & Supply: S S' 10 9 8 7 6 5 4 3 2 D' 1 0 D 1 2 3 4 5 6 7 8 9 10 Quantity (1,000s) Increase in Demand & Supply: S S' 10 9 8 7 6 5 4 3 2 1 0 D 1 2 3 4 5 6 7 8 D' 9 10 Quantity (1,000s) Increase in Demand & Supply: S' S 10 9 8 7 6 5 4 3 2 1 0 D 1 2 3 4 5 6 7 8 D' 9 10 Quantity (1,000s) Increase in Demand & Decrease in Supply: S' S 10 9 8 7 6 5 4 3 2 1 0 D 1 2 3 4 5 6 7 8 D' 9 10 Quantity (1,000s) Increase in Demand & Decrease in Supply: S' S 10 9 8 7 6 5 4 3 2 D' 1 0 D 1 2 3 4 5 6 7 8 9 10 Quantity (1,000s) Increase in Demand & Decrease in Supply: S' S 10 9 8 7 6 5 4 3 2 1 0 D 1 2 3 4 5 6 7 8 D' 9 10 Quantity (1,000s)