Download Economics 1

Economics 1: Macroeconomic Principles
Handout 1: Notes Ch. 1 - Ch. 4
1. Economics Definition
–Incentives
–Scarcity
–Human Behavior / Social Science
2. Economic Questions
•What gets produced?
•In what quantities?
•How are goods and services produced?
•When are goods and services produced?
•Where are goods and services produced?
•Who consumes the goods and services?
3. Factors of Production
•Natural Resources
•Labor
•Physical Capital
•Human Capital
•Entrepreneurship
4. Analytical Approaches
•Positive (What is?)
•Normative (What Ought to be?)
5. Examples
•Economic Growth in Mexico, China, Japan,
United States
•Economic Growth in Europe, Africa
•Traffic Congestion
•Universal Health Care
6. Economic Way of Thinking
•Assumptions
•Ceteris Paribus
•Thinking “at the margin”
•Rationality—self-interest seeking behavior
7. Macroeconomics
•Explains Growth
–What are the important variables and factors
to consider when understanding a nation’s
economy and its growth?
•Explains economic fluctuations
•Helps make business and individual decisions
by helping to predict economic changes
8. Chapter 2: Key principles in formulating
economic ideas and models
•Scarcity
•Opportunity Costs defines tradeoffs
•Marginal Benefit
•Marginal Cost
•Production Possibilities Frontier
•Diminishing Returns
•Nominal Value
•Real Value
•Inflation
•Choices (voluntary) are made in small steps
(marginally, “at the margin”)
•Incentives influence how we make choices
(“voluntary” includes the impact of incentives)
9. Other Ideas
•Voluntary tradeoffs make for win-win
transactions and induces efficiency
•Markets do not always work effectively
because incentives are not always aligned, or
symmetric, in exchanges—market intervention
is sometimes warranted.
Macro Ideas:
•Income = Expenditure = Value of Production
•Living Standards rise with Productivity
•Inflation occurs when money is less scarce
than goods and services
•Unemployment results from market failures or
from efficient transitions—some unemployment
is healthy, and other is not.
10. Economic Classifications:
–Philosophy
•What is: Positive
•What ought to be: Normative
–Activities
•Observation and Measurement
•Model Building
•Testing
–What can go wrong:
•Cause-and-Effect identification problems
•Fallacy of Composition
•Post Hoc Fallacy
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11. Production Possibilities Frontiers
•Tradeoffs in production due to scarcity
•Efficiency
•Comparative Advantages
•Absolute Advantages
12. Demand
•The term demand refers to the entire
relationship between the quantity demanded
and the price of a good, other things remaining
the same. Demand is described by both the
demand schedule and the demand curve.
13. Examples of Demand
–The demand for MP3 files is the relationship
between the price of MP3s and the quantity of
MP3s demanded, holding all other influences
on the quantity of MP3 files bought constant.
–Similarly, the demand for MP3 players is the
relationship between the price of MP3 players
and the quantity of MP3 players demanded,
holding all other influences on the quantity of
MP3 files bought constant.
14. Supply
•The term supply refers to the entire
relationship between the quantity supplied and
the price of a good, other things remaining the
same. Supply is described by both the supply
schedule and the supply curve.
15. Examples of Supply
–The supply of MP3 files is the relationship
between the price of MP3 files and the quantity
of MP3 files supplied, holding all other
influences on the quantity of MP3 files sold
constant.
–Similarly, the supply of MP3 players is the
relationship between the price of MP3 players
and the quantity of MP3 players supplied,
holding all other influences on the quantity of
MP3 files sold constant.
16. The Buying Decision
–The quantity of MP3 Players that people plan
to buy depends on:
•The price of a MP3 Player
•The prices of related good (such as tapes,
portable CD players, and CDs)
•Disposable Income
•Expected future prices
•Population
interested in MP3 Players
–To begin to learn how these factors influence
demand, you will look at the law of demand.
17. Law of Demand
•The law of demand states that other things
remaining the same, the higher the price of a
good, the smaller is the quantity demanded of
that good.
•Why? For two reasons.
•If the price of a good rises, the
opportunity cost of using that good
rises, so people buy less of that good
and more of some substitute goods.
This is a substitution effect.
•If the price of a good rises, real
income falls, so people buy less of all
goods including the good whose price
has risen. This is a income effect.
•The law of demand can be illustrated by a
demand schedule or a demand curve.
•A demand schedule lists the quantities
demanded at each price, holding constant all
other influences on buying plans.
•A demand curve graphs the quantity demanded
at each price holding constant all other
influences on buying plans.
•The demand curve can be interpreted as a
willingness to pay curve.
•It tells us the highest price that people are
willing to pay for a given quantity of the good
Summary of Influences on Demand
–The factors that influence buyers' plans
cause either a:
•movement along the demand curve
•shift of the demand curve
–A change in the price of a good, with
everything else remaining the same,
brings a movement along the demand
curve and a change in the quantity
demanded.
–A change in any other influence on
buying plans, except the price of the
good, brings a shift of the demand
curve and a change in demand.
18. Law of Demand Examples
•If the price of a movie ticket rises, other things
remaining the same, the quantity of movie
tickets that people plan to buy decreases.
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•If the price of a PC falls, other things
•The supply curve can be interpreted as a
remaining the same, the quantity of PCs that
people plan to buy increases.
minimum supply price curve.
•It tells us the lowest price that firms are
willing to accept for supplying a given quantity
of the good.
19. The Selling Decision
–The quantity of MP3 Players that firms plan to
sell depends on:
•The price of a MP3 Player
•The prices of the factors of production used to
make MP3 Players
•The prices of related goods (such as tapes,
portable CD players, and CDs)
•Expected future prices
•The number of suppliers
•Technology
–You are going to learn how these factors
influence supply. To begin, you will look at the
law of supply.
20. Law of Supply
•The law of supply states that other things
remaining the same, higher prices for a good
lead to greater quantity supplied of that good.
Supply
–A supply schedule lists the quantities supplied
at each different price when all other influences
on the amount producers plan to sell remain the
same.
–A supply curve shows the relationship
between the quantity supplied of a good and its
price, holding constant all other influences on
producers' planned sales. A supply curve is
plotted in a graph that measures the quantity
supplied of the good on the x-axis, and the price
of the good on the y-axis.
–Other things remaining the same, the higher
the price of a good, the greater is the quantity
supplied of that good.
–Why?
–If the quantity produced of a good (↑)
increases, then, the opportunity cost of
producing that good rises. And firms are willing
to sell more of a good only if its price rises to
cover the opportunity cost of producing it.
•The law of supply can be illustrated by a
supply schedule or a supply curve.
•A supply schedule lists the quantities supplied
at each price, holding constant all other
influences on selling plans.
Supply Curve
21. Change in Supply
A change in the quantity supplied at each and
every price is called a change in supply. It is
illustrated as a shift in the supply curve. An
increase in supply is shown by a rightward shift
in the supply curve and a decrease in supply is
shown by a leftward shift in the supply curve.
[Remember, increase = rightward shift and
decrease = leftward shift. An increase in supply
is not an upward shift in the supply curve. What
looks like an upward shift on a graph is actually
a leftward shift and is a decrease in supply.]
A change in the quantity supplied refers to the
change in the quantity of a good that firms plan
to sell in a market resulting from price
changes—holding all other influences on
selling plans remain the same. A change in the
quantity supplied is illustrated by movement
along the supply curve.
–Four key influences on a firm’s selling plans
are:
1. Number of firms that produce a good
2. Prices of other goods
3. Prices of factors of production
4. Technology
–When any of these factors change, there is a
change in supply.
–A change in supply is shown by a new supply
schedule or by a new supply curve, i.e. a shift in
the supply curve.
–The graph opposite summarizes the effects of
these factors.
Summary of Influences on Supply
–The factors that influence sellers’ plans cause
either
•A movement along the supply curve, or
•A shift of the supply curve.
–A change in the price of a good, with
everything else remaining the same, brings a
movement along the supply curve and a
change in the quantity supplied.
–A change in any other influence on selling
plans except the price of the good brings a shift
of the supply curve and a change in supply.
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22. Price Determination
•You will cover two topics in your study of
price determination:
•Price as a regulator
•Equilibrium (equilibrium price and
equilibrium quantity)
23. Price as a regulator
–The price of a good regulates the quantities
demanded and supplied.
–The higher the price of a good, other things
remaining the same, the smaller is the quantity
demanded and the greater is the quantity
supplied for that good.
–The lower the price of a good, other things
remaining the same, the greater is the quantity
demanded and the smaller is the quantity
supplied for that good.
–If the price is too high, there is a surplus of
goods and if the price is too low, there is a
shortage of goods.
–If there is a shortage of a good, the price rises,
and if there is a surplus of a good, the price
falls.
–When there is neither a shortage nor a surplus
of a good, the quantity demanded equals the
quantity supplied and the price does not change.
–This price is then the equilibrium price
representing the quantity demanded and
supplied. The equilibrium quantity is the
quantity that is bought and sold.
–If demand increases, both the price and
quantity increase.
–If demand decreases, both the price and the
quantity decrease.
Effects on Equilibrium from Change in
26. Changes in Supply
–A change in the supply for Walkmans can
result from a change in any of the following:
•The price of a factor of production, such as the
wage rate of the labor that produces Walkmans
•The price of a substitute in production to
Walkmans, such as a car tape deck
•The number of firms that make Walkmans
•The technology used to produce Walkmans
–If supply increases, the price falls and quantity
increases.
–If supply decreases, the price rises and the
quantity decreases.
27. Equilibrium Changes
–If both demand and supply increase, the
quantity increases but the price can rise, fall, or
remain unchanged.
–If both demand and supply decrease, the
quantity decreases but the price can rise, fall, or
remain unchanged.
–If demand increases and supply decreases, the
price rises but the quantity can increase,
decrease, or remain unchanged.
–If demand decreases and supply increases, the
price falls but the quantity can increase,
decrease, or remain unchanged.
24. Equilibrium
•You will learn how to predict changes in
prices and quantities by studying the effects of:
•A change in demand
•A change in supply
•A change in both demand and supply
Effects on Equilibrium from Change in
25. Changes in Demand
–A change in the demand for Walkmans can
result from a change in any of the following:
•The price of a substitute for a Walkman, such
as a portable CD player
•The price of a complement to a Walkman, such
as an audio tape
•Income
•Population
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