Download Chapter 8 - Together We Pass

1
Chapter 1
1.1. Scarcity, Choice, Opportunity Cost
 Definition of Economics: Resources versus Wants
 Wants: more and better → unlimited
Versus
 Needs: essential → limited
Versus
 Demand: ability to pay + want
 Resources: Natural/ Human/ Man – Made → limited
 Scarcity: Because resources are scares, has to
choose. Example: Time
 Opportunity Cost: Forgone opportunity
 Production possibility Curve: levels of output + given
limited resources + given fixed production techniques
(figure 1.1) Illustrate: choice, scarcity and opportunity
cost (trade – off)
1.2. Economics as a science
 As a social science: behavior of human beings in
changing environment versus Natural science
controlled environment, example chemistry
 Ceteris paribus: “all other remain the same” to explain
unpredictable outcomes.
 Also Empirical science: measured economic
performance
 Microeconomics: individual parts of Economy,
example: consumers, households. Box 1.2
 Macroeconomics: Economy as a whole, example: Total
production, income and expenditure. Box 1.2
 Mesoeconomics: “In between”
 Positive statement: Facts
 Normative statement: Debated
1.3. Levels and Rates of Change
 Levels: example, wages and income versus Rates:
example, inflation and growth
 Example: Box 1.3
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Chapter 2
2.1 What should be produced?
 Goods versus Services: Tangible versus Non Tangible
 Consumer versus Capital Goods: Individuals versus
Production
 Non- versus Semi-versus Durable: Times used
 Final versus Intermediate Goods: When used
 Private versus Public goods: Who used
 Economic versus Free Goods: Cost + Price
 Homogeneous (exactly the same) versus Heterogeneous
Goods (different varieties)
 Production possibilities Curve: Figure 2.1
 Shifts in the production possibility curves: Figure 2.2-4
2.2 How should it be produced?
 Factors of production: (5)
 Primary versus secondary versus tertiary, Box 2.2
 Human versus non-Human resources
1. Natural Resources: non-renewable
2. Labour: Specialisation\ Division of labour (split in
subunits) Box 2.1
3. Capital: Depreciation
4. Entrepreneurship
5. Technology
 Capital- intensive versus Labour- intensive
2.3 For Whom should it be produced?
 Income for factors of production
2.4 Solutions to the central Questions: Economic
systems
 What, How, For Whom
 Traditional\ Command\ Market\ Mixed
1. Property Rights
2. Coordinating mechanism, Box 2.3
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Chapter 3
3.1 Production, Income and Spending
 Production generates → Income (for various factors of production) → use
for Spending on Production (fig.3.1)
 Stock versus Flow variable → Time dimension difference
Once versus Continues (box 3.1)
3.2 The interdependence between Households and Firms
 Figure 3.2(goods and services) + Figure 3.3(income and spending)
 Households: people who make economic decisions and sells factors of
production on the factor market
 Firms: employs factors of production and produce goods and services for
the goods market
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Study unit 4
Demand and Supply and prices
4.1 Intro
 Prices are determined by the interaction of demand and supply
 Remember that:
o Households demand
o Firms supply
o Price and quantity exchanged is established by a combination of
these two
4.2 Demand
(the quantity of goods and services that the potential buyers are willing and able to buy)
 This is the outcome of decision about which wants to satisfy, give available
means
 Means you intend to buy and you have the PP (purchasing power)
 Demand is a flow
 It relates to plans (may differ from what is actually bought)
Individual demand (e.g. for tomatoes)
Determinants:
o Price
o Price of related products (complements and substitutes)
o Income of the consumer
o Customer preferences
o Size of household
 Demand is not affected by: availability or supply (it is independent of
supply situation – availability only affects actual outcome)
 Can state demand as a verbal statement, with symbols or equations, with a
demand schedule and with a demand curve
Market demand
 This is all the individual demand schedules added together, and can then do
a market demand curve
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Movement along a demand curve:
(This occurs when there is a change in price)
 This indicates a change in quantity demanded
 Relates to the slope of the curve
A shift in the demand curve
(This occurs when there is a change in any of the determinants other than price)
 Indicates a change in demand
 Relates to its position or intercept
 Can be caused by a change in:
o Price of related products (complements and substitutes)
o Income of the consumer
o Customer preferences
o Size of household (changes in population)
o Other influences on demand (expected changes in price, distribution of
income)
NOTE: many students get confused here. Understand now that:
 a movement along = change in price, and is called a change in quantity
demanded
 a shift = a change in any other determinant other than price, and is called a
change in demand
In the exam and in assignments they may just ask a question like: “indicate a
change in quantity demanded” or “indicate a change in demand”. You need to
know the terminology of this NOW so you don’t get confused
(please draw in the demand curve here when you print your notes)
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4.3 Supply
Individual supply
The quantity of good or service that produces plan to sell at each possible price
during a certain period
 it is a flow
 can also be expressed in words, symbols, schedules and curves
Determinants:
o Price
o Price of alternative products
o Price of factors of production
o Expected future prices
o State of technology
Market supply
 This is the horizontal addition of all individual supplies
 Need to take number of firms supplying into account
Other factors (determinants)
 Government policy
 Natural disasters
 Joint products and by-products
 Productivity
Movement along a supply curve
If there is a change in price
 If price of product increases, supply increases
 Is referred to as a change in quantity supplied
A shift in the supply curve
A change in any factor other than price
 Referred to as change in supply
 Shift to the left (up) = decrease in supply
 Shift to the right (down) = increase in supply
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(please draw in the supply curve here when you print your notes)
4.4 Market equilibrium
 Equilibrium is when quantity demanded (Qd) = quantity supplied (Qs)
 At any other price have market disequilibrium
Excess demand (market shortage)
 When Qd is greater than Qs, at that price
 Causes an upward pressure on prices
Excess supply (market surplus)
 When Qs is greater than Qd, at that price
 Downward pressure on prices
(please draw in the demand, supply and equilibrium curve here when you print your notes)
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NOTE: equilibrium is NOT where demand = supply. It is where Qd = Qs.
The function of prices in a market economy
 Causes adjustments in Qd and Qs of each good
 Serves 2 functions:
o Rationing function (prices serve to ration scare supplies of goods and
services to those who really want them
o Allocative function (shows factors of production where to allocate
resources)
Note: people who lack PP or command over factors of production are not able to
signal their wants or plans via the market (only money counts)
Note: theory:
 Explains how different elements are related in complex real economic world
 Predicts what will happen if something changes
 Is basis for formulation and analysis of decisions on economic policy
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Study unit 5
Demand and supply in action
5.1 Changes in demand
An increase in demand
 Results in an increase in price of the product and in an increase in the
quantity exchanged, cet par
 Sources include:
o Increased price of a substitute
o Decreased price of complementary
o Increased consumer salary
o Consumer preference increases
o Expected rise in price of product
A decrease in demand
 Results in a decrease in price and quantity exchanged, cet par
 Sources include:
o Fall in price of substitute
o Increase price of complimentary
o Fall in consumer income
o Reduced preferences
o Expected future fall in price of product
5.2 Changes in supply
An increase in supply
Will result in a fall in the price of the product and in increase in the quantity
exchanged, cet par
It means either:
 More goods are supplied at each price OR
 Quantity supplied at lower price than before
Factors that could cause this:
 Fall in price of alternative product or rise in price of joint product
 A reduction in price of any of the factors of production
 Improvement in productivity of factors of production
The demand remains the same but the quantity demanded increases
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A decrease in supply
Will result in an increase in the price of the product and decrease in the quantity
exchanged, cet par
5.3 Simultaneous changes in supply and demand
Change in demand
Increase
Increase
Decrease
Decrease
Change in supply
Increase
Decrease
Increase
Decrease
Change in price
Uncertain
Increase
Decrease
Uncertain
Change in quantity
Increase
Uncertain
Uncertain
Decrease
You must know these graphs!!!
Figure 8-5 A simultaneous increase in demand and decrease in supply
(Please draw in the graphs when you print your notes)
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5.4 Interaction between related markets
Substitutes
E.g. fish and meat
When the pope lifted the ban on meant on Fridays
= increase in demand for meat
(rightward shift of meat curve)
= decrease in demand for fish
(leftward shift of fish curve)
Complimentary products
E.g. motorcars and tires
If cost of producing motorcars increases
= leftward shift in supply
= left movement up the demand curve
= equilibrium price rises
Therefore demand for new tires drops as less people are buying cars
= shift in demand curve (to the left) in tires
A cost saving technology in cars = opposite effect on tires
Government intervention (you NEED to KNOW this!!)
Usually market forces determine prices, but sometimes pressure is put on
government to intervene. Interventions include:
 Price ceilings
 Price floors
 Subsidies for certain products or activities
 Taxing certain products or activities
Maximum prices – price ceilings, price control
Are set:
 To keep prices of basic foodstuffs low to assist poor
 Avoid exploitation of consumers
 To combat inflation
 To limit certain goods and services in wartime
 If set above the equilibrium price will have no affect
 If set below the equilibrium price you will have a market shortage and
excess demand as lower prices mean more people want it, but suppliers
don’t want to supply
o Shortfall will be Q2-Q1
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o How to solve problem of allocation? (i.e. who gets the goods that are
in such short supply)
 “first come first served” (with queues and waiting lists)
 Informal rationing system (e.g. limited number sold to each
customer or selling to regular customers only)
 Government could put official rationing, with tickets or coupons
o Problems:
 Queues and informal rationing all = additional private costs to
both suppliers and consumers
 Official rationing = additional government intervention and
stimulates corruption
 Black markets develop
Black markets occur in any situation where market forces of supply and demand
cannot eliminate excess demand
 In the case of maximum price fixing black markets are illegal
 ALL cases of price fixing create black markets!!
Therefore we can see that fixing prices below equilibrium price:
 Creates excess demand
 Prevents market mechanism from allocating available quantity among
consumers
 Stimulates black markets as people can obtain the good and resell it at a
higher price to people willing to pay a higher price for it
Price controls create more problems than good!
5.6 Agricultural prices
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Chapter 7
7.1 Demand and Supply: an introductory overview
 Functioning of a specific market with household (intended demand) and firms
(intended supply). Figure 7.1
7.2 Demand
 Definition: Quantities of a good or service that the potential buyers are willing
and able to buy. (flow)
 Quantity demand (Qd) depends on: price of the good (Px), the price of related
goods (Pg), income of the individual (Y), taste (T), number of people (N) → Qd
= f (Px, Pg, Y, T, N)
 Qd = f (Px) ceteris paribus for (Pq, Y, T, N)
 Example: Table 7.1 → Figure 7.2 (also words, schedules, equations)
 Law of demand: higher prices, lower quantity demand → negative, inverse
relationship
 Market Demand: adding individual demand curves horizontally (Figure 7.3)
 Movement Along a demand curve(fig7.4) → ⌂ (change) P versus Shift of the
demand curve → ⌂ P of related good (Substitutes(fig 7.5)/Complements(fig
7.6)) Pg / ⌂ consumer tastes or preferences, T / ⌂ population, N / ⌂ expected
future price / ⌂ Income / Etc.
 Demand: a summary, Table 7.3
7.3 Supply
 Definition: q of a good or service that the producers plan to sell at each
possible price
 Quantity supply (Qs) depends on: price of the good (Px), price of alternative
products (Pg), price of factors of production and other inputs (Pf), expected
future price (Pe), state of technology (Ty) → Qs = f (Px, Pg, Pf, Pe, Ty)
 Qs = f (Px) ceteris paribus for (Pg, Pf, Pe, Ty)
 Example: Table 7.4 → figure 7.8(also words, schedules, equations)
 Law of supply: higher prices, higher quantity supplied → positive, direct
relationship
 Market Supply: adding individual supply curves
 Movement along a supply curve ⌂ P→ versus Shift of the supply curve → Pg,
Pf, Pe, Ty, etc.
 Supply: a summary: Table 7.5 and Figure 7.10 + 7.9
7.3 Market Equilibrium
 Table 7.6 → Figure 7.11
 Excess Demand: Qd > Qs, Excess Supply: Qd < Qs, Equilibrium: Qd = Qs
 Function of prices in a market economy:
1. Rationing goods + services to who can afford them
2. Allocating factors of production where it is needed (cost) the most.
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Chapter 8
8.1 Changes in Demand
 Increase in demand (any determinants except price) equilibrium ↑P ↑Q →
figure 8.1(a) and Decrease in demand ↓P↓Q →figure 8.1(b)
8.2 Changes in Supply
 figure 8.3 & 8.4
8.3 Simultaneous change in Demand and Supply
 Precise outcome cannot be predicted; change may work in opposite direction.
Example: Increase in Demand + Decrease in supply = 3 different Q → figure
8.5
8.4 Interaction between related markets
 Substitutes figure 8.6
 Complements figure 8.7
8.5 Government Intervention
 Maximum prices (price ceiling) → figure 8.9
 Consequences: shortage (excess demand)/ prevent market mechanism from
allocating/ black market activity
 Example rent control
8.6 Agricultural prices
 Minimum prices (price floor) Figure 8.12
 Consequences: surplus (excess supply)/ artificially high prices/ farms owned by
big companies benefit/ inefficient producers are protected/ disposal of surplus –
further cost.
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Chapter 9
Introduction
 A general definition of elasticity: Responsiveness of dependent variable
(Q) to change in independent (p)
9.1 Price elasticity of demand (ep)
 Definition: 1%⌂P →? %⌂Q
 Meaning of ep 1.5 = 1%⌂P → 1.5%⌂Q
 ep along a linear demand curve various → figure 9.1
 ep versus TR → figure 9.3 and box 9.2
 Five categories of ep Table 9.2 and Figure 9.4
 Determinants of ep: substitutes >; complements <; Types of wants satisfied ⌂;
Time >; proportion of income >.
9.2 Other demand elasticities
 Income elasticity (ey): %⌂Y →%⌂Q
 + ey = normal goods / - ey = inferior goods / ey >1 = luxury goods / 1> ey >0
= essential goods
 Example Table 9.3
 Cross elasticity
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Chapter 10
10.1 Utility
 Definition: satisfaction/consumer/consumption/goods + services
10.2 Marginal utility and total utility
 Marginal Utility: extra utility by consumption of a additional unit (increase in
total utility)
 Total Utility: sum of all the marginal utilities. Example: Table 10.1
 Average Utility: Total utility /quantity = utility per unit. (Box 10.1→average
mark or score and different relationships between total, marginal and average)
 Law of diminishing Marginal Utility: Marginal Utility (MU) eventually declines as
more is consumed.
10.3 Consumer Equilibrium
 Assumptions:
1. every consumer maximize his wants by consuming goods and services
(until max TU) Table 10.1
2. is in a position to arrange his wants in order of importance (table 10.2)
(ordinal utility)
 Equilibrium Conditions:
1. combination has to be affordable – Table 10.3 (to many)
2. Weighted MU must be equal – MUa /Pa = MUb/Pb – Table 10.2 (value of
30) - utility derived from the last unit of money spend on the product is the
same
10.4 Derivation of an individual demand curve for a product
 Marginal utility approach can be used to derived a demand curve
 Table 10.4 chocolate R2.00 and budget R10.00 →quantity of 2
 Table 10.5 chocolate R1.00 and budget R10.00 →quantity of 4
 Figure 10.1
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Chapter 11
11.1 Introduction
 Types of firms(individual proprietorships, partnerships, companies, close
corporations, cooperative, trusts, public corporations)
 The goal of the firm (maximize profit but principal-agent problem)
 Profit, revenue and cost (profit is surplus of revenue over cost, TR=PxQ,
AR=TR/Q, MR=⌂TR/⌂Q : Box 11.2)
 short run (fixed capital equipment, variable labor) and the long run (variable
labor and capital) in production and cost theory
11.2 Basic cost and profit concepts
 TC=cost of production, AC = TC/Q, MC = ⌂TC/⌂Q
 Opportunity Cost = Alternative sacrificed
 Explicit cost = monetary payment versus Implicit cost = opportunity cost not
reflected in monetary payment
 Economic cost: Explicit + Implicit cost
 Profit (Figure 11.1) : Accounting profit = TR – Explicit cost
Economic profit = TR - economic cost (Explicit + Implicit)
Normal profit = TR equal to economic cost
Economic loss = TR < economic cost
11.3 Production in the short run
 Definition: Physical transformation of inputs into output
 Fixed input: cannot be altered in the short run versus Variable input can be
altered in the short run
 Production function: relationship between inputs and outputs
 Law of diminishing returns: more inputs/ production process/ point is reached/
MP↓, AP↓, TP↓
 Table 11.2 → Figure 11.2 MP & AP relationships in figure 11.3
11.4 Cost
 Economic cost include Opportunity cost = Implied cost
 Fixed Cost: remains constant irrespective of Q versus Variable cost: change
when total product changes
 AFC = TFC/TP, AVC = TVC/TP, AC = TC/TP, MC = ⌂TC/⌂TP
 Table 11-4 → Figure 11.5 and 11.6
 Relationship between production and cost
Figure 11.7 Maximum MP → Minimum MC
Maximum AP → Minimum AVC
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Chapter 12
12.1 Perfect Competition
 Definition: No market participant → influence → price →”Price Taker”
 Requirements: large number of buyers and sellers/ no collusion/ identical
products/ freedom of entry and exit/ perfect knowledge/ no government
intervention/ mobile factors of productions
 Relevance: Analysis of various markets
12.2 The Demand for the product of the firm
 Demand Curve = Sales Curve → horizontal at market price (figure 12.1)
Higher → another supplier, lower → not optimum “Price Taker”
 Receive same price for any number of units therefore MR = AR = P (Box 12.1
– Numerical proof) 3*
12.3 Equilibrium of the firm under perfect competition
 Shut down rule: (figure 12.7) TR = TVC (AR = AVC) → TR just sufficient to
cover TVC, continue in order to retain employees and clients
 Profit maximizing rule: (figure 12.5) MR = MC → revenue earned from the
last additional unit (MR) is equal to the cost of producing the last unit (MC).
MR < MC → profit decreasing
MR > MC → expanding production increase profit
 Different equilibrium positions: figure 12.6
a) AR > AC → Economic Profit
b) AR = AC → Normal Profit
c) AR < AC → Economic Loss (if AR = AVC → shut down point)
12.4 The supply curve of the firm and the market supply curve
 Figure 12.7 → various quantities at different prices. Not below (b) → close
down point (does not cover variable cost)
 Supply curve slope = MC curve slope → because MC↑ as output(supply)↑
 Market Supply = ∑ individual supply curve
12.5 Long-run equilibrium of the firm and the industry under perfect
competition

Study Guide Only
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(Study Guide Only)
13.1 Market Structure
 Perfect Competition vs. Monopoly vs. Monopolistic Competition vs. Oligopoly
→ Table 13.1
 Number of firms/ Nature of product/ Entry/ Information/ Collusion/ Control over
price/ Demand curve/ Economic Profit
13.2 Monopoly
 Main features: one seller/ no substitutes/ entry to market is blocked/ downward
sloping demand curve
 Economic profit → short + long run (as entry is block) versus Perfect
competition: economic profit → short run and normal → long run (no barriers).
13.3 Monopolistic Competition (mini-monopoly)
 Conditions: Differentiated product, downward sloping demand curve, large
number of firms, no barriers to entry.
 Economic profit → short run and normal → long run (no barriers).
13.4 Oligopoly
 A few large firms dominate the market, high degree of interdependent → rival
reaction to its own action is uncertain → collude e.g. OPEC
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Chapter 14
14.1 The labour market versus the goods market
 Box 14.1 – money (nominal) wages: amount of actual money received
versus real wages: purchasing power of money received
 Versus goods market p.314
14.2 Perfect competitive market
 Requirements for perfect competition p316
 Equilibrium in the labour market figure 14.1
 The market supply of labour: figure 14.3 shift due to non-wages
determinants p.318
 The market demand of labour: figure 14.5 shift due to non-wages
determinants p321
 Study Guide: Employ more workers (profit) when labour (wages)MRP
(MPPxP) until Wage = MRP
14.3 Imperfect labour markets
 Reasons for imperfect p324
 Trade unions: craft versus industrial p326 figure14.8
 Government intervention in the labour market: employer versus employees
 Minimum wages: Figure 14.10
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