EC10E_Basic_Economic_Tools_and_Principles_revised Lecture Notes 1

8/7/2019 EC10E_Basic_Economic_Tools_and_Principles_revised Lecture Notes 1

http://slidepdf.com/reader/full/ec10ebasiceconomictoolsandprinciplesrevised-lecture-notes-1 1/39



y What is Economics?



y Economics is the study of decision making in the faceof scarce resources

y Important point resources are scarce

y This implies that individuals and societies mustchoose



y Micro individual units, eg. households andfirms

y Macro economy as a whole national

economiesy Macro is based on micro



y Positive = what is or will be = objective

y Normative = what should be = subjective



y A n economic theory is a set of ideas about theeconomy that has been organized in a logicalframework egs. the theory of the firm, the law of

demandy A n economic model is a mathematical representation,

based on economic theory, of a firm, a market or someother entity



y A simplification is a representation of a problem in aform that is more easily understood without loss of information

yA bstraction involves ignoring non-vital details in orderto focus on the most important aspects of a problem



y Ceteris Paribus with other things the same

y A llows us to analyze the relationship between twovariables



y A graph typically illustrates the relationship betweentwo variables

y General formula for the equation of a straight line:

y Where y = variable on the vertical axis

x = variable on the horizontal axis

m = slope

c = y-intercept

cmxy !



y P = 4 2Q

y Two points (Q1,P1) and (Q2,P2)

y I choose (0,4) and (2,0)



y Two Common Fallacies:

1. Post-Hoc Fallacy after this thereforebecause of this

2. Fallacy of Composition what is true forpart is true for the whole



y Scarcity the problem of infinite human needs andwants in a world of finite resources

y Therefore choices have to be made

y This leads us to the concept of opportunity cost



y Opportunity cost is the value of the next bestalternative that the decision maker is forced to forgo

y If resources are fixed, in order to produce more of one

good a country must produce less of something else





y It is impossible to make anyone better off withoutmaking someone worse off

y It is impossible to produce more output without using

more inputy Production occurs at the lowest possible per unit cost



y Productive efficiency the economy is using all itsresources and technology to produce the maximumamount of output

y

The PPF shows the maximum amount of a good thatcan be produced for any given amount of another goodgiven the economys technology and the factors of production available



y A ny point along the PPF represents attainable efficientproduction

y A ny point inside the PPF is attainable but inefficient

y A ny point outside the PPF is unattainabley If the economy is operating within the PPF some

resources are unemployed and/or we are not using themost advanced technology



y It has a negative slope

y It is bowed outwards represents the principle of

increasing opportunity cost



y Economic growth is an increase in the productivecapacity of an economy

y It is represented by an outward shift of the PPF

y Can be cause by an increase in resources and/or animprovement in technology



y What?

y How?

y For Whom?



y Command Economy the government

y Laissez-Faire/FreeMarket the market

y Mixed Economy - both



y The Basic Decision-Making Unitsy Households consuming units

y Firms producing units



y Product/OutputMarkets

y Factor/InputMarkets



y Land

y Labour

y Capital



y The outer loop represents the flow of dollars

y The inner loop represents the flow of goods andservices

y Households sell their labour to firms

y Firms use labour to produce goods and services

y Firms sell goods and services to households





y The quantity of a good demanded is the amount of that good that an individual is willing and able to buy in a given time period, at a particular price

y

The demand curve is the relationship between thequantity of a good that consumers are willing and ableto buy and the price of the good

y The demand curve slopes downwards reflecting the

law of demand



y It has a negative slope

y It cuts the quantity axis

y It cuts the price axis





y Market demand is the quantity of the good that allconsumers in a market will buy at a particular price

y It is the sum of the individual demand curves of allconsumers in a particular market



y Quantity supplied is the amount of a particular goodthat a firm would be willing and able to offer for sale ina given time period, at a particular price

y

The supply curve shows the quantity of a good thatproducers are willing to sell at a given price

y The curve is upward sloping reflecting the law of supply



y It has a positive slope

y It intersects the price axis



y The price of the good

y Cost of inputs

y Technology

y Prices of Related Products



y Market supply is the sum of all that is supplied by allproducers in a single market per period



y Equilibrium occurs when quantity demanded is equalto quantity supplied

y A t any price above the equilibrium price there is a

surplusy A t any price below the equilibrium price there is a

shortage



y Shifts in the demand and/or supply curves will causechanges in equilibrium



y We move from micro to macro analysis by aggregatingor combining the individual markets into one overallmarket

y Some argue that this ignores distinctions amongdifferent products

y Others argue differences between goods areinsignificant when analyzing economy wide issues



y Domestic Product = the total value of all goods andservices produced in the economy in a year

y Price = overall price level = average price

y A D = aggregate demand = the economy wide demandfor output

y AS = aggregate supply = the total amount of output

that firms supply



y A D curve = a diagram showing the relationshipbetween the price level and the economy wide demandfor output

y AS curve = a diagram showing the relationshipbetween the price level and the total amount thatfirms supply

Date post:	08-Apr-2018
Category:	Documents
Upload:	seana-geddes
View:	219 times
Download:	0 times

EC10E_Basic_Economic_Tools_and_Principles_revised Lecture Notes 1

Documents