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PowerPointto accompany
Chapters1&2
EconomicIssues & Market
Demand andSupply Analysis
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Sloman: Principles Of Economics 3e 2010 Pearson Australia
Learning Objectives
1 The economic problem What iseconomics all about?
2 Dividing up the subject What ismeant by macroeconomics andmicroeconomics?
3 Modelling economic relationshipsHow can diagrams be used to illustrateeconomic issues?
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The Economic Problem What is economics all about?
production and consumption: satisfyinghuman needs with available resources
scarcity, the central economic problem:potentially unlimited human needs andlimited resources
demand and supply: help solve scarcity
by reconciling resources and needs
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Dividing Up The Subject
Macroeconomic issues managing demand and supply aggregates
encouraging national economic growth
minimising inflation
managing the balance of trade
managing cyclical economic fluctuations
minimising unemployment
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Dividing Up The Subject Microeconomic issues
the choices to be made:
what to produce?
how to produce? for whom to produce?
the concept of opportunity cost
making rational decisions
marginal benefits vs marginal costs
the social implications of choice
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Production Possibility Curve:Modelling Economic Relationships
Diagrams
represent models in economics
illustrate basic economic relationships
simplify and explain economic issues
Production possibility curve (PPC)
a fundamental economic model
illustrates societys production choices
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Production Possibility Curve
Derivation of a ProductionPossibility Curve
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Unitsoffood
(millions) x
w
Units of clothing (millions)
A Production Possibility Curve [Figure 1.1]
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ModellingEconomic Relationships
An economist uses diagrams to illustrateeconomic issues
These diagrams are called models
The production possibility curve (PPC)
what the curve demonstrates
microeconomics and the PPC:
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Modelling Economic Relationships
Using diagrams to illustrate economicissues
The production possibility curve (PPC)
what the curve shows
microeconomics and the PPC:
choice creates opportunity cost
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Modelling Economic Relationships
Using diagrams to illustrate economicissues
The production possibility curve (PPC)
what the curve shows
microeconomics and the PPC:
choice creates opportunity cost
opportunity cost increases
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Production Possibility Curve
Opportunity Cost and the PPC
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U
nitsoffood(m
illions)
x
y
Z
Units of clothing (millions)
Increasing Opportunity Costs [Figure 1.2]
1
1
2
1
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Modelling Economic Relationships
Using diagrams to illustrate economic issues
The production possibility curve (PPC)
what the curve shows
microeconomics and the PPC
macroeconomics and the PPC
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Modelling Economic Relationships
Using diagrams to illustrate economic issues
The production possibility curve (PPC)
what the curve shows
microeconomics and the PPC
macroeconomics and the PPC:
production within the curve
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Production Possibility Curve
Resource Use and the PPC
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V
X
Y
O
F
ood
Clothing
Making a Fuller Use of Resources[Figure 1.3]
Production inside theproduction possibility
curve
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Modelling Economic Relationships
Using diagrams to illustrate economic issues
The production possibility curve (PPC)
what the curve shows
microeconomics and the PPC:
macroeconomics and the PPC:
production within the curve
shifts in the curve
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Production Possibility Curve
Shifts in the PPC
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O
F
ood
Clothing
Growth in Potential& Actual Output
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O
F
ood
Clothing
Growth in Potential Output[Figure 1.4]
Now
5 years time
x
x1
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O
F
ood
x
Clothing
Growth in Actual Output
x1
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Circular Flow of Goods and Income:Modelling Economic Relationships
The circular flow of goods and incomes
firms and households
what is a market?
goods markets
real flows: goods and services
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Goods & services
Circular Flow of Goods and Incomes - I
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Goods & services
$Consumer
expenditure
Circular Flow of Goods and Incomes - II
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The circular flow of goods and incomes
firms and households
what is a market?
goods markets
real flows: goods and services
money flows: consumer expenditure
factor markets
Circular Flow of Goods and Incomes
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Goods & services
$Consumer
expenditure
The services of the factors ofproduction
Circular Flow of Goods and Incomes - III
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Goods and services
$Consumer
expenditure
The services of the factors of production
Wages, rent,dividends, and so on
$
[Figure 1.5]
Circular Flow of Goods and Incomes - IV
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The circular flow of goods and incomes(cont.)
macroeconomic issues
the size of total flows
microeconomic issues
individual markets
choices within goods and factor markets
Circular Flow of Goods and Incomes
Back to Learning Objectives
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Learning Objectives
2.1 Economic systems How do countries differ in theway their economies are organised?
2.2 Demand How much will people buy of any item?
2.3 The free market economy How well does it
serves us? 2.4 The determination of price How much of any
item will actually be bought and sold, and at what price?
2.5 The free market economy How well does it
serves us?
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Types of economy
classification by degree of governmentcontrol
command economies
free-market economies
mixed economies
Economicsystems
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Economic systems
The free-market economy
free decision making by individuals
firms seek to maximise profits
consumers seek value for money frompurchases
workers seek to maximise wages
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The price mechanism shortages and surpluses
shortage price rises
surplus price falls
equilibrium price
where demand equals supply
equilibrium
a position of balance
Economic systems
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The effect of changes in demand and supply a change in demand
a change in supply
Interdependence of markets
effect of a rise in demand
in the goods market in the factor market
Economic systems
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Goods Market
Dg shortage(Dg> Sg)
PgSg
Dg
until Dg = Sg
Factor Market
Sg
Sf
Df until Df = SfDf shortage
(Df> Sf)Pf
The price mechanism:The effect of a rise in demand
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Interdependence of markets
effect of a rise in demand
in the goods market
in the factor market
the interdependence of different goods
markets
interdependence and the public interest
Competitive markets
perfectly competitive markets
everyone is aprice taker
Economic systems
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Demand
The relationship between demand and price
law of demand
income effect
substitution effect
The demand curve
assumptions
the axes
illustrates how much would be demanded ateach price
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(1) (2) (3) (4)
Price($ per kg)
Tracey'sdemand
(kg)
Darren'sdemand
(kg)
Total marketdemand
(tonnes: 000s)
A 0.40 28 16 700
B 0.80 15 11 500
C 1.20 5 9 350
D 1.60 1 7 200
E 2.00 0 6 100
The demand curve:The demand for potatoes (monthly)
Market demand for potatoes (Monthl )
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0
0.4
0.8
1.2
1.6
2
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Price($ per kg)
0.40
Market demand(tonnes 000s)
700A
Point
Demand
Market demand for potatoes (Monthly)
APrice($per
kg)
Market demand for potatoes (Monthly)
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0
0.4
0.8
1.2
1.6
2
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Price($ per kg)
0.40
Market demand(tonnes 000s)
700A
Point
Demand
Market demand for potatoes (Monthly)
APrice($per
kg)
B 0.80 500
B
Market demand for potatoes [Fi 2 1]
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0
0.4
0.8
1.2
1.6
2
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Price($ per kg)
0.40
Market demand(tonnes 000s)
700A
Point
Demand
Market demand for potatoes [Fig. 2.1]
APrice($per
kg)
B 0.80 500
B
C 1.20 350
C
D
D 1.60 200
E
E 2.00 100
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Other determinants of demand
tastes
number and price of substitute goods
number and price of complementary goods
income
distribution of income
expectations of future price changes
Movements along and shifts in the demandcurve
Demand
An increase/Shift in demand [Fig 2 2]
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D1
P
O Q0 Q1 Quantity
D0
Price
An increase/Shift in demand [Fig 2.2]
An decrease in demand
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D0
P
O Q1 Q0 Quantity
D1
An decrease in demand
Price
Back to Learning Objectives
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Supply
Supply and price
as price rises, firms supply more
it is worth incurring the extra unit costs
they switch from less profitable goods
in the long run, new firms will be encouraged toenter the market
The supply curve
assumptions
the axes
illustrates how much would be supplied at eachprice
The Supply Curve:
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Price ofpotatoes($ per kg)
Farmer X'ssupply(tonnes)
Total Marketsupply
(tonnes: 000s)
a 0.40 50 100
b 0.80 70 200
c 1.20 100 350
d 1.60 120 530
e 2.00 130 700
The Supply Curve:The Demand for Potatoes (Monthly)
Market supply for potatoes (Monthly)
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0
0.4
0.8
1.2
1.6
2
0 100 200 300 400 500 600 700 800
Supply
a
P
0.40
Q
100a
Quantity (tonnes: 000s)
Price($perkg)
Market supply for potatoes (Monthly)
Market supply for potatoes (Monthly)
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0
0.4
0.8
1.2
1.6
2
0 100 200 300 400 500 600 700 800
Supply
a
P
0.40
Q
100a
Quantity (tonnes: 000s)
Price($perkg)
Market supply for potatoes (Monthly)
b
b 0.80 200
c
c 1.20 350
d
d 1.60 530
e
e 2.00 700
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Other costs of production determinants of supply
profitability of alternative products
profitability of goods in joint supply
nature, random shocks and other unpredictableevents
aims of producers
expectations of future price changes the number of suppliers
Movements along and shifts in the supply curve
Shift in Supply
Shifts in the supply curve [Fig 2 4]
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P
QO
S0
Shifts in the supply curve [Fig 2.4]S1S2
Increase in
supply
Decrease insupply
Back to Learning Objectives
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The determination of price
Equilibrium price and output
response to shortages and surpluses
market clearing
significance of equilibrium
demand and supply curves
Equilibrium price and output:
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Price of Potatoes ($per kilo)
Total Market Demand(Tonnes: 000s)
Total Market Supply(Tonnes: 000s)
0.40 700 (A) 100 (a)
0.80 500 (B) 200 (b)
1.20 350 (C) 350 (c)
1.60 200 (D) 530 (d)
2.00 100 (E) 700 (e)
Equilibrium price and output:Market demand and supply of potatoes
(monthly) [Table 2.3]
Determination of market equilibrium [Fig 2 5]
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0 100 200 300 400 500 600 700 800
E
D
C
A
a
c
d
e
Supply
Demand
Bb
2.00
1.60
1.20
0.80
0.40
Quantity (tonnes: 000s)
Determination of market equilibrium [Fig 2.5]
Price
($perkg)
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Significance of Equilibrium price and output
response to shortages and surpluses
market clearing
demand and supply curves
effect of price being above equilibrium
surplus
price falls effect of price being below equilibrium
shortage price rises
equilibrium: where D = S
The determination of price
Determination of market equilibrium [Fig 2.5]
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0 100 200 300 400 500 600 700 800
E
C
B
Aa
b
c
e
Supply
Demand
D dSURPLUS
(330 000)
2.00
1.60
1.20
0.80
0.40
Quantity (tonnes: 000s)
q [ g ]
Price($pe
rkg)
Determination of market equilibrium [Fig 2.5]
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0 100 200 300 400 500 600 700 800
E
D
C
Aa
c
d
e
Supply
Demand
Bb
2.00
1.60
1.20
0.80
0.40
Quantity (tonnes: 000s)
q
Price($perkg)
Determination of market equilibrium [Fig 2.5]
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0 100 200 300 400 500 600 700 800
E
D
C
B
A
a
b
c
d
e
Supply
Demand
SHORTAGE
(300 000)
2.00
1.60
1.20
0.80
0.40
Quantity (tonnes: 000s)
q [ g ]
Price($perkg)
Determination of market equilibrium [Fig 2.5]
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D d
Qe
E
B
Aa
b
e
Supply
Demand
2.00
1.60
1.20
0.80
0.40
Quantity (tonnes: 000s)
q [ g ]
Price($pe
rkg)
Effect of Shift in demand
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Effect of Shift in demandcurve
Movement to a new equilibrium
movement along S curve and new D curve
rise in demand (rightward shift) P rises
fall in demand (leftward shift) P falls
Effect of a shift in the demand curve [Fig 2.6]
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P
QO
Pe1
Qe1
S
D1
D2
g
[ g ]
Effect of a shift in the demand curve [Fig 2.6]
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P
QO
Pe1
Qe1
S
g h
D1
D2
Pe2
Qe2
i
[ g ]
Effects of shifts in the supply curve
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movement along D curve and new S curve
rise in supply (rightward shift) P falls
fall in supply (leftward shift) P rises
Effects of shifts in the supply curvef price
Effect of a shift in the supply curve [Fig 2.7]
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P
QO
Pe1
Qe1
D
S1
S2
g
pp y [ g ]
Effect of a shift in the supply curve [Fig 2.7]
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P
QO
Pe1
Qe3Qe1
D
S1
S2
j g
k
pp y [ g ]
Pe2
Back to Learning Objectives
The free-market economy
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The free market economy
Advantages of a free-market economy
transmits information between buyers and sellers
no need for costly bureaucracy
incentives to be efficient
competitive markets respond to consumer wishes
Problems with a free-market economy
competition may be limited
inequality
environment and social goals may be ignored
The free-market economy
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The free market economy
The mixed economy
types of intervention
use of taxes, subsidies and benefits legislation and regulation
direct provision by the government