Transcript Principles of Economics

Principles of
Economics
The Basic Ideas and Principles that
will guide our year

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
Greek word in origin, meaning “one who manages a
household.”
Our definition: the study of the production, distribution and
consumption of goods and services
Two major divisions in economics
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
Microeconomics: studies how people make decisions and how
these decisions interact
Macroeconomics: branch of economics concerned with the
overall ups and downs in the economy

No one directly; instead, it is the
MARKET ECONOMY
Decisions about production and consumption
are made by individuals
 Used in all capitalist countries.
 Differs sharply from a Command Economy
(used in the former Soviet Union) where a
central body controls economic decisions.

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In this market economy, the “individual hand”
refers to the way that individual pursuit of selfinterest can lead to good results for society.
For the most part, but occasionally we can have
MARKET failure where the pursuit of selfinterest leads to bad results for society.
Examples of Market Failure
So, let’s being our look at
Microeconomics!!!
• Every economic issue involves
individual choice—what to do
and what not to do.
• Four economic principles
underlie the economics of
individual choice…
Resources are scarce
• Since the world sadly lacks an infinite amount of
resources, economics is simply the study of how
society (individuals, governments, corporations,
etc.) manages its scarce resources.
The real cost of something is what you
must give up to get it.
• In order to receive one thing, we have to give
up something else (money, time, sleep, etc.).
• In economics, whatever must be given
up to obtain some item is called an
opportunity cost.
• Examples of opp. Costs?
“How Much?” is a Decision at the
Margin
• People face trade-offs in all
decisions of life.
– Should I study for the semester exam
or hit up the club?
– Your decision ultimately depends on
your analysis of the costs and benefits.
• The typical answer is you will do
both, but for how much time?
• In your decision, you weigh the costs (an hour
of studying or an hour missed of throwing it
down) versus the benefits (an increase in your
grade).
• As long as the benefit of studying outweighs
the cost, you should study.
• This is a marginal decision. They involve
making a trade-off between doing a little bit
more of something versus a little bit less. To
study it is a marginal analysis.
People Usually Exploit Opportunities to
Make Themselves Better Off
• We respond to incentives, or anything that
offers reward to people who change their
behavior
• Changing behavior rarely happens without
some incentive for doing so.
When calculating the cost of college, which of the
following should you probably not include?
-Cost of Tuition
-Cost of books required for classes
-The income you would have earned had you not
gone to college
-The price of the college’s meal plan
• We STOPPED HERE at end of Ch. 1, don’t look
at slides below until getting to Ch. 3
The Marketplace
• Group of buyers and sellers of a particular good or
service
• For this point in class, we will assume all markets
are perfectly competitive, meaning that no one
single person or company can control it.
The Demand Curve
 The relationship between the price of a good and the
quantity demanded
 A.k.a. demand schedule, demand table
Price of Smoothie
Quantity Demanded
$0.00
40
$1.00
32
$2.00
24
$3.00
16
$4.00
8
$5.00
2
Law of Downward Sloping Demand
 Given all things equal, the quantity demanded of a good falls
when the price of a good rises
A Sample Demand Curve
Price of Smoothie
Quantity Demanded
$0.00
40
$1.00
32
$2.00
24
$3.00
16
$4.00
8
$5.00
2
The demand curve plots quantity
demanded on the horizontal axis and the
price on the vertical axis.
The price that the consumer is willing to
pay for any given quantity is graphed in
the coordinate plane.
For the quantities and prices given
below, a smooth curve is drawn that then
imputes the price for any quantity.
Individual Demand Curves
The demand curves of different individuals for the same
product may look quite different. Consider the following
demand curves for burritos. What might explain the
differences among these demand curves?
For example, Person A is willing to pay more at any
quantity than person D. Both Person A and Person D
are willing to buy more for a relatively small change in
price. Person B is different. Even when price changes,
they are not a big fan of the product. Person C is like a
hybrid of Persons A and B. What factors might explain
these behaviors?
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Market Demand
The market demand for a product is simply
the sum of the demands of all individuals in
the market. At any given price, the market
will consume a certain quantity. That
quantity will represent the convergence of
all consumers tastes and preferences in that
market.
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Shifts in the Demand Curve
If there is a “change in quantity demanded,”
then the price has moved ON the demand
curve. But at other times, there are “changes in
demand” when the curve shifts to the RIGHT
for an increase and the LEFT for a decrease.
Changes in demand are caused by:
•Change in income
•Change in prices of related goods
•Change in tastes
•Change in expectations
•Change in population (# of buyers)
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• Change in Income
– Normal Good: As income increases, demand for
good increases.
– Inferior Good: As income increases, demand for
good decreases. (ex: public transportation)
• Price of Related Goods
– Substitutes: an increase in the price of one leads
to an increase in the demand of the other
• Ex: Hot Dogs/Hamburgers, Chips/Pretzels
– Complements: an increase in the price of one
leads to a decrease in the demand of the other
• Ex: Hot Fudge/Ice Cream, Peanut Butter/Jelly
• Tastes: a person’s preference affects whether
they want to purchase an item or not
• Expectations: a person will buy a good if they
expect good results as a benefit of the
purchase (ex: buying fancy clothes will help
you look in style with friends and co-workers)
• # of buyers, or population: The demand can
always shift depending on who is purchasing
the product.
Law of Supply
• When the price of a good rises, the quantity
supplied will also rise.
• Supply is always being graphed on an upward
slope.
• Change in Quantity Supplied= Price Change
• “Change in Supply” caused by:
– Input costs
• Labor, Resources, and Capital
– Technology
– Demand of related goods
– Special Circumstances
– # of suppliers
– Expectations
The Market for Nike Tennis Shoes
Price
QS
QD
$20
8,000
90,000
$50
20,000
77,000
$80
37,000
62,000
$110
54,000
44,000
$140
76,000
25,000
$170
98,000
7,000
Sketch the Supply and Demand market for Tennis Shoes, where is our
equilibrium point?
• An article comes out in Sports Illustrated
saying that Usain Bolt, the world’s fastest
man, credits all of his success to Nike. What
impact will this cause?
At the same time of Bolt’s
statement, an earthquake
hits Malaysia. It has caused
sizable damage to Nike’s
facilities. What impact will
this cause?
• Bolt’s statement had a small impact on
consumers, but the earthquake has affected
Nike greatly. How will this shift our market?
Equilibrium
 The intersection of the supply and demand curves is
the equilibrium.
 It is where the price and quantity from the supply and
demand sides have found balance.
Three Steps in Analyzing an
Equilibrium Problem
1. Decide whether the event affects the supply
or demand curve.
2. Decide in which direction the curve shifts.
3. Use the supply and demand diagram to see
how the shift affects price and quantity
Moving From Excess Demand (a shortage) to Equilibrium
In Figure 1, at a price of P',
what is happening?
P
D
S
The quantity demanded in the market
exceeds what producers are willing to
supply. Shoppers are now competing
for a shortage of goods, and so they
will bid up the price.
What will cause producers to
supply more goods?
Producers will be willing to
supply more goods as the price
increases.
When the price is bid up to P'', the
quantity supplied and quantity
demanded will be in equilibrium.
This equilibrium point occurs at the
intersection of the supply and
demand curves.
P''
P'
S
D
Q
Figure 1
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Moving From Excess Supply (Surplus) to Equilibrium
In Figure 2, at a price of P',
the quantity supplied
exceeds the quantity
demanded. Shoppers do
not want all the goods that
are brought to market.
Producers will lower the
price until quantity
demanded equals quantity
supplied at the equilibrium
price, P''.
P
D
S
P'
P''
S
D
Q
Figure 2
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Moving to Equilibrium When Supply Shifts
P
Assume that supply and demand for
orange juice are in equilibrium at the
point E. What happens to the
equilibrium price and quantity if there
is a bad orange season caused by a
weather disaster?
The shortage of oranges will cause
the supply curve to shift to the left,
from SS to S'S'. The new equilibrium
is shown at E'. The equilibrium
quantity is lower and the equilibrium
price is higher.
On the consumer side, shoppers are
willing to pay a higher price, since
orange juice is more scarce.
Producers are supplying less of the
product at any price, because of the
shortage of oranges.
D
S'
S
Price Increases
E'
E
S'
S
D
Q
Quantity Decreases
Figure 3
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Moving to Equilibrium When Supply Shifts
P
S
D
S'
How would you describe the
movement to equilibrium when
supply shifts to the right as shown
in Figure 4?
What would be a cause of the shift
in supply? How do consumers
respond? What is the change in
price? What is the change in the
equilibrium point of quantity
demanded and supplied?
E
E'
S
S'
D
Q
Figure 4
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Moving to Equilibrium When Demand Shifts
P
D
Assume that supply and demand
for automobiles are in equilbrium at
the point E. What happens to the
equilbrium price and quantity if the
income of all consumers
increaeses? The increased income
will cause the demand curve to
Price Increases
shift to the right, from DD to D'D'.
The new equilibrium is shown at E'.
The equilibrium quantity is higher
and the equilibrium price is higher.
S
On the supply side, producers are
willing to supply more cars, since
the good is in greater demand..
S
D'
E'
E
D'
D
Q
Quantity Increases
Figure 5
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Moving to Equilibrium When Demand Shifts
P
D'
D
S
How would you describe the
movement to equilibrium when
demand shifts to the left?
What would be a cause of the shift
in demand? How do producers
respond? What is the change in
price? In the equilibrium point of
quantity demanded and supplied?
E
E'
S
D'
D
Q
Figure 6
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