ECON 1102 Study Notes
Chapter 1: Foundations and models
- People make choices to attain their goals → people face trade-offs in a world of scarcity o SCARCITY – unlimited wants vs limited resources to fulfil wants
Scarcity can include lack of skills
o RESOURCES – inputs to produce goods and services
Includes natural resource, labour, capital, entrepreneurial ability “FACTORS OF PRODUCTION”
- Economics is the study of choices peoples and societies make to attain their unlimited wants given limited resource
- 3 key ideas;
o People are rational
o People respond to incentives
o Optimal decisions are made at the margin – little changes
Comparison of marginal benefits and costs
- ECONOMIC MODELS → simplified versions of reality used to analyse real world economic situations - OPPORTUNITY COST → the highest valued alternative given up to engage in an activity
CENTRALLY PLANNED ECONOMY → govt decides who gets resources
MARKET ECONOMY → free market forces, households and firms interact to allocate resources CONSUMER SOVEREIGNTY → consumers ultimately decide what is produced by firms
Analysis types:
- Positive analysis → concerned with what is, things that can be analysed with hard facts and data - Normative analysis → concerned with what ought to be, involves value making judgements that are not
easily tested and backed
Microeconomics → study of households and firms and how they make choices, how the government can interact in markets to attempt to influence choices
- Concerned with issues such as:
o How consumers react to changes in product prices o How firms decide what price to charge
o Policy issues – reducing smoking through taxes, Reducing pollution etc.
Macroeconomics → study of the economy as a whole, including topics such as inflation, unemployment and economic growth
- Concerned with;
o Economic expansions and contractions o Unemployment fluctuations
o Long run economic growth
o Policy issues – fiscal and monetary EFFICIENCY
- Productive efficiency – goods and services produced with the least amount of resource possible - Allocative frequency – production that reflects consumer preferences – only make what people want - Dynamic efficiency – new technology and innovation are adapted over time
- Voluntary exchange – both buyers and sellers are better off from the exchange
- Equity – fairness of distribution of economic benefits amongst individuals and societies.
Chapter 2: Choices and Trade-offs in the Market
People engage in trade because of scarcity → you cant and don’t have the resource to produce everything you need and want, hence you make something, sell it to buy other things you need.
Analysis of scarcity and Decision making → PPF → production possibilities frontier
- Shows the maximum attainable combinations of two products that can be made with the available resources - Anything inside the line is inefficient
- Anything outsie the line is not possible with current resources → need increase in human capital or technology
- The nature of the curve is due to an increasing marginal opportunity cost
o Initially the rate of change in opportunity for one vs another is low, but the opportunity cost increases as the combination ratio increases.
o This gives the curve its convex shape
o The more of the other you begin to produce, the more of the original product it will cost
ECONOMIC GROWTH → can be shown by a shift outwards of the PPF → it can be an increase in available resources or technology for one or both of the products that are being produced.
GAINS FROM TRADE → people should produce things they have comparative advantage in producing
- Absolute advantage – ability to produce more of a good or service than another producer using the same inputs
- Comparative advantage – ability to produce a good or service at a lower opportunity cost than other producers
MARKET SYSTEM → the interaction of households, firms and the govt.
- Market – group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
- Product markets – markets for goods and services - Factor markets – markets for the factors of production
o Labour – work that people do
o Capital – physical capital such as machines, tools and computers, used to produce other goods o Natural resource – land, water, oil, raw materials etc
o Entrepreneurial ability – someone who is able to bring together all factors of production to produceand sell goods and services successfully.
o HOUSEHOLDS ARE SUPPLIERS IN THIS MARKET AND THE FIRMS ARE BUYERS FREE MARKET GAINS → no govt restriction on how good or service is sold
- Free markets around the world have proved to be the most successful in raising living standards
- The price mechanism shows that supply and demand rule, and that people’s decisions are based on that A successful market system relies on a few things → things govts can do to encourage economic growth
- Protection of private property → this is in the form of property rights which essentially incentivise people to innovate and come up with ideas → patents are granted
- Enforcement of contracts and property rights → law systems and courts ensure it is enforced
Chapter 3: Demand and Supply
Based on consumer sovereignty → people demand and suppliers have to supply based on what consumers want - Demand schedule = table showing price of product and the amount people demand at that price
- Quantity demanded = amount consumers are willing to purchase of a good or service a certain price - Demand curve = curve showing relationship between the price of a product and the quantity demanded
o They are often drawn as straight lines for convenience but are not so in reality.
- MARKET DEMAND – the demand by all consumers of a given good or service.
o AS PRICE INCREASES, DEMAND FALLS → law of demand
********** ‘Ceteris Paribus’ → “all else being equal” ***********
*We hold all variables constant and change one. See what the effect Is on the others.
Substitution effect → change in quantities demanded of a good/service resulting from a price change, making the good less expensive comparatively to relative goods. Meaning people buy more of the cheaper good
Income effect → change in quantity demanded resulting from a change in consumer purchasing power. If the net change gives greater purchasing power, they will generally buy more. There are however inferior goods.
EFFECT OF SHIFTS IN THE DEMAND CURVE
- Income – amount of free income affects willingness and ability to spend - Prices of related goods – depends if it is a substitute or complimentary good.
o Substitute = goods that can be used for same or similar purpose o Complementary = good that used together with another - Tastes – depends what people like to buy
- Population and demographics – different places, different people, demand different things - Expected future prices – people decide to buy things based on the expected future prices.
Supply → amount of good or service a firm is willing and able to supply at a given price Market supply is total
EFFECT OF SHIFTS IN THE SUPPLY CURVE
- Prices of inputs – cost of making the good or service
- Technological change – affects efficiency and how much it can produce with given inputs
- Prices of substitutes in production – other goods in the market that can be used instead of another - Number of firms in the market – more firms = greater supply
- Expected future prices – firms adjust their supply based on what they expect MARKET EQUILIBRIUM → where supply = demand
Competitive market equilibrium is just where a market of lots and buyers and sellers will meet equilibrium of supply and demand
SURPLUS – amount supplied greater than demand DEFICIT – amount supplied less than demand