BUSS1040 â Economics for Business Decision Making Lecture 1 ...
BUSS1040 – Economics for Business Decision Making Lecture 1 • Scarcity is the inevitable situation in which society’s unlimited wants exceed the resources available to fulfill those wants. • Resources (also referred to as factors of production) are the inputs used to produce goods and services, e.g. natural resources (land, water, minerals) and things like labour and capital. • A trade-‐off is the necessary sacrificing of producing one good or service to produce another good or service due to scarcity of resources. • Scarcity of resources forces society to have to make choices or trade-‐offs. • Economics is the study of the choices/trade-‐offs that society makes in order to fulfill their unlimited wants given its scarcity of resources. • Opportunity costs include both explicit and implicit costs (that is the foregone costs). • Efficiency is the property of maximizing the return from scarce resources, while equity is the property of fairly distributing the benefits of those resources among society, i.e. efficiency refers to the size of the economic pie, and equity refers to the proportions in which it is divided. Due to different beliefs regarding the manner in which things should be distributed, equity is therefore a subjective idea, and efficient outcomes are by no means necessarily equitable. • Productive efficiency is the property of producing a good or service using the least amount of resources required. • Allocative efficiency is the property of having resources allocated throughout the economy according to the demands of society, and thus the property of having production reflecting the choices of society. • Dynamic efficiency is the property of having new technologies and innovation adopted over a period of time that balances the short-‐term needs with the long-‐term needs, that is, it balances the need to produce goods in the short term with the need to achieve productive efficiency in the long term. • Opportunity cost is the highest-‐valued alternative that must be given up to engage in an activity. • Economic models are simplified versions of reality used to analyse real-‐ world economic situations. To develop an economic model, the following steps are usually followed: o Assumptions about the general behavior of the individuals/firms that make up society are made (e.g. that individuals will purchase goods and services that are most affordable/maximise their satisfaction or that firms will act to maximise their profits). o A hypothesis regarding an economic variable is formulated which can be tested (e.g. the price paid for water use). This hypothesis usually concerns a causal relationship between one variable and another (e.g. the price paid for water use, and the amount of water used). o Economic data is used to test the hypothesis (e.g. statistics regarding the price paid for water use and the amount of water used).
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o The model is revised if it is negated/not supported by the economic data. N.B. Just because there is a correlation between two variables does not mean that their relationship is causal, and thus although statistics may appear to support or negate a model, other variables can change which can complicate the testing of a hypothesis and lead to false conclusions. o The revised model is used to predict answers to future economic questions. Positive analysis pertains to what is and involves value-‐free statements that can be confirmed or negated by factual data, whereas normative analysis pertains to what ought to be and involves value judgments that are both subjective and unable to be tested. Economics is concerned with positive analysis. The production possibility frontier is a curve showing the maximum attainable combinations of two products that may be produced with the available resources. Any point that falls on the curve is efficient, as it marks a point at which all the available resources are being fully utilised for maximum output. Any point inside the curve is inefficient, as it marks a point at which only some of the resources are being utilised and thus that maximum output is not occurring. Any point outside the curve, unlike the points inside or on the curve, is unattainable due to the limited resources of the producer. If the production possibility frontier is a straight line, then the opportunity cost is constant, typically, however, the production possibility frontier is a curve, illustrating the concept of increasing marginal opportunity costs. Marginal opportunity costs increase due to the fact that resources are inherently best suited for different purposes, and therefore as the economy moves down the production possibility frontier curve, more resources that are better suited to the production of a certain good are allocated to the production of another, causing increasingly smaller increases in the production of the second good at the expense of increasingly greater decreases in the production of the first.
Increasing marginal opportunity costs demonstrate the idea that the more resources already devoted to an activity, the smaller the payoff of devoting additional resources to that activity (or the converse, the less
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resources already devoted to an activity, the greater the payoff of devoting additional resources to that activity). **economic growth definition?**Economic growth is the expansion of society’s production potential; it can be illustrated by a shift outwards in a production possibility frontier curve (similarly, economic reduction can be illustrated by a shift inwards in a production possibility frontier). As an increase in the production of goods and services ultimately raises the standard of living, economic growth, which causes an increase in the production of goods and services, therefore raises the standard of living. N.B. Technological advances can cause an increase in production in certain sectors whilst leaving others unchanged, shifting the production possibility curve (which therefore represents economic growth) whilst leaving production in certain other sectors unchanged. Absolute advantage is the ability of an individual, firm or country to produce more of a good or service than competitors using the same amount of resources. Comparative advantage is the ability of an individual, firm or country to produce a good or service at a lower opportunity cost than competitors. Comparative advantage, rather than absolute advantage, is the basis for trade, and as the table below demonstrates, individuals, firms and countries are better off specialising in the production of the goods and services for which they have a comparative advantage and to then obtain the other goods they need by trading.
Trade is the act of buying or selling a good or service in a market. A market is a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade. Product markets are markets for goods and services (e.g. computers, medical treatment etc.). In product markets, households are the demanders and firms are the suppliers. Factor markets are markets for the factors of production, which are typically divided into four broad categories: o Labour e.g. part-‐time work at McDonalds or being a CEO of a corporation o Capital e.g. machines, tools and computers o Natural resources e.g. land, water, minerals etc.
o Entrepreneurial ability e.g. the skills to bring together the other factors of production so that goods can be successfully produced and sold • Free markets are markets with few government restrictions on how a good or service can be produced or sold or how a factor of production can be employed. • Property rights are the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it. To enforce contracts and property rights, an independent court system with impartial judges is required. Without the enforcing of property rights, the production of goods and services is hindered, reducing economic efficiency, leaving the economy inside its production possibility frontier and reducing the standard of living for the economy. Lecture 2 • When creating graphs in economics, price is always put on the y axis • A perfectly competitive market is a market in which all goods being offered are homogeneous (the same), and in which there are many buyers and sellers of the goods, none of which have the power to impact on market prices, that is, they are price takers. • The quantity demanded is the amount of a good or service that a consumer is willing and able to purchase at a given price at a certain period in time. • The demand schedule is a table relating the price of a product to the quantity demanded of that product. • The demand curve is a curve that relates the price of a product and the quantity demanded of that product. • The market demand is the total demand by all consumers of a certain good or service. • The Law of Demand states that ceteris paribus (the requirement that all other constants be held equal when analyzing the relationship between two variables), when the price of a product falls, the quantity demanded will increase, and the opposite, that when the price of a product increases, that the quantity demanded will decrease.
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A shift in demand is any increase or decrease in demand as a whole. An increase in demand means that at any given price, consumers as a whole will buy more of a good, whereas a decrease in demand, means that at any given price, consumers as a whole will buy less of a good. This is represented on a demand curve, in the case of an increase in demand, by shifting the whole curve the right, and in the case of a decrease in demand, by shifting the whole curve to the left.
Variables that shift demand in a market include (in order of importance): income, the price of related goods, population and demographics (i.e. changes in the size and composition of the market), changes in tastes, expected future prices. N.B. Price does not shift demand in a market, but is rather a movement along the demand curve or a change in quantity demanded. Income: o A normal good is a product for which the demand increases as income rises and decreases as income falls (e.g. iPhones, business class flights etc.). o An inferior good is a product for which the demand increases as income falls and decreases as income rises e.g. home brand tinned spaghetti, or inter-‐city bus travel. The price of related goods: o The demand for a good increases when the price of a substitute good (a good that can be used for the same purpose) increases, and decreases when the price of a substitute good decreases (e.g.
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the demand for iPhones increases when the price of Samsung Galaxy S4s – a substitute good – increases) o The demand for a good decreases when the price of a complementary good (a good that is used in conjunction with another good) increases, and the demand for a good increases when the price of a complementary good decreases (e.g. the demand for iPods decreases when the price of iTunes music – a complementary good – increases) The substitution effect is the change in the quantity demanded of a product as a result of the effect that a change in price of either product A or product B, that causes product A to be more or less expensive relative to product B and others (e.g. the quantity of Emirates business class flights demanded decreases as a decrease in the price of Qantas business class flights causes the Emirates flights to be more expensive relative to Qantas). Purchasing power is the quantity of goods that can be bought with a fixed amount of income. The income effect is the change in the quantity demanded of a product as a result of the effect that a change in the price of that product has on consumer purchasing power (e.g. the quantity of business class flights demanded decreases as an increase in their price causes a decrease in consumers’ purchasing power). Changes in tastes: o The demand for a good increases when consumers’ taste for that good increases and the demand for a good decreases when consumers’ taste for that good decreases (e.g. Roger Federer wearing Nike shoes makes them fashionable, increasing consumers’ taste for the shoes and thus the demand for the shoes). Population and demographics: o In general, the demand for most goods increases as the population increases. o The demand for a good increases and decreases as changes occur in the demographics of a population (age, race, gender etc.). Expected future prices: o The demand for a good increases when consumers expect future prices to increase, and the demand for a good decreases when consumers expect future prices to decrease (e.g. the demand for iPhones decreases when consumers expect the prices of iPhones to drop). A change in demand is a shift in the demand curve as a result of a change in variables other than the product’s price, whereas a change in the quantity demanded is a movement along the demand curve as a result of a change in the product’s price. The market demand curve is simply a summation of the values on the x-‐ axis (that is a horizontal summation) of the individual consumer demand curves. N.B. This is provided that the price is on the Y axis and the quantity demanded is on the X axis).
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o The model is revised if it is negated/not supported by the economic data. N.B. Just because there is a correlation between two variables does not mean that their relationship is causal, and thus although statistics may appear to support or negate a model, other variables can change which can complicate the testing of a hypothesis and lead to false conclusions. o The revised model is used to predict answers to future economic questions. Positive analysis pertains to what is and involves value-‐free statements that can be confirmed or negated by factual data, whereas normative analysis pertains to what ought to be and involves value judgments that are both subjective and unable to be tested. Economics is concerned with positive analysis. The production possibility frontier is a curve showing the maximum attainable combinations of two products that may be produced with the available resources. Any point that falls on the curve is efficient, as it marks a point at which all the available resources are being fully utilised for maximum output. Any point inside the curve is inefficient, as it marks a point at which only some of the resources are being utilised and thus that maximum output is not occurring. Any point outside the curve, unlike the points inside or on the curve, is unattainable due to the limited resources of the producer. If the production possibility frontier is a straight line, then the opportunity cost is constant, typically, however, the production possibility frontier is a curve, illustrating the concept of increasing marginal opportunity costs. Marginal opportunity costs increase due to the fact that resources are inherently best suited for different purposes, and therefore as the economy moves down the production possibility frontier curve, more resources that are better suited to the production of a certain good are allocated to the production of another, causing increasingly smaller increases in the production of the second good at the expense of increasingly greater decreases in the production of the first.
Increasing marginal opportunity costs demonstrate the idea that the more resources already devoted to an activity, the smaller the payoff of devoting additional resources to that activity (or the converse, the less
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resources already devoted to an activity, the greater the payoff of devoting additional resources to that activity). **economic growth definition?**Economic growth is the expansion of society’s production potential; it can be illustrated by a shift outwards in a production possibility frontier curve (similarly, economic reduction can be illustrated by a shift inwards in a production possibility frontier). As an increase in the production of goods and services ultimately raises the standard of living, economic growth, which causes an increase in the production of goods and services, therefore raises the standard of living. N.B. Technological advances can cause an increase in production in certain sectors whilst leaving others unchanged, shifting the production possibility curve (which therefore represents economic growth) whilst leaving production in certain other sectors unchanged. Absolute advantage is the ability of an individual, firm or country to produce more of a good or service than competitors using the same amount of resources. Comparative advantage is the ability of an individual, firm or country to produce a good or service at a lower opportunity cost than competitors. Comparative advantage, rather than absolute advantage, is the basis for trade, and as the table below demonstrates, individuals, firms and countries are better off specialising in the production of the goods and services for which they have a comparative advantage and to then obtain the other goods they need by trading.
Trade is the act of buying or selling a good or service in a market. A market is a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade. Product markets are markets for goods and services (e.g. computers, medical treatment etc.). In product markets, households are the demanders and firms are the suppliers. Factor markets are markets for the factors of production, which are typically divided into four broad categories: o Labour e.g. part-‐time work at McDonalds or being a CEO of a corporation o Capital e.g. machines, tools and computers o Natural resources e.g. land, water, minerals etc.
o Entrepreneurial ability e.g. the skills to bring together the other factors of production so that goods can be successfully produced and sold • Free markets are markets with few government restrictions on how a good or service can be produced or sold or how a factor of production can be employed. • Property rights are the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it. To enforce contracts and property rights, an independent court system with impartial judges is required. Without the enforcing of property rights, the production of goods and services is hindered, reducing economic efficiency, leaving the economy inside its production possibility frontier and reducing the standard of living for the economy. Lecture 2 • When creating graphs in economics, price is always put on the y axis • A perfectly competitive market is a market in which all goods being offered are homogeneous (the same), and in which there are many buyers and sellers of the goods, none of which have the power to impact on market prices, that is, they are price takers. • The quantity demanded is the amount of a good or service that a consumer is willing and able to purchase at a given price at a certain period in time. • The demand schedule is a table relating the price of a product to the quantity demanded of that product. • The demand curve is a curve that relates the price of a product and the quantity demanded of that product. • The market demand is the total demand by all consumers of a certain good or service. • The Law of Demand states that ceteris paribus (the requirement that all other constants be held equal when analyzing the relationship between two variables), when the price of a product falls, the quantity demanded will increase, and the opposite, that when the price of a product increases, that the quantity demanded will decrease.
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A shift in demand is any increase or decrease in demand as a whole. An increase in demand means that at any given price, consumers as a whole will buy more of a good, whereas a decrease in demand, means that at any given price, consumers as a whole will buy less of a good. This is represented on a demand curve, in the case of an increase in demand, by shifting the whole curve the right, and in the case of a decrease in demand, by shifting the whole curve to the left.
Variables that shift demand in a market include (in order of importance): income, the price of related goods, population and demographics (i.e. changes in the size and composition of the market), changes in tastes, expected future prices. N.B. Price does not shift demand in a market, but is rather a movement along the demand curve or a change in quantity demanded. Income: o A normal good is a product for which the demand increases as income rises and decreases as income falls (e.g. iPhones, business class flights etc.). o An inferior good is a product for which the demand increases as income falls and decreases as income rises e.g. home brand tinned spaghetti, or inter-‐city bus travel. The price of related goods: o The demand for a good increases when the price of a substitute good (a good that can be used for the same purpose) increases, and decreases when the price of a substitute good decreases (e.g.
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the demand for iPhones increases when the price of Samsung Galaxy S4s – a substitute good – increases) o The demand for a good decreases when the price of a complementary good (a good that is used in conjunction with another good) increases, and the demand for a good increases when the price of a complementary good decreases (e.g. the demand for iPods decreases when the price of iTunes music – a complementary good – increases) The substitution effect is the change in the quantity demanded of a product as a result of the effect that a change in price of either product A or product B, that causes product A to be more or less expensive relative to product B and others (e.g. the quantity of Emirates business class flights demanded decreases as a decrease in the price of Qantas business class flights causes the Emirates flights to be more expensive relative to Qantas). Purchasing power is the quantity of goods that can be bought with a fixed amount of income. The income effect is the change in the quantity demanded of a product as a result of the effect that a change in the price of that product has on consumer purchasing power (e.g. the quantity of business class flights demanded decreases as an increase in their price causes a decrease in consumers’ purchasing power). Changes in tastes: o The demand for a good increases when consumers’ taste for that good increases and the demand for a good decreases when consumers’ taste for that good decreases (e.g. Roger Federer wearing Nike shoes makes them fashionable, increasing consumers’ taste for the shoes and thus the demand for the shoes). Population and demographics: o In general, the demand for most goods increases as the population increases. o The demand for a good increases and decreases as changes occur in the demographics of a population (age, race, gender etc.). Expected future prices: o The demand for a good increases when consumers expect future prices to increase, and the demand for a good decreases when consumers expect future prices to decrease (e.g. the demand for iPhones decreases when consumers expect the prices of iPhones to drop). A change in demand is a shift in the demand curve as a result of a change in variables other than the product’s price, whereas a change in the quantity demanded is a movement along the demand curve as a result of a change in the product’s price. The market demand curve is simply a summation of the values on the x-‐ axis (that is a horizontal summation) of the individual consumer demand curves. N.B. This is provided that the price is on the Y axis and the quantity demanded is on the X axis).
