Introduction Day #1 Chapter 1: Economics and ...
Introduction
Day #1
What is economics? The word economy comes from the Greek word for “one who manages the household.” What do parents do everyday? Make decisions -The household must allocate its scarce resources among its various family members taking into account each member’s abilities, efforts, and desires. -Like a household, a society also faces many decisions -A society must decide what jobs and who will do them. Economics-study of how society manages its scarce resources; a behavioral science Division of Economics: -Microeconomics: study of how households and firms make decisions and how they interact in markets -Macroeconomics: study of economy wide phenomena including inflation, unemployment and economic growth
Chapter 1: Economics and Economic Reasoning
Day #2
Economics-study of how society manages its scarce resources; behavioral science -study how human beings coordinate their wants and desires, given the decision making mechanisms, social customs, and political realities of the society Coordination in Economics: -Any economic system must face and solve three coordination problems: -what and how much to produce -how to produce it -for whom to produce it Marginal Cost-the additional cost above the costs you have already incurred Sunk Cost-the cost that has already been incurred and cannot be recovered -What is the marginal cost of driving to school? Money you pay for the gasoline. -What is the sunk cost? The money you paid for buying the car. -What is the sunk cost of attending this class? Tuition Example: Suppose there is a 200 seat plane and the plane is about to take off with ten empty seats and there is a standby passenger waiting at the gate. What is the marginal cost for the airline company if they accept this standby passenger? -a drink or a cookie (whatever the passenger consumes); gas -marginal benefit: money from ticket
Example 2: You rent a car for $29.95. The first 150 miles are free, but each mile thereafter costs 15 cents. You drive it 200 miles. What is the marginal cost of driving the car? What is the sunk cost? Sunk cost: $29.95 Marginal cost: 200 miles-150 miles=50 miles; 50 miles times 15 cents=$7.50; price of gas Marginal Benefits-the additional benefit above what you have already derived -What is the marginal benefit of attending this class? Knowledge; Credit for Major -What is your decision based on the marginal benefit and marginal cost? Compare the cost to the benefit and if benefit greater attend class but if not sleep late. Opportunity Cost-the best alternative that we give up when we make a choice or a decision. (There is no such thing as a free lunch) Example 3: What is the opportunity cost of teaching? Sleeping at home, watching on tv, working on my dissertation. Example 4: Suppose that you are considering going to a concert. Tickets cost $60. If you go to the concert, you will have to miss 4 hours of work, where you are making $10 an hour. What is your total opportunity cost of going to the concert measured in dollars given up? $40 and $60. Because if you don’t go to the concert you can save the $60 and spend on something else. Example 5: Suppose that after studying 7 hours for an econ test you are confident that you know enough to make a B. However, if you study one more hours instead of watching your favorite TV show, you will probably improve your grade to an A. Identify the marginal costs and benefits in the situation. Marginal cost: extra hour to do something else, benefit: A on test Example 6:Suppose you currently earn 30,000 a year. You are considering a job that will increase your lifetime earnings by 300,000 but that requires an MBA. The job will mean also attending business school for two years at an annual cost of $25000 You already have a bachelors degree, for you spent 80,000. Sunk cost: 80,000 you paid already Marginal Cost: 50,000+60,000 (two years of working) Opportunity Cost: 60,000 +50,000 (two years of school) Marginal Benefit: Increased earnings of 300,000 Economics and Market Forces: -Economic forces: mechanisms that ration scarce goods -A market force is an economic force that is given relatively free rein by society to work through the market. -The invisible hand is a market force that rations goods by changing prices.
-If there is a shortage, prices rise. -If there is a surplus, prices fall. Invisible Hand: -The invisible hand is the price mechanism the rise and fall of prices that guides our actions in market. -Through the invisible hand, market can allocate resource efficiently. -Efficiency means achieving a goal as cheaply as possible.
Chapter 2: The Production, Possibility Model, Trend and Globalization Day #3 -Production possibility curve (PPC) -The functions of PPC -Shifts in the PPC Example: A Production Possibilities Curve for an Individual -A two decrease in history is the opportunity cost but three point increase in economics. -Straight line if the opportunity cost is unchanged - Inside PPC, inefficient -Outside PPC, unattainable
Production Possibility Curve (PPC) -A curve measuring the maximum combination of outputs that can be obtained from a given number of imports Output-result of an activity (grade) Input-what you put into a production process to achieve an output (hours of studying)
The function of the PPC -Demonstrates opportunity costs with a PPC -Opportunity cost is the best alternative that we give up when we make a choice or a decision. The functions of the PPC -Demonstrate the efficient and inefficient outputs with a PPC Productive efficiency- achieving as much output as possible from a given amount of resource-occurs at any point on the PPC Any point within the PPC represents inefficiency Any point outside the PPC is unattainable, given present resources and technology Example:2 A Production Possibilities Table for Society -opportunity cost of producing one pound of butter is four guns (from A to B) -can not gather same information on opportunity cost for row (from E to F opportunity cost is 1/5)
-opportunity cost is decreased…so PPC is not a straight line -can find same information in graph
Example 3: Efficiency and Inefficiency
Example 4: Why all the points on the PPCs represent efficiency? -Because PPCs represent the maximum combination of outputs that can be obtained from a given number of inputs. -100%, maximum achieved when it lies on the line Shifts in the PPC -Society can produce more output if: -technology is improved -more resources are discovered -economic institutions get better at fulfilling our wants -More output is represented by an outward shift in the PPC. Example 5: Shifts in the PPC -original green -new blue
Question: -The improvement of technology lowers the cost of manufactured goods x-axis: manufactured goods y-axis: agricultural goods -can produce more, same point on y but point on x is further out -Global warming increases the cost of producing agriculture goods. x-axis: agricultural goods y-axis: manufactured goods -can produce less, lower point on y and same point on x -manufactured goods increase-agricultural goods decrease -Hurricanes destroy the natural resources. -A new technology is discovered that doubles the speed at which all goods can be produced.
Day # 4 Increasing Marginal Opportunity Cost -The principle of increasing marginal opportunity cost states that opportunity costs increase as you produce more of one product -In other words, initially the opportunity costs of an activity are low, but they increase the more we concentrate on that activity (Guns vs. Butter) Comparative Advantage -used to describe the opportunity cost of 2 products -the producer who has a smaller opportunity cost of producing one good is said to have a comparative advantage in producing that good
Example Assume there are two guys: Tom and John. I suppose that both of them know how to produce potatoes and meat.
o For Tom: 1 Pound of potatoes 1 hour 1 pound of meat 1 hours o For John 1 pound of potatoes 1 hour 1 pound of meat 2 hours Tom-1 pound of meat…1 pound of potatoes John-1/2 pound of meat…2 potatoes • Tom - comparative advantage of producing meat • John – comparative advantage of producing potatoes • Meat Farmer • 20h/1lb Rancher • 1h/1lb
Potatoes 10h/1lb 8h/1lb
The producer that requires a smaller quantity of input to produce a good is said to have an absolute advantage in producing that good Rancher has absolute advantage…but we’re looking for comparative advantage! Must compare opportunity costs Opportunity cost of: • 1 lb of potatoes/ 1lb of meat • Farmer o ½ meat/ 2 lbs of potatoes • rancher o 8 lb meat/ 1/8 lb potatoes • •
Rancher has comparative advantage in producing meat Farmer has comparative advantage in producing potatoes
If both of them need meat and potatoes and they only have 40 hours to produce them and each spend 20 hours a week on the activity • If we let farmer produce potatoes only and rancher produce meat only. • Farmer – 4 lbs potatoes • Rancher 40 lbs. meat • Original output (both the farmer and rancher producing meat and potatoes – same hours) o 21 lbs meat – 4.5 lbs potatoes If they trade w/ each other – farmer gives 2 of 4 lbs potatoes to rancher and the rancher gives 6 lbs of meat in return. Then farmer has 6lbs meat and 2 lbs
potatoes to eat every week. The rancher has 34 lbs meat and 2 pounds potatoes every week.
Day #5 Question: Assume that the US can produce Toyotas at the cost of 16000 per car. In Japan, Toyotas can be produced at 1,000,000 yen and Chevrolets at 500,000 yen. A. In terms of Chevrolets, what is the opportunity cost of producing Toyotas in each country? US: Toyota 18,000 Chevy 16,000 18,000/16,000=9/8 Japan: Toyota 1,000,000
Chevy 500,000
1,000,000/500,000=2 (opp.cost) B. Who has the comparative advantage in producing Chevrolets? Japan: opportunity cost of producing Chevy 500,000/1,000,000=1/2 T US: 16,000/18,000=8/9 T C. Assume America purchase 500,000 Chevys and 300,000 Toyotas each year and that the Japanese purchase far fewer of each. Which Country should produce Chevys and which country should produce Toyotas? US should make Toyota Japan should make Chevy
Chapter 4: Demand and Supply Demand: -The amount of goods that buyers are willing and able to purchase The air that we need to breathe everyday is our demand? No The Law of Demand: -Quantity demanded rises as price falls, other things constant -Quantity demanded falls as price rises, other things constant The Demand Curve: -Demand curve is a graph of the relationship between the price if a good and the quantity demanded. -Based on the law of demand, what kind of shape the demand curve should be like? Diagonal line from top left to bottom right Vertical: price of good; Horizontal: quantity demanded
Example of From a Demand Table to a Demand Curve:
Quantity Demanded Versus Demand -Quantity demanded refers to a specific amount that will be demanded per unit of time at a specific price, other things constant. -Quantity demanded refers to a specific point on the demand curve -A change in quantity demanded, caused only by a change in the price of the good itself, is shown by a movement along a demand curve. -Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant. -It refers to the entire demand curve. -A change in demand caused by anything other than the good’s own price is shown by a shift in the demand curve. Example: Quantity Demanded Versus Demand graph in power point 1st: A-B because price went up 2nd: Change in demand by everything except price of good
Day #6 Normal good vs. Inferior good -Normal good is the good that an increase in income leads to an increase in demand, other things constant (Clothes, cars) -Inferior good is the good that an increase in income leads to a decrease in demand, other things constant (drive car instead of paying to ride the bus, new book vs. used book) Substitutes vs. Complements -Substitutes are often pairs of goods that are used in place of each other and an increase in the price of one leads to an increase in demand fir the other. (Dell, HP…if dell increases and hp stays same…would be considered substitutes) -Complements are often pairs of goods that are used together and an increase in the price of one leads to a decrease in the demand for the other. (ice cream and ice cream cones) Shift Factors of Demand -Shift factors of demand are factors that cause changes in demand (shifts in the demand curve) -Society’s income: -An increase in income will increase demand for normal goods. -An increase in income will decrease demand for inferior goods. (price of used book decrease…demand increase) -Prices of Other Goods: -When the price of a substitute good falls, demand falls for the good whose price has not changed. -When the price of a complement good falls, demand rises for the good whose price has not changed. -Tastes: -A change in taste will change demand with no change in price. -Expectations: -If you expect your income to rise, you may consume more now. -If you expect prices to fall in the future, you may put off your purchase today. -Taxes and Subsidies: -Taxes increase the cost of goods, thereby reducing demand. -Subsidies have an opposite effect. Example: Would a change in the price of pizza shift the pizza’s demand curve? -No, it would change the quantity demanded. Below:A market demand curve is the horizontal sum of all individual demand curves.
Day #7 Supply -Supply is the amount of a good that sellers are willing and able to sell. The Law of Supply -Quantity supplied rises as price rises, other things constant. -Quantity supplied falls as price falls, other things constant. The Supply Curve -Supply Curve is the graph of the relationship between the price of a good and the quantity supplied. -Based on the law of supply, what kind of shape the supply should look like Upward slope, vertical or horizontal line Price is vertical axis Quantity supplied of good is horizontal axis -The supply curve is the graphic representation of the law of supply. -The supply curve slopes upward to the right because the relationship between quantity supplied and the price is positive. 2-As price increase, the quantity supplied increases.
Quantity Supplied vs. Supply -Quantity supplied refers to a specific amount that will be supplied at a specific price. -Quantity supplied refers to a specific point on the supply curve. -A change in quantity supplied, caused only by a change in the price of the good itself, is shown by the movement along the supply curve. -Supply refers to a schedule of quantities a seller is willing to sell per unit of time at various prices, other things constant. -Supply refers to the whole supply curve. -A change in supply, caused by anything other than the good’s price, is shown by a shift in the supply curve. Quantity Supplied Versus Supply
Shift Factors of Supply:
-Shift factors of supply are factors that cause changes in supplt (shifts in the supply curve). -Price of inputs: -When costs go up, profits go down, so that the incentive to supply also goes down. -Technology: -Advances in technology reduce the number of inputs needed to produce a given supply of goods, decreasing costs, increasing profits, leading to increased supply. -Expectations: -If suppliers expect prices to rise in the future, they may store today’s supply to sell later, decreasing supply now. -Taxes and Subsidies: -When taxes increase, costs go up, and profits go down, causing a decrease in supply. -When subsidies increase, costs decrease, and profits increase, leading to am increase in supply. Question: according to the law of supply, what will motivate firms to increase their quantity supplied of a product? Price Equilibrium
Concepts -Equilibrium is a situation in which supply and demand have been brought into balance. -Equilibrium price is the price that balances supply and demand. -Equilibrium quantity is the quantity supplied and quantity demanded when the price has adjusted to balance supply and demand Equilibrium -When the market is not in equilibrium, there is either excess demand or excess supply.
-Excess supply: a surplus, the quantity supplied is greater than the quantity demanded, and prices fall. -Excess demand: a shortage, the quantity demanded is greater than the quantity supplied and prices rise. -When quantity demanded equals quantity supplied, prices have no tendency to change. Increase in Demand
Decrease in Supply
Day #8 Shifts in Supply and Demand -Shifts in either supply or demand change equilibrium price. An increase in demand or a decrease in supply: -creates excess demand at the original equilibrium price -Excess demand increases price until a new higher equilibrium price and quantity are reached Question: It has been reported that eating red meat is bad for your health. Using
supply and demand curves demonstrate the report’s likely effect on the equilibrium price and quantity of steak sold in the market. Question 2: Why does the price of airline tickets rise during summer months? Demonstrate you’re your answer with demand and supply curves. Questions: Show how the equilibrium price and quantity will be affected by each of the following factors: a. Bad weather wreaks havoc with the tea crop b. A technological innovation lowers the cost of producing tea c. Consumers’ income falls.( Assume tea is a normal good.) d. A medical report implying tea is bad for your health is published Summary: •A change in quantity demanded (supplied), caused only by a change in the good’s own price, is a movement along the demand (supply) curve. •A change in demand (supply) is a shift of the entire demand (supply) curve. •Factors that affect supply and demand other than price are called shift factors. Shift Factors of Demand Income Price of other goods Tastes Expectations Taxes and Subsidies on Consumers
Shift Factors of Supply Price of inputs Technology Expectations Taxes and Subsidies on Producers
•A market demand (supply) curve is the horizontal sum of all individual demand (supply) curves. •When quantity demanded equals quantity supplied at equilibrium, prices have no tendency to change. •When quantity demanded > quantity supplied, prices tend to rise. •When quantity supplied > quantity demanded, prices tend to fall. •When the demand curve shifts to the right (left), equilibrium price rises (declines) and equilibrium quantity rises (falls). •When the supply curve shifts to the right (left), equilibrium price declines (rises) and equilibrium quantity rises (falls).
Chapter 5: Using Demand and Supply The Price of a Foreign Currency: -The market for foreign exchange is called the foreign exchange (forex) market. -The exchange rate is the price of one currency in terms of another one. -People demand currencies to buy those countries’ goods and assets.
-Exchange rates are determined by supply and demand. The Supply and Demand for Euros -The quantity of euros is on the horizontal axis. -The price of the currency is on the vertical axis, measured in terms of dollars (how many dollars it takes to buy or sell one euro). -The supply of euros represents people who want to sell euros and buy dollars, while the demand for euros represents people who want to buy euros and sell dollars.
The Price of a Foreign Currency •The 12 members of the European Union began using a common currency, the euro, in 1999. •The euro dropped from $1.17 to $0.85 in 2001. •By 2004 the euro had risen to $1.30 because: –U.S. interest rates decreased, Europeans bought fewer U.S. financial assets, so the supply of euros decreased. –Americans increased their demand for euros in order to buy European financial assets.
-Europeans buy fewer US financial assets and decrease supply of euros. -Americans buy more European financial assets and increase demand for euros. Question: •If the increase in demand of euros is greater than the decrease in supply of euros, what will be happened on the price and equilibrium quantity of euros? •If the increase in the demand of euros is less than the decrease in supply of euros, what will be happened on the price and equilibrium quantity of euros? Government Intervention in the Market -Buyers look to the government for ways to hold prices down. -A price ceiling is a government-imposed limit on how high a price can be charged Rent Controls •Rent control is a price ceiling on rents set by the government. •The shortage would have been eliminated if rents had been allowed to rise to $1000 per month.
Government Intervention in the Market •Sellers look to the government for ways to hold prices up. •A price floor is a government-imposed limit on how low a price can be charged. Minimum Wage -The minimum wage, a price floor, is set by government specifying the lowest wage a firm can pay legally. -A minimum wage, Wmin, above the equilibrium wage, We, helps those who are employed, Q2, but hurts those who would have been employed at We, but can no longer find employment, Qe-Q2.
Excise Taxes •An excise tax is a tax that is levied on a specific good. •A tariff is an excise tax on an imported good. •Taxes and tariffs raise prices and reduce quantity.
Review of Changes in Supply and Demand
Quantity Restrictions:
Chapter 6: Describing Supply and Demand: Elasticity’s The Concept of Elasticity: •Elasticity is a measure of the responsiveness of one variable to another. •The greater the elasticity, the greater the responsiveness. •In economics, elasticity is used to describe the responsiveness of quantity supplied or quantity demanded to price. The Price Elasticity of Demand: •The price elasticity of demand measures how much the quantity demanded responds to a change in price. Price elasticity of demand (ED) (division) ED=percentage change in quantity demanded/percentage change in price Example: Suppose that a 10-percent increase in the price of an ice-cream cone causes the amount of ice cream you buy to fall by 20 percent. The related price elasticity of demand: 20 percent / 10 percent = 2 The Price Elasticity of Supply: •The price elasticity of supply measures how much the quantity supplied responds to a change in price. Price elasticity of supply (ES)
ES=percentage change in quantity supplied/percentage change in price Example2: Suppose a 10 percent increase in the price of an ice-cream causes a 5 percent increase in the supply of ice-cream. The related price elasticity of supply: 5 percent/ 10 percent = 0.5 Classifying Demand and Supply as Elastic or Inelastic: •Demand or supply is elastic if the percentage change in quantity is greater than the percentage change in price. E>1 •Demand or supply is inelastic if the percentage change in quantity is less than the percentage change in price. E
Day #1
What is economics? The word economy comes from the Greek word for “one who manages the household.” What do parents do everyday? Make decisions -The household must allocate its scarce resources among its various family members taking into account each member’s abilities, efforts, and desires. -Like a household, a society also faces many decisions -A society must decide what jobs and who will do them. Economics-study of how society manages its scarce resources; a behavioral science Division of Economics: -Microeconomics: study of how households and firms make decisions and how they interact in markets -Macroeconomics: study of economy wide phenomena including inflation, unemployment and economic growth
Chapter 1: Economics and Economic Reasoning
Day #2
Economics-study of how society manages its scarce resources; behavioral science -study how human beings coordinate their wants and desires, given the decision making mechanisms, social customs, and political realities of the society Coordination in Economics: -Any economic system must face and solve three coordination problems: -what and how much to produce -how to produce it -for whom to produce it Marginal Cost-the additional cost above the costs you have already incurred Sunk Cost-the cost that has already been incurred and cannot be recovered -What is the marginal cost of driving to school? Money you pay for the gasoline. -What is the sunk cost? The money you paid for buying the car. -What is the sunk cost of attending this class? Tuition Example: Suppose there is a 200 seat plane and the plane is about to take off with ten empty seats and there is a standby passenger waiting at the gate. What is the marginal cost for the airline company if they accept this standby passenger? -a drink or a cookie (whatever the passenger consumes); gas -marginal benefit: money from ticket
Example 2: You rent a car for $29.95. The first 150 miles are free, but each mile thereafter costs 15 cents. You drive it 200 miles. What is the marginal cost of driving the car? What is the sunk cost? Sunk cost: $29.95 Marginal cost: 200 miles-150 miles=50 miles; 50 miles times 15 cents=$7.50; price of gas Marginal Benefits-the additional benefit above what you have already derived -What is the marginal benefit of attending this class? Knowledge; Credit for Major -What is your decision based on the marginal benefit and marginal cost? Compare the cost to the benefit and if benefit greater attend class but if not sleep late. Opportunity Cost-the best alternative that we give up when we make a choice or a decision. (There is no such thing as a free lunch) Example 3: What is the opportunity cost of teaching? Sleeping at home, watching on tv, working on my dissertation. Example 4: Suppose that you are considering going to a concert. Tickets cost $60. If you go to the concert, you will have to miss 4 hours of work, where you are making $10 an hour. What is your total opportunity cost of going to the concert measured in dollars given up? $40 and $60. Because if you don’t go to the concert you can save the $60 and spend on something else. Example 5: Suppose that after studying 7 hours for an econ test you are confident that you know enough to make a B. However, if you study one more hours instead of watching your favorite TV show, you will probably improve your grade to an A. Identify the marginal costs and benefits in the situation. Marginal cost: extra hour to do something else, benefit: A on test Example 6:Suppose you currently earn 30,000 a year. You are considering a job that will increase your lifetime earnings by 300,000 but that requires an MBA. The job will mean also attending business school for two years at an annual cost of $25000 You already have a bachelors degree, for you spent 80,000. Sunk cost: 80,000 you paid already Marginal Cost: 50,000+60,000 (two years of working) Opportunity Cost: 60,000 +50,000 (two years of school) Marginal Benefit: Increased earnings of 300,000 Economics and Market Forces: -Economic forces: mechanisms that ration scarce goods -A market force is an economic force that is given relatively free rein by society to work through the market. -The invisible hand is a market force that rations goods by changing prices.
-If there is a shortage, prices rise. -If there is a surplus, prices fall. Invisible Hand: -The invisible hand is the price mechanism the rise and fall of prices that guides our actions in market. -Through the invisible hand, market can allocate resource efficiently. -Efficiency means achieving a goal as cheaply as possible.
Chapter 2: The Production, Possibility Model, Trend and Globalization Day #3 -Production possibility curve (PPC) -The functions of PPC -Shifts in the PPC Example: A Production Possibilities Curve for an Individual -A two decrease in history is the opportunity cost but three point increase in economics. -Straight line if the opportunity cost is unchanged - Inside PPC, inefficient -Outside PPC, unattainable
Production Possibility Curve (PPC) -A curve measuring the maximum combination of outputs that can be obtained from a given number of imports Output-result of an activity (grade) Input-what you put into a production process to achieve an output (hours of studying)
The function of the PPC -Demonstrates opportunity costs with a PPC -Opportunity cost is the best alternative that we give up when we make a choice or a decision. The functions of the PPC -Demonstrate the efficient and inefficient outputs with a PPC Productive efficiency- achieving as much output as possible from a given amount of resource-occurs at any point on the PPC Any point within the PPC represents inefficiency Any point outside the PPC is unattainable, given present resources and technology Example:2 A Production Possibilities Table for Society -opportunity cost of producing one pound of butter is four guns (from A to B) -can not gather same information on opportunity cost for row (from E to F opportunity cost is 1/5)
-opportunity cost is decreased…so PPC is not a straight line -can find same information in graph
Example 3: Efficiency and Inefficiency
Example 4: Why all the points on the PPCs represent efficiency? -Because PPCs represent the maximum combination of outputs that can be obtained from a given number of inputs. -100%, maximum achieved when it lies on the line Shifts in the PPC -Society can produce more output if: -technology is improved -more resources are discovered -economic institutions get better at fulfilling our wants -More output is represented by an outward shift in the PPC. Example 5: Shifts in the PPC -original green -new blue
Question: -The improvement of technology lowers the cost of manufactured goods x-axis: manufactured goods y-axis: agricultural goods -can produce more, same point on y but point on x is further out -Global warming increases the cost of producing agriculture goods. x-axis: agricultural goods y-axis: manufactured goods -can produce less, lower point on y and same point on x -manufactured goods increase-agricultural goods decrease -Hurricanes destroy the natural resources. -A new technology is discovered that doubles the speed at which all goods can be produced.
Day # 4 Increasing Marginal Opportunity Cost -The principle of increasing marginal opportunity cost states that opportunity costs increase as you produce more of one product -In other words, initially the opportunity costs of an activity are low, but they increase the more we concentrate on that activity (Guns vs. Butter) Comparative Advantage -used to describe the opportunity cost of 2 products -the producer who has a smaller opportunity cost of producing one good is said to have a comparative advantage in producing that good
Example Assume there are two guys: Tom and John. I suppose that both of them know how to produce potatoes and meat.
o For Tom: 1 Pound of potatoes 1 hour 1 pound of meat 1 hours o For John 1 pound of potatoes 1 hour 1 pound of meat 2 hours Tom-1 pound of meat…1 pound of potatoes John-1/2 pound of meat…2 potatoes • Tom - comparative advantage of producing meat • John – comparative advantage of producing potatoes • Meat Farmer • 20h/1lb Rancher • 1h/1lb
Potatoes 10h/1lb 8h/1lb
The producer that requires a smaller quantity of input to produce a good is said to have an absolute advantage in producing that good Rancher has absolute advantage…but we’re looking for comparative advantage! Must compare opportunity costs Opportunity cost of: • 1 lb of potatoes/ 1lb of meat • Farmer o ½ meat/ 2 lbs of potatoes • rancher o 8 lb meat/ 1/8 lb potatoes • •
Rancher has comparative advantage in producing meat Farmer has comparative advantage in producing potatoes
If both of them need meat and potatoes and they only have 40 hours to produce them and each spend 20 hours a week on the activity • If we let farmer produce potatoes only and rancher produce meat only. • Farmer – 4 lbs potatoes • Rancher 40 lbs. meat • Original output (both the farmer and rancher producing meat and potatoes – same hours) o 21 lbs meat – 4.5 lbs potatoes If they trade w/ each other – farmer gives 2 of 4 lbs potatoes to rancher and the rancher gives 6 lbs of meat in return. Then farmer has 6lbs meat and 2 lbs
potatoes to eat every week. The rancher has 34 lbs meat and 2 pounds potatoes every week.
Day #5 Question: Assume that the US can produce Toyotas at the cost of 16000 per car. In Japan, Toyotas can be produced at 1,000,000 yen and Chevrolets at 500,000 yen. A. In terms of Chevrolets, what is the opportunity cost of producing Toyotas in each country? US: Toyota 18,000 Chevy 16,000 18,000/16,000=9/8 Japan: Toyota 1,000,000
Chevy 500,000
1,000,000/500,000=2 (opp.cost) B. Who has the comparative advantage in producing Chevrolets? Japan: opportunity cost of producing Chevy 500,000/1,000,000=1/2 T US: 16,000/18,000=8/9 T C. Assume America purchase 500,000 Chevys and 300,000 Toyotas each year and that the Japanese purchase far fewer of each. Which Country should produce Chevys and which country should produce Toyotas? US should make Toyota Japan should make Chevy
Chapter 4: Demand and Supply Demand: -The amount of goods that buyers are willing and able to purchase The air that we need to breathe everyday is our demand? No The Law of Demand: -Quantity demanded rises as price falls, other things constant -Quantity demanded falls as price rises, other things constant The Demand Curve: -Demand curve is a graph of the relationship between the price if a good and the quantity demanded. -Based on the law of demand, what kind of shape the demand curve should be like? Diagonal line from top left to bottom right Vertical: price of good; Horizontal: quantity demanded
Example of From a Demand Table to a Demand Curve:
Quantity Demanded Versus Demand -Quantity demanded refers to a specific amount that will be demanded per unit of time at a specific price, other things constant. -Quantity demanded refers to a specific point on the demand curve -A change in quantity demanded, caused only by a change in the price of the good itself, is shown by a movement along a demand curve. -Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant. -It refers to the entire demand curve. -A change in demand caused by anything other than the good’s own price is shown by a shift in the demand curve. Example: Quantity Demanded Versus Demand graph in power point 1st: A-B because price went up 2nd: Change in demand by everything except price of good
Day #6 Normal good vs. Inferior good -Normal good is the good that an increase in income leads to an increase in demand, other things constant (Clothes, cars) -Inferior good is the good that an increase in income leads to a decrease in demand, other things constant (drive car instead of paying to ride the bus, new book vs. used book) Substitutes vs. Complements -Substitutes are often pairs of goods that are used in place of each other and an increase in the price of one leads to an increase in demand fir the other. (Dell, HP…if dell increases and hp stays same…would be considered substitutes) -Complements are often pairs of goods that are used together and an increase in the price of one leads to a decrease in the demand for the other. (ice cream and ice cream cones) Shift Factors of Demand -Shift factors of demand are factors that cause changes in demand (shifts in the demand curve) -Society’s income: -An increase in income will increase demand for normal goods. -An increase in income will decrease demand for inferior goods. (price of used book decrease…demand increase) -Prices of Other Goods: -When the price of a substitute good falls, demand falls for the good whose price has not changed. -When the price of a complement good falls, demand rises for the good whose price has not changed. -Tastes: -A change in taste will change demand with no change in price. -Expectations: -If you expect your income to rise, you may consume more now. -If you expect prices to fall in the future, you may put off your purchase today. -Taxes and Subsidies: -Taxes increase the cost of goods, thereby reducing demand. -Subsidies have an opposite effect. Example: Would a change in the price of pizza shift the pizza’s demand curve? -No, it would change the quantity demanded. Below:A market demand curve is the horizontal sum of all individual demand curves.
Day #7 Supply -Supply is the amount of a good that sellers are willing and able to sell. The Law of Supply -Quantity supplied rises as price rises, other things constant. -Quantity supplied falls as price falls, other things constant. The Supply Curve -Supply Curve is the graph of the relationship between the price of a good and the quantity supplied. -Based on the law of supply, what kind of shape the supply should look like Upward slope, vertical or horizontal line Price is vertical axis Quantity supplied of good is horizontal axis -The supply curve is the graphic representation of the law of supply. -The supply curve slopes upward to the right because the relationship between quantity supplied and the price is positive. 2-As price increase, the quantity supplied increases.
Quantity Supplied vs. Supply -Quantity supplied refers to a specific amount that will be supplied at a specific price. -Quantity supplied refers to a specific point on the supply curve. -A change in quantity supplied, caused only by a change in the price of the good itself, is shown by the movement along the supply curve. -Supply refers to a schedule of quantities a seller is willing to sell per unit of time at various prices, other things constant. -Supply refers to the whole supply curve. -A change in supply, caused by anything other than the good’s price, is shown by a shift in the supply curve. Quantity Supplied Versus Supply
Shift Factors of Supply:
-Shift factors of supply are factors that cause changes in supplt (shifts in the supply curve). -Price of inputs: -When costs go up, profits go down, so that the incentive to supply also goes down. -Technology: -Advances in technology reduce the number of inputs needed to produce a given supply of goods, decreasing costs, increasing profits, leading to increased supply. -Expectations: -If suppliers expect prices to rise in the future, they may store today’s supply to sell later, decreasing supply now. -Taxes and Subsidies: -When taxes increase, costs go up, and profits go down, causing a decrease in supply. -When subsidies increase, costs decrease, and profits increase, leading to am increase in supply. Question: according to the law of supply, what will motivate firms to increase their quantity supplied of a product? Price Equilibrium
Concepts -Equilibrium is a situation in which supply and demand have been brought into balance. -Equilibrium price is the price that balances supply and demand. -Equilibrium quantity is the quantity supplied and quantity demanded when the price has adjusted to balance supply and demand Equilibrium -When the market is not in equilibrium, there is either excess demand or excess supply.
-Excess supply: a surplus, the quantity supplied is greater than the quantity demanded, and prices fall. -Excess demand: a shortage, the quantity demanded is greater than the quantity supplied and prices rise. -When quantity demanded equals quantity supplied, prices have no tendency to change. Increase in Demand
Decrease in Supply
Day #8 Shifts in Supply and Demand -Shifts in either supply or demand change equilibrium price. An increase in demand or a decrease in supply: -creates excess demand at the original equilibrium price -Excess demand increases price until a new higher equilibrium price and quantity are reached Question: It has been reported that eating red meat is bad for your health. Using
supply and demand curves demonstrate the report’s likely effect on the equilibrium price and quantity of steak sold in the market. Question 2: Why does the price of airline tickets rise during summer months? Demonstrate you’re your answer with demand and supply curves. Questions: Show how the equilibrium price and quantity will be affected by each of the following factors: a. Bad weather wreaks havoc with the tea crop b. A technological innovation lowers the cost of producing tea c. Consumers’ income falls.( Assume tea is a normal good.) d. A medical report implying tea is bad for your health is published Summary: •A change in quantity demanded (supplied), caused only by a change in the good’s own price, is a movement along the demand (supply) curve. •A change in demand (supply) is a shift of the entire demand (supply) curve. •Factors that affect supply and demand other than price are called shift factors. Shift Factors of Demand Income Price of other goods Tastes Expectations Taxes and Subsidies on Consumers
Shift Factors of Supply Price of inputs Technology Expectations Taxes and Subsidies on Producers
•A market demand (supply) curve is the horizontal sum of all individual demand (supply) curves. •When quantity demanded equals quantity supplied at equilibrium, prices have no tendency to change. •When quantity demanded > quantity supplied, prices tend to rise. •When quantity supplied > quantity demanded, prices tend to fall. •When the demand curve shifts to the right (left), equilibrium price rises (declines) and equilibrium quantity rises (falls). •When the supply curve shifts to the right (left), equilibrium price declines (rises) and equilibrium quantity rises (falls).
Chapter 5: Using Demand and Supply The Price of a Foreign Currency: -The market for foreign exchange is called the foreign exchange (forex) market. -The exchange rate is the price of one currency in terms of another one. -People demand currencies to buy those countries’ goods and assets.
-Exchange rates are determined by supply and demand. The Supply and Demand for Euros -The quantity of euros is on the horizontal axis. -The price of the currency is on the vertical axis, measured in terms of dollars (how many dollars it takes to buy or sell one euro). -The supply of euros represents people who want to sell euros and buy dollars, while the demand for euros represents people who want to buy euros and sell dollars.
The Price of a Foreign Currency •The 12 members of the European Union began using a common currency, the euro, in 1999. •The euro dropped from $1.17 to $0.85 in 2001. •By 2004 the euro had risen to $1.30 because: –U.S. interest rates decreased, Europeans bought fewer U.S. financial assets, so the supply of euros decreased. –Americans increased their demand for euros in order to buy European financial assets.
-Europeans buy fewer US financial assets and decrease supply of euros. -Americans buy more European financial assets and increase demand for euros. Question: •If the increase in demand of euros is greater than the decrease in supply of euros, what will be happened on the price and equilibrium quantity of euros? •If the increase in the demand of euros is less than the decrease in supply of euros, what will be happened on the price and equilibrium quantity of euros? Government Intervention in the Market -Buyers look to the government for ways to hold prices down. -A price ceiling is a government-imposed limit on how high a price can be charged Rent Controls •Rent control is a price ceiling on rents set by the government. •The shortage would have been eliminated if rents had been allowed to rise to $1000 per month.
Government Intervention in the Market •Sellers look to the government for ways to hold prices up. •A price floor is a government-imposed limit on how low a price can be charged. Minimum Wage -The minimum wage, a price floor, is set by government specifying the lowest wage a firm can pay legally. -A minimum wage, Wmin, above the equilibrium wage, We, helps those who are employed, Q2, but hurts those who would have been employed at We, but can no longer find employment, Qe-Q2.
Excise Taxes •An excise tax is a tax that is levied on a specific good. •A tariff is an excise tax on an imported good. •Taxes and tariffs raise prices and reduce quantity.
Review of Changes in Supply and Demand
Quantity Restrictions:
Chapter 6: Describing Supply and Demand: Elasticity’s The Concept of Elasticity: •Elasticity is a measure of the responsiveness of one variable to another. •The greater the elasticity, the greater the responsiveness. •In economics, elasticity is used to describe the responsiveness of quantity supplied or quantity demanded to price. The Price Elasticity of Demand: •The price elasticity of demand measures how much the quantity demanded responds to a change in price. Price elasticity of demand (ED) (division) ED=percentage change in quantity demanded/percentage change in price Example: Suppose that a 10-percent increase in the price of an ice-cream cone causes the amount of ice cream you buy to fall by 20 percent. The related price elasticity of demand: 20 percent / 10 percent = 2 The Price Elasticity of Supply: •The price elasticity of supply measures how much the quantity supplied responds to a change in price. Price elasticity of supply (ES)
ES=percentage change in quantity supplied/percentage change in price Example2: Suppose a 10 percent increase in the price of an ice-cream causes a 5 percent increase in the supply of ice-cream. The related price elasticity of supply: 5 percent/ 10 percent = 0.5 Classifying Demand and Supply as Elastic or Inelastic: •Demand or supply is elastic if the percentage change in quantity is greater than the percentage change in price. E>1 •Demand or supply is inelastic if the percentage change in quantity is less than the percentage change in price. E
