ECO601 Lecture Notes Key Concepts in Economics and Market Structures

Lecture notes - ECO601

Principles Of Economics (Torrens University Australia)

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Lecture notes - ECO601

Principles Of Economics (Torrens University Australia)

Scan to open on Studocu

Studocu is not sponsored or endorsed by any college or university What is Economics? - Economics is the study of how people make decisions in the fact of scarcity of resources to satisfy unlimited wants. These can be individual decisions, family decisions, business decisions or societal decisions. Problem of Scarcity - A good is scarce if the choice of one alternative requires that another be given up. Because of scarcity, most of us never have enough income to buy all the things we want. Key questions for decision making - What are the alternative uses the resource could be put to? Which alternative use provides the greatest return? What would be the net gain for the agent of the current choice relative to the best alternative use? Scarcity, choice, and opportunity cost - The existence of alternative uses forces us to make choices. Economic agents, producers and consumers alike are forced to make trade-offs. That is, having more of one good thing means having to do with less of another in the face of resource scarcity. Opportunity cost - The opportunity cost of any choice is the value of the best alternative forgone in making it. A fundamental principle of economics is that every choice has an opportunity cost. Opportunity costs underpins all economic decisions. Example of OC- If you spend your income on video games, you cannot spend it on movies. Principles of Microeconomics - People face trade-offs because of scarce resources: To get one thing, we usually have to give up something else. -The cost of something is what you give up to get it: There is always an opportunity cost to every action. -Rational people think at the margin: Marginal or incremental adjustments in production /revenue and costs determine economic decisions. -People respond to incentives: There are benefits and costs of all choices, and rational agents choose actions where benefits exceed costs. -Markets are usually a good way to organise economic activity: Resources are allocated as a result of buyers’ and sellers’ decisions made in their own self-interest. -Government can sometimes improve market outcomes: As markets can fail. Branches of Economics - Microeconomics: focuses/analysis on the actions of individual agents within the economy, like households, workers, and businesses. -Macroeconomics: looks at the economy as a whole. It focuses on broad issues such as growth of production, the number of unemployed people, the inflationary increase in prices, government deficits, and levels of exports and imports. Factor of Production - Scarce resources are typified in economics in four groupings: Scarce resources are typified in economics in four groupings: Land –> rental income, Labour –> wages and salaries, Capital –> interest, Entrepreneurship –> profit Assumptions - efficiency—the economy is operating at full employment and full production. fixed resources—the quantity and quality of the factors of production which are available to a society are fixed. fixed technology—no new technology or knowledge is introduced, and The economy is being analysed at a particular point in time. The curvature of the production possibilities frontier shows that as we add more resources to capital goods, moving from left to right along the horizontal axis, the original increase in opportunity cost is fairly small, but gradually increases. Thus, the slope of the PPF is relatively flat near the vertical-axis intercept. Conversely, as we add more resources to consumer goods, moving from bottom to top on the vertical axis, the original declines in opportunity cost are fairly large, but again gradually diminish. Thus, the slope of the PPF is relatively steep near the horizontalaxis intercept. In this way, the law of increasing opportunity cost produces the outward bending shape of the production possibilities frontier. A producer has an absolute advantage in producing a good or service if the he/she can produce that product using fewer resources. A producer has a comparative advantage in producing something if the opportunity cost of that production is lower than other producer. Demand and Supply - Demand: the amount of some good or service consumers are willing and able to purchase at each price. Law of demand: Other things being constant (ceteris paribus), the higher the price of a good or service, the less consumers will demand of that good or service. The lower the price, the greater consumers will demand of that good or service. There is an inverse relationship between the price of the good or service and the quantity demanded. Why is the demand curve downward sloping? - The substitution effect and the income effect Moving vs Shifting - A price change causes a movement up or down the demand curve. It is known as Qd (quantity demand). A change in any non-price factor of demand causes a shift in the demand curve, either to the right or left. This is known as shifting D (demand).

Non-price factors (Examples) --1- Number of consumers in the market. --2Income of the consumer segment

--3-Taste and preferences of the consumers --4Expectations of the consumers, including future price expectations Prices of related goods and services –> these are substitutes and complementary goods and services.

Law of Supply - Supply: the amount of some good or service a producer is willing to supply at each price.

Law of supply: all other things being constant (ceteris paribus), the higher the price of a good or service, the higher the quantity supplied of that good or service, and the lower the price, the lower the quantity supplied of that good or service.

Supply curve shift and move is same as demand

Non-price factors (Examples) - Number of suppliers or producers - The price of substitutes in production - Price of inputs - Future price - Technological advancement

Market Equilibrium - In a competitive market economy, market equilibrium occurs at the interaction of demand and supply.

Together, demand and supply determine the price and the quantity that will be bought and sold in a market.

Elasticity - Elasticity measures the sensitivity of one variable to a change in another variable.

Most common forms of demand elasticity are

1. price elasticity of demand 2. income elasticity of demand 3. cross-price elasticity of demand.

Price Elasticity of Demand (PED) - PED measures the responsiveness (sensitivity) of the quantity demanded of a particular good or service to changes in its price.

Factors Influencing PED- 1. Nature or Type of Good, 2. Availability of Substitutes, 3. Share of Income Spent on Good,

4. Time Period

Income Elasticity of Demand- Income elasticity of demand is the percentage change in the quantity demanded as a result of a 1% change in the income of the consumer. -A positive relationship between income and demand is a prior expectation for normal goods. -An increase in income may be associated with a fall in demand of the inferior good. Cross-price Elasticity of Demand- Cross-price elasticity is the % change in the quantity of good Y as a result of a one percent change in the price of good X. -In case of substitute goods, the cross-price elasticity of demand would be positive, that is, when the price of the substitute good increases, the demand for the other good will increase – as the substitute has now become relatively expensive. -In case of complementary goods, the cross-price elasticity of demand would be negative. Price Elasticity of Supply- Price elasticity of supply measures the responsiveness (sensitivity) of the quantity supplied of a particular good or service to changes in its price. -Price elasticity of supply shows the percentage change in the quantity supply in response to a percentage change in price.

PED and Revenue

Factors Effecting Supply Elasticity –

Number of producers: More the number of producers, greater will be the elasticity of supply. Spare capacity: it is easy to increase production if there is spare production capacity available. This will make supply more elastic. Ease of switching: if production of goods can be varied in the same set up, supply is more elastic. Ease of storage: when goods can be stored easily, the supply response can be more elastic Length of production period: quick production run time enables a quicker response to a price increase, which means more elastic supply. Factor mobility: when moving resources into the industry is easier, the supply curve in more elastic.