Topic 1 - Overview of Key Economic Concepts - Economics PDF

ECON1001 – Global Economic Concepts STUDENT NOTES TOPIC 1 – Overview of Key Economic Concepts ECON1001 - Global Economics Concepts GLOBAL ECONO...

ECON1001 – Global Economic Concepts STUDENT NOTES TOPIC 1 – Overview of Key Economic Concepts ECON1001 - Global Economics Concepts GLOBAL ECONOMIC CONCEPTS Topic 1 Overview of Key Economic Concepts Key Concepts What is Economics? Scarcity & Choices Trade-Off & Opportunity Cost Microeconomics vs Macroeconomics Production Possibility Frontier The Laws of Demand & Supply Market Equilibrium What is Economics? Page 1  ECON1001 – Global Economic Concepts STUDENT NOTES TOPIC 1 – Overview of Key Economic Concepts What is Economics about? Economics is about our unlimited wants and our limited resources. We are unable to satisfy ALL our wants because we have limited (scarce) resources. This is “Scarcity”  For example these resources are limited: money, time, or oil.  Due to scarcity, we must make choices.  People make choices based on incentives (rewards) or disincentives (penalties) Micro and Macro Economics Economics divides in two main parts: Microeconomics - the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments. Example: Toyota decides to produce more 4 wheel drives than sedan cars. Macroeconomics - the study of the performance of the national and global economies. Example: Why did production and the number of jobs shrink in 2019. Every Choice made is a Tradeoff and has an Opportunity Cost Due to scarcity people have to make choices. Every choice they make is as a tradeoff: You have to GIVE UP one thing to GET another. For example: If you want to buy a car and a motorbike, but don’t have enough money for both, then you have to give up one of the two. If you buy a car you are giving up the opportunity to buy a motorbike. The opportunity cost of something is the highest- valued alternative that must be given up to get it. In the example above the opportunity cost of buying a car is a motorbike. Page 2  ECON1001 – Global Economic Concepts STUDENT NOTES TOPIC 1 – Overview of Key Economic Concepts Production Possibility Frontier Production Possibility Frontier - Video Production Possibilities Frontier A country’s production possibilities frontier (PPF) is the point at which the economy is most efficiently producing its various goods and services. In other words, its resources are used in the best way possible. Below is an example of the combination of Capital goods and consumer goods in a country. 1. All combinations at points a, b, c, d & e are POSSIBLE. 2. The combination at point ‘g’ is UNATTAINABLE (impossible) with current resources 3. The combination at point ‘i’ is POSSIBLE but inefficient. Page 3  ECON1001 – Global Economic Concepts STUDENT NOTES TOPIC 1 – Overview of Key Economic Concepts Production Possibilities and Production Efficiency Production efficiency is when we cannot produce more of one good without producing less of the other good. All points on the PPF are efficient for this reason. If it is possible to produce more of one good without producing less of the other it is inefficient. At ‘i’ resources are either unemployed or misallocated. Production Possibilities and Opportunity Costs Every choice along the PPF involves a tradeoff. On this PPF, we must give up some capital goods to get more consumer goods or vice versa. What we give up in the trade-off is the “Opportunity Cost.” The Laws of Demand & Supply Page 4  ECON1001 – Global Economic Concepts STUDENT NOTES TOPIC 1 – Overview of Key Economic Concepts Demand Demand refers to a consumer's desire to purchase a good or service, backed up with the willingness and ability to pay the price. In Economics if demand something, it means a person has: … a desire or want for a product or service and … the ability to buy it … has made the decision to buy it It is a desire plus the willingness and ability to buy. The Law of Demand Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded and, the lower the price of a good, the larger is the quantity demanded. LAW OF DEMAND What are the “other things” that must remain the same for the Law of Demand to work? 1. The prices of related goods 2. Expected future prices of the good 3. Income 4. Expected future income and credit 5. Population 6. Preferences Page 5  ECON1001 – Global Economic Concepts STUDENT NOTES TOPIC 1 – Overview of Key Economic Concepts Other things or “Ceteris Paribus” 1. Prices of Related Goods When the price of a substitute increases, or when the price of a complement falls, the demand for a good increases A substitute is a good that is used in the place of another good. Example: Taxi instead of a bus. A complement is a good that is used together with another good. Example: Butter with Bread Other things or “Ceteris Paribus” 2. Expected Future Prices If the price of a good is expected to rise in the future, and the good can be stored, current demand for the good increases even when price rises and vice versa. 3. Income When income increases, consumers buy more of most goods, and the demand curve shifts rightward: o A normal good is one for which demand increases as income increases. Example: shoes, clothes o An inferior good is a good for which demand decreases as income increases. Example: Karwa Bus Other things or “Ceteris Paribus” 4. Expected Future Income and Credit When income is expected to increase in the future or when credit is easy to obtain, the demand might increase now 5. Population The larger the population, the greater is the demand for all goods 6. Preferences People with the same income have different demands if they have different preferences Page 6  ECON1001 – Global Economic Concepts STUDENT NOTES TOPIC 1 – Overview of Key Economic Concepts Supply Supply reflects a decision about what goods and service to produce (with the available technology and resources) The Law of Supply The Law of Supply Other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied. Other things or “Ceteris Paribus” The prices of factors of production The prices of related goods produced Expected future prices The number of suppliers Technology State of nature Page 7  ECON1001 – Global Economic Concepts STUDENT NOTES TOPIC 1 – Overview of Key Economic Concepts Other things or “Ceteris Paribus” 1. Prices of Factors of Production If the price of a factor of production used to produce a good rises, the producer’s profitability decreases therefore supply decreases. Example: The price of cheese increasing by 40% for Pizza Hut A rise in the price of a factor of production decreases supply and shifts the supply curve leftward Other things or “Ceteris Paribus” 2. Prices of Related Goods Produced A substitute in production for a good is another good that can be produced using the same resources. Example: Leather can be used for shoes, handbags or jackets The supply of a good increases if the price of a substitute in production falls Goods are complements in production if they must be produced together. Example: Petrol refining produces, wax and lubricating oil. The supply of a good increases if the price of a complement in production rises. Example: More wax and lubricating oil is produced when petrol prices rise as more petrol is refined. Other things or “Ceteris Paribus” 3. Expected Future Prices If the price of a good is expected to rise in the future, supply of the good today decreases and the supply curve shifts leftward 4. The Number of Suppliers The larger the number of suppliers of a good, the greater is the supply of the good An increase in the number of suppliers shifts the supply curve rightward Page 8  ECON1001 – Global Economic Concepts STUDENT NOTES TOPIC 1 – Overview of Key Economic Concepts Other things or “Ceteris Paribus” 5. Technology Advances in technology create new products and lower the cost of producing existing products So advances in technology increase supply and shift the supply curve rightward 6. The State of Nature The state of nature includes all the natural forces that influence production. Example: bad weather can destroy crops & decrease supply even if price is the same. A natural disaster decreases supply and shifts the supply curve leftward Market Equilibrium Equilibrium is a situation in which opposing forces balance each other. When the price of buyers and sellers is equal and the point where the Demand & Supply curve intersect is the point of equilibrium. When supply exceeds Demand there is a surplus in the market. When Demand exceeds Supply there is a shortage in the market.. The market price corrects shortages and surpluses. Summary Scarcity Trade-Off & Opportunity Cost Microeconomics vs Macroeconomics Production Possibility Frontier Demand & Supply Market Equilibrium Shortage and Surplus Page 9