Economics Notes DP1 PDF

Introduction to Economics 27/08/2024 Key concepts - Scarcity - Choice - Efficiency - Economic well-being - Sustainability - Change - Interdependence - Intervention 28/08/2024 Two kinds of economics Microeconomics - studies the behaviour of individual economics Macroeconomics...

Introduction to Economics 27/08/2024 Key concepts - Scarcity - Choice - Efficiency - Economic well-being - Sustainability - Change - Interdependence - Intervention 28/08/2024 Two kinds of economics Microeconomics - studies the behaviour of individual economics Macroeconomics - studies the economy as a whole, focusing on countries' fundamental economic goals. 02/09/2024 Definitions Economics - A social science. It is the study of people in society and how they interact. It is the study of rationing systems: How scarce resources meet the infinite needs of individuals. Economic good - Is a scarce good. It is limited. Free good - A good so abundant, there is no scarcity. No opportunity cost to produce. Scarcity - Unlimited needs and wants but limited resources. Due to scarcity, we are unable to have everything we desire. Therefore, we must make choices about the resources we consume and give up. Trade-off - All the alternatives that are given up when a choice is made Opportunity cost - The next best alternative that is given up when a choice is made. Centres Paribus - The effect one economic variable has on another, provided all other variables remain the same Scarcity leads to choices. Choices lead to trade-offs. But not all trade-offs are equal. Factors of production - CELL Capital Physical capital - any human-made resource used to create other goods and services Human capital - skills or knowledge gained through education or experiences. Entrepreneurship Leaders who bring together all the factors of production to create goods and services. Their primary motivation is profit. Land Any natural resource used to produce goods and services. Anything that comes naturally from the earth. Labour A person who devotes effort to a task and who is usually paid. Decision making When analysing choices, economists will “thinking the margin”(marginal analysis) which simply put, means making decisions based on increments. The basic economic questions 1. What to produce? 2. How to produce? 3. For whom to produce? Economic system Traditional economies - Hunting, or barter. Roles and jobs are typically passed down through generations. Command/Centrally planned economies - Controlled by the government, which decides what to produce, how to produce it, and who gets the goods. Market economies - Allows individuals and businesses to make decisions based on supply and demand with little government interference. Free Market economies - A type of market economy with no government intervention, where the forces of supply and demand completely guide economic activity. Mixed economies - Combines elements of both market and command economies, with some government regulation alongside private enterprise. PPC - Production Possibilities Curve A model designed to show the alternative combinations a firm or a country can produce using their maximum resources. Assumptions of the PPC: Only 2 goods can be produced Full employment(All possible jobs are filled) Mixed resources Fixed technology Note: It is about an economy NOT about a business or a firm Efficiency Resources are being used in the best possible way. The is no waste and no improvements to be made. 03/09/2024 Opportunity cost, Scarcity, and Choice Opportunity cost The value of the best alternative is forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. As you produce more of one good, the opportunity cost increases. Not all resources are equally suited for the production of both goods. The result of this leads to a ‘bowed out’ curve. Sometimes, resources can be easily interchanged to produce either good leading to a constant opportunity cost. Constant opportunity cost - all resources are of equal quality and that they are all equally suited to the production of both commodities. (straight) Increasing opportunity costs mean that for each additional unit of G produced, ever-increasing amounts of D must be given up. (curve) Actual growth When growth/efficiency is achieved by making better use of resources. That is growth that can happen given the current resources.  Potential growth An increase in the maximum amount that can be produced. Results in a shift in the PPC.a few things can cause the shift of the PPC: - Change in quantity or quality of Factors of Production - Improvement in Technology Scarcity The demand for a good or service is greater than the availability of the good or service. Choice The ability of a consumer or producer to decide which good, service or resource to purchase or provide from a range of possible options. Circular Flow Closed Circular Flow Open Circular Flow Leakages - money that flows out of an economy (saving, taxes, imports) Injections - money that flows into an economy (investments, government spending. exports) *transfer payments are not part of government spending Growing the economy Gross national Income (GNI) - the amount of income flowing in the circular flow GNI rising -> The economy is growing; injections growing and no growth in leakages. GNI falling-> there might be a recession; leakages are growing larger than injections. Classical economics Advocates for private ownership of business, empowered individuals, and a labor-based theory of value. Say’s law - The supply of goods creates its demand - Comparative advantage(David Ricardo) Entrepreneurship and the supply of goods/services lead to profit, wages, income, and spending resulting in an overall increase in demand. Neoclassical Economics - Not a focus on the supply of goods(and the value determined by labour costs plus input) but the utility of goods; what value do consumers place on goods - ‘The Marginal Revolution’ - The theory of marginal utility - More mathematical/scientific - Economics became a science - Assumptions: producer and consumer are rational - More focus on demand New concepts in the 19th century Utility - a measure of satisfaction derived from consuming a good or service The margin or marginal utility is the extra or additional utility derived from consuming one more unit of good or service. Keynesian revolution - Government intervention is important to promote economic stability. Uses fiscal and monetary policy - During a recession, the government should run a budget deficit and spend money to boost the economy(counter-cyclical)  - Stagflation: a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high Monetarism (new classical) Monetarists believe the main determinant of economic growth is the total amount of money in the economy so their focus was mainly on monetary policy; money-making. - Money supply should grow at the same pace as output - The government should NOT try to manage demand 21st century - Increased collaboration among other academic disciples such as psychology “nudging” - A growing interest in behaviour economics to understand why and how economic agents make decisions - Increasing awareness about the relationship between economic activity and the environment - Increasing awareness about the relationship between economic activity and society - A focus on shifting to a circular economic model - an economic model where waste or pollution are phased out and reuse of materials in production Doughnut model Microeconomics Types of demand Individual Individual demand is the demand of one person for a product Market The market demand is the sum of all the individual demands for a product at every price. Law of demand An inverse relationship between price and quantity demanded, As the price of a good rises, the quantity demanded will usually fall, ceteris paribus. (& vice versa) Example: higher price = lower quantity demanded Why does the law of demand occur - Income effect - As prices fall, “real income”(the amount their money is really worth) increases, - If the price goes down for a product, the purchasing power increases for customers - allowing them to purchase more. - Substitution effect - As prices fall, the product becomes more attractive compared to other products whose prices remain the same. Therefore, customers will purchase more of the cheaper product by substituting it for the more expensive product. - Law of diminishing marginal utility - The principle is that as additional units of a good or service are consumed, the marginal utility will decline. - In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit consumed. - When you receive less satisfaction, you stop buying. 5 shifters of demand 1. Income a. Normal goods - as income increases, demand decreases b. Inferior goods - as income decreases, demand increases. These tend to be lower quality, less expensive goods. 2. Price of related goods a. Complements - two goods that are typically purchased or used together b. Substitutes - two similar goods 3. Tastes and preferences When goods become more or less popular because of fashion, current events or promotion campaigns, demand is affected and the demand curve curve may shift to the right or the left. 4. Number of costumers  If there is an increase in the number of consumers of a product, then there will be a shift of the demand curve to the right. Thai often relates to the size of the population and demographic changes in a country. 5. Future expectations a. Future price - if people expect prices of goods and services to increase shortly, they may decide to purchase more of the goods now b. Future economy - if consumers expect the economy to do well, meaning consumers wish to keep their jobs and increase their incomes shortly, they may increase their consumption of goods and services and vice versa. Non-price determinants of demand are all the factors that affect demand for a good or service, except for the price—for example, amount of consumers, income, price of related goods, consumer expectations, etc. DEDE Definitions. 2-3 (intro) Explanation(with the help of a diagram) Diagrams Examples A Veblen good is a type of luxury good, named after American economist Thorstein Veblen, for which the demand increases as the price increases, in apparent contradiction of the law of demand, resulting in an upward-sloping demand curve. Elasticities of Demand Goods and services are not all created equal. Some goods are very sensitive in price change while others seem to be unaffected. Elasticity - How sensitive one economic factor is to changes in another. Elasticity of demand - a measure of the responsiveness of the quantity demanded of a good or service to change in one of the factors that determine it. Price Elasticity of Demand (PED) - a measure of how much the quantity demanded of a good changes when there is a change in its price. Formulas The extent to which the quantity demanded depends on how elastic its demand is concerning its price. 𝑛𝑒𝑤−𝑜𝑙𝑑 Percentage change = 𝑜𝑙𝑑 × 100 = %△ % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑥 % △𝑄𝑑 PED = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑥 = %△𝑃 Under 1 is inelastic. Above 1 is elastic. Inelastic vs Elastic Elastic goods include luxury items and certain food and beverages, as price changes can have an impact on demand to a great extent. Inelastic goods may include items such as tobacco and prescription drugs, as demand often remains constant despite price changes. An elastic demand is one in which the change in quantity demanded due to a change in price is large. An inelastic demand is one in which the change in quantity demanded due to a change in price is small. Inelastic - Few close substitutes - High degree of necessity - Small portion of income (cheaper) - Addictive - Required now, rather than later (time). No time to find substitutes. - Elasticity coefficient less than 1 Elastic - Many substitutes - Luxury goods - Large portion of income - Non-addciitive - Plenty o time to decide, not urgent - Elasticity coefficient greate than 1 Determinants of PED - The numern and closeness of substitutes - The necessity of the good and how widely the product is defined - The proportion of income spent on the good - Time - as the price of the product changes it often takes time for the consumers to change their buying and consumption habits Total Revenue Test If the demand for medicine is inelastic, what ahppens to TR for medicine stations if price increases? Inelastic Elastic Unit Elastic Price - increase Price - increase Price - increase/decrease TR - increase TR - decrease TR - no change Price - decrease Price - decrease TR - decrease TR - increase Total Revenue - money a business earns from operating. Price * quantity produces/sold Profit - money a business retains after subtracting operating and other expenses. Income elasticity of demand (YED) - a measure of how much the quantity demanded of a good will change in response to a change in consumers’ incomes. % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑥 𝑌𝐸𝐷 = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒 If coefficient is negative (inverse relationship) the good is inferior If coefficient is positive (direct relationship) then the good is normal Engel Curve To illustrate YED, we use an Engel Curve. An Engel Curve is used to show the relationship between income and quantity demanded. Income is placed on the vertical axis. Quantity demanded on the horizontal axis. YED>0 YED