economics lecture 1

8/13/2019 Economics Lecture 1

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Lecture One - Review

Macroeconomic Essentials

Economics is a social science. It studies how to efficiently allocate the limited resources

to satisfy unlimited human wants. Since resources are scarce, but wants are unlimited, welearn to make choices. When choices are made, certain wants must be sacrificed. For

example, when you decided to take this class, you are prepared to give up some of yourleisure time. he leisure time you give up in order finishing this class plus what you

would have otherwise used the tuition money for is your opportunity cost for this class.

Since every one of you has decided to take this class, that means you valued the benefitof this class more than the cost !which is the time you give up and what you would have

used the tuition money for". Economists are making wise choices by comparing the extra

benefit to the corresponding extra cost at each decision. he extra benefit is called

#arginal benefit !#$"% the extra cost is called #arginal cost !#&". 'ou should onlychoose an item when its #$ is greater or e(ual to its #&.

#arginal )ule* #$+ or #&, then do it% #$ - #&, then dont do it.

Production Possibility Frontier

In any society, people have to deal with limited resources by comparing their opportunity

costs. If a country chooses to produce more weapons, then this country must give up

some of the other good, say food. It is because resources like labor or capital must be

relocated to produce weapons. In other words, an economy producing only weapons andfood can only increase its weapons output by reducing its food output. !/nder the

assumption of fixed technological level, full employment and full efficiency". he

combinations of weapons and food can be illustrated by using a production possibilityfrontier !00F". #ost of the 00F curves are concave due to the inadaptability of the

resources. he law of increasing opportunity cost states* as the production of one good

rises, the opportunity cost of producing that good increases. 1owever, this country canhave more weapons and food at the same time by a" improving its technological level, b"

having economic growth, &" trading with another country.

Capitalism and Socialism

From the 00F, we understand that it is impossible to produce as much of every good aswe might want, so choices must be made. 2ifferent economic systems will make different

choices. here are two ma3or economic systems* capitalism and socialism, but mostcountries use some combination of the two known as a mixed economy.

In pure or laisse45faire capitalism, there is private ownership, and markets and prices

coordinate and direct economic activity. In socialism, there is public !state" ownership,

and central government planning coordinates economic activity. Socialists believe thatgovernment decision makers are persons who promote the best interests of society as a

whole and make every effort to obtain the information needed to make the right decision.

1owever, capitalists think that government is more likely to respond to producers who



have the political power to lobby congress than to consumers who do not lobby. &entral

government planning may favor special 6interest groups at the expense of the rest of the

society. herefore, governments role should be limited to order maintenance. 0urecapitalism is an abstract model. he economy is self5regulating.

he /.S. system is a mixed economy, but closer to pure capitalism. here are two ma3or

markets !product and resources market", and three ma3or sectors !household, business,government" in the domestic economy. In the product market, goods and services are

produced in the business sector and sold to households. In return, businesses get revenue

from the household as they pay for the goods and services. In the resources market,resources are supplied by the households. $usinesses pay for the desired resources, which

produce good and services. In return, households get income, which they will use to pay

for the goods and services. /.S. government collects taxes from both sectors, buys goodsand services from the businesses, pays for resources they employed, provides services

and will intervene by their policies according to different market situations. &ircular flow

model of a #arket 7riented system is illustrated in your textbook.

International Trade

From the 00F curve, we understand that trading can expand 00F outward. 2omestic

trading is comparatively simpler than international trading. Since different countries have

different standards and regulations on various products, exporters and importers have tolearn to cope with them. International trading has to involve customs, and (uota, tariffs,

and some other barriers limiting producers right. 8 large number of producers are

engaged in international trading because of the comparative advantages. 9ook around

your household% you probably have a lot of imported items. Why did you choose to buyforeign goods instead of /.S. goods: he answer is very simple* imports are cheaper.

0roducers decided to move production to other countries for the same reason. &ountries

with abundant labor resources have comparative advantage on labor intensive goods,such as clothing, shoes, and most of the consumer goods. herefore these countries will

produce consumer goods and export them to the /.S. he /.S. has comparative

advantage on many capital goods !tools and e(uipment used to produce consumer goods"%therefore the /.S. exports capital goods and imports consumer goods. hrough

international trading, the 00F of /.S. can expand outward.

emand and Supply

emand!

Demand !2" is a schedule that shows the various amounts of product consumers are

willing and able to buy at each specific price in a series of possible prices during aspecified time period.

Quantity demanded !;d" is the amount of a good or service that individuals are willing

and able to buy at a particular price at a particular time.

In another words, demand is the (uantity demanded at all prices during a specific time

period. 8 change in price will change the (uantity demanded, not the demand. 8ny other

factors other than price change will change the demand.



T"e law o# demand!

Law of demand states: As price of a good increase, the quantity demanded of the good falls, and as the price of a good decrease, the quantity demanded of the good rises,

ceteris paribus.

)estated* there is an inverse relationship between price and (uantity demanded.

emand Curve!

It is the graphical representation of the relationship between the (uantity demanded of agood and the price of the good. It is a downward sloping curve.

Individual emand $s Mar%et emand!

#arket demand is the summation of all of the individual demand curves for a particularitem. he transaction from an individual to a market demand schedule is accomplished by

summing individual (uantities at various price levels. 8ggregate demand !82" is not the

same as market demand. 82 is a schedule that shows the various amount of real domesticoutput !<20" which domestic and foreign buyers will desire to purchase at each possible

price level.Supply!

Supply !S" is a schedule, which shows amounts of a product a producer is willing and

able to produce and sell at each specific price in a series of possible prices during aspecified time period.

;uantity supplied !;s" is the amount of a product that producers are willing and able to produce and sell at a particular price at a particular time.

In another words, supply is the (uantity supplied at all prices during a specific time

period. 8 change in price will change the (uantity supplied, not the supply. 8ny otherfactors other than price change will change the supply.

T"e law o# supply

Law of supply states: As price of a good increase, the quantity supplied of the good rises,and as the price of a good decrease, the quantity supplied of the good falls, ceteris

paribus.

)estated* there is a direct relationship between price and (uantity supplied.

E&planation o# Law o# Supply

If the product cost is given, a higher price means greater profits and thus an incentive to

increase the (uantity supplied. 0rice and (uantity supplied are directly related.

Supply Curve

It is the graphical representation of the relationship between the (uantity supplied of a

good and the price of the good. It is an upward sloping curve.

Individual Firm's Supply $s Mar%et Supply

#arket supply is the summation of the individual firms entire supply curve for a

particular item. he transaction from an individual to a market supply schedule isaccomplished by summing individual firms (uantities at various price levels. 8ggregate

supply !8S" is not the same as market supply. 8S is a schedule showing level of <20



comparing the (uantity between importer and exporter, we can determine who has more

impact on the market.

economics lecture 1

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