iqra micro lec 1(introduction & graphs) 18-9-10

8/8/2019 IQRA Micro Lec 1(Introduction & Graphs) 18-9-10

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Course Objectives

The objectives of this course are to provide

students with a basic understanding of the

economic theory and analytical tools thatcan be used in decision-making problems.


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Course Outline

Introduction to Basic Concepts of Economics

Demand, Supply and Market Equilibrium,

Comparative Static Analysis

Elasticity ofDemand and Supply and its Application

Theory of Consumer Behavior

Production and Economics of the Firm

Short Run & Long Run Cost Analysis

Market Structure: Perfect Competition, Monopoly

Monopolistic Competition & Oligopoly National Income Accounting

Aggregate Demand, Supply and Equilibrium


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Course Books

Recommended Book1. Pindyck, R. S., Rubinfeld, D. L. and

Mehta, P. L. (2008). Microeconomics.

6th Edition. Pearson Prentice Hall.

Reference Books

1. Mankiw, N. G. (2010). Macroeconomics. 7th

Edition, Worth Publishers

2.P

arkin M. (2003). Microeconomics. 6th Edition.Addison Wesley.

3. Samuelson P. A. and Nordhaus, W. D. (2005).

Economics. McGraw Hill.


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Learning Strategies

In addition to in-class quizzes and homework assignments,

each student will undertake a project. They will be required

to present the results of their analyses in the class and

submit it in the form of a term paper. Grading plan will beas follows:

Mid-Term Exam 30 Marks

Final Term Exam 50 MarksTerm Paper & Presentation 20 Marks


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Your Input

Any questions so far?

Any comments?

Short introduction of participants


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Human Nature and Reality

People have unlimited wants. People have limited resources to acquire the

things they want.

Scarcity. . . means that society has limited

resources and therefore cannot produce all the

goods and services people wish to have.

As a result, they must make choices.

Choices involve pursuing some things while

forgoing others.


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Definition of Economics

Economics is the study of how scarce resourcesare allocated among unlimited wants.

Microeconomics focuses on the individual parts ofthe economy.

How households and firms make decisions andhow they interact in specific markets.

Macroeconomics looks at the economy as a whole. How the markets, as a whole, interact at the

national level.


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Two Roles of Economists

When they are trying to explain theworld, they are scientists.

When they are trying to change theworld, they are policymakers.


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Coordination Problem

An economic system has to solve threecoordination problems:

What to produce?

How to produce?

For whom to produce?

Every decision has an opportunity cost thecost in foregone opportunities.


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Opportunity Cost

Opportunity cost: the value of the

highest-valued alternative that must be

forgone when a choice is made. It is the evaluation of a trade-off.


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What to Produce?

Anything with a price on it is called aneconomic goodthese include goods andservices.

A free good is a good for which there isno price.

An economic bad is anything you want toget rid of (pollution, disease, garbage)


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How to Produce?

Resources are the elements needed toproduce goods. Resources are also called

factors ofproduction

inputs

They are:

Land (includes natural resources)

Labor(physical and intellectual services of people) Capital (plant, machinery, equipment used in

production)


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For Whom to Produce?Who gets the goods and services that are produced

depends on the incomes that people earn.

Producers

of GoodsResource

Suppliers

land

labor

capital

rent

wages

interest


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The Circular-FlowDiagram

FirmsHouseholds

Market for

Factors

of Production

Market for

Goods

and Services

SpendingRevenue

Wages, rent,

and interest

Income

Goods &Services sold

Goods &Servicesbought

Labor, land,and capital

Inputs forproduction


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Graphing Data

A graph reveals a causal

relationship between two

variables.

The vertical line is the y-axis.

Independent variable.

The horizontal line is thex-axis.

Dependent variable.

How do we show a negative

and a positive relationship

between variables?


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Graphing Data

Economists use three types of graphs to

reveal relationships between variables.

They are:

Time-series graphs

Cross-section graphs

Scatter diagrams


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Time-series Graph:

Real wages in London, 1500-1800

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4

5

6

7

8

9

0

500 550 600 650 700 750 800

Year

Source: RC Allen (2001), The Great Divergence


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Cross-section Graph:Real wages across Europe in 1750


0

1

2

3

4

5

67

8

9

10

A e da London an Va en a V enna K a o


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Panel Data Graph:Real wages across Europe, 1500-1800

0

2

4

6

8

10

1500 1550 1600 1650 1700 1750 1800

Amsterdam London Vienna Krakow Milan Valencia



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A scatter diagram can describe the relationshipbetween advertising expenditures and sales.

1

1

Adverti i Expenditure

Sa

les

Excel scatter diagram

Advertising Expenditure

Sales

Advert Sales1 30

3 40

5 40

4 50

2 35

5 50

3 35

2 25

Scatter Diagrams


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Graphs Used in Economics

We can plot graphs for the variables:

- that move in the same direction.- that move in opposite direction.

- that have a maximum or minimum.

- that are unrelated.


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Two Simple Rules

for Movements vs. Shifts

Rule One

When an independent variable changes andthat variable does not appear on the graph,the curve on the graph will shift.

Rule Two

When an independent variable changes anddoes appear on the graph, a movement alongthe existing curve will occur. The curve willnot shift.


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Typical Patterns

Positive linear relationship Negative linear relationshipNo relationship

Negative nonlinear relationship

This is a possible relationship,

but,doesnt the nextone appearto fit the data better?

Nonlinear (concave) relationship


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Production Possibilities Curve

The production possibilities curve shows

the maximum quantity of goods and

services that can be produced when theexisting resources are used fully and

efficiently.


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Production Possibilities

Underutilized

(Inefficient)

Nondefense Goods

B1

F1C1

D1

Only nondefensegoods produced

E1

Only defensegoods produced

A1

EfficientCombinations

Defense Goods

Impossible

200

175

150

125

100

75

0

7525 50

G1

100 125

Defense

Non-defense

A1 200 0

B1 175 75

C1 130 125

D1 70 150

E1 0 160

F1 130 25

G1 200 75

150


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Growth

The PPC moves outward (growth occurs)as the result of:

Increased resources

Larger labor force

Change in labor force participation Chance in labor-leisure decision

Improved technology (innovation)

Expansion of capital stock

An improvement in the rules (laws, institutions,and policies) of the economy


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A Shift of the PPC

Nondefense Goods

B1

C1

D1

E1

A1Defense Goods

200

175

150

125

100

75

0

7525 50

B2

100 125 150

225A2

C2

D2

E2

F2

Defense Non-defense

A2 225 0

B2 200 75

C2 175 120

D2 130 150

E2 70 160

F2 0 165

iqra micro lec 1(introduction & graphs) 18-9-10

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