Academic Year 2009/2010 1

Reviewing some key concepts from year 1 micro

Dr Helena LenihanDepartment of EconomicsEmail: helena.lenihan@ul.ie Room: KB3-35

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Text:????

Relevant chapters????

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The Economic Problem

Core of the Economic Problem: use of scarce resources to satisfy unlimited wants

Scarcity and Choice Economic Activity: Production,

Consumption and Exchange Factors of production

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Economic way of thinking

A logical framework for organising your thoughts and understanding economics

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Basic Economic Questions

What?

How?

For Whom?

Goods or Services are produced

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Concept of opportunity cost: the best alternative sacrificed for a chosen alternative.

Marginal analysis: an examination of the effects of additions to and subtractions from a current situation.

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Economic Science: Methodology

Positive and normative statements

Laws of Economics general tendencies of

behaviour

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Production Possibility Frontier

Production transforms inputs into outputs [factors of production into goods and

services] Goods - Tangible Services - Intangible Capital (Producer) Goods Consumer Goods

Durable Non-Durable

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Limitations on Output

Output is limited by: Quantity (and quality) of Resources State of Technology

PPF marks the boundary between attainable and unattainable combinations of goods

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PCs(000s)

TV Sets (000s)

Y .

X .

PPF

B

PPF

O

A

D

C

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Summary

Efficient output combinations on PPF (=productive efficiency)

Efficiency implies it is not possible to produce more of one good without less of the other

Combinations outside not possible (i.e. X)

Combinations inside are inefficient (i.e.Y)

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Efficiency of Resource Use

Resource use is efficient when we produce goods and services we value most highly…choice is made at the margin by comparing the additional costs with the additional benefits

When resources are used efficiently we cannot produce more of one good without giving up units of a good we value more highly

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Economic Growth

Increased productive capabilities

Outward shift of PPF caused by either

[1] Capital accumulation, or [2] Technological progress,or [3] Both

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Military Goods

Civilian Goods

PPF1

PPF 2

Figure 8:Economic Growth and the PPFs

O

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Law of Demand 1

Demand (in Economics) refers to: willingness and ability of buyers to

purchase: (a) Different quantities of a good (b) at different prices (c ) during a specific time period

Quantity demanded of a good may differ from actual amount bought

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Law of Demand 2

Consumers buy more at a Lower Price

Law of Demand: As the price of a good rises, the quantity demanded of the good falls and vice versa, ceteris paribus

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Factors influencing change in Demand 1. Income

Normal goods Inferior goods

2. Price of related goods substitutes complements

3. Preferences/tastes/fashions 4. Population structure/ number of

buyers 5. Future price expectations

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Change in Demand .V. Change in Quantity Demanded

Change in quantity demanded of a good arises when the price of a good changes while all other variables affecting demand are unchanged = movement along the demand curve

Change in Demand means a shift in the demand curve arising from a change in those factors which influence demand = shift of demand curve

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Supply and Law of Supply

Supply refers to: willingness and ability of firms to

produce for sale (a) quantities of a good (b) at different prices (c) during a specific time period

Law of Supply: Positive P-Q Relationship

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Factors Influencing Supply

Prices of Factors of Production Prices of Other Goods supplied

Substitutes in Production Complements in production

Expected Future Prices Number of Suppliers Technology Change Taxes, Subsidies, Regulations

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Change in Quantity Supplied vs. Change in Supply Movement Along the Supply Curve (Change in Qs at a different Price on the Curve)

Change in Supply (Change in Qs at all Prices = shift of entire Supply Curve)

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Figure 6: Market Equilibrium

S

SD

D

3

6

0 Q

1

2

4

5

P

53 4 6

Surplus

Shortage

EquilibriumE

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Market Equilibrium

No surplus or shortage exists - the market ‘clears’

Opposing forces of buyers and sellers are balanced

At the equilibrium price, Qs = Qd Positions above or below the

equilibrium price lead to behavioural changes by producers and consumers which lead to a return to E (=stable equilibrium)