lecture 16 nov
TRANSCRIPT
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Some key topics
Why locating businesses properly helpsguarantee profitability
Why land use patterns arise in cities
Why regional economies grow or decline
How large, global corporations are
reshaping the geography of production
How industrial systems are being reshaped
by the information revolution
Why geography matters in economics!!
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Geographic Perspectives
Economic Geography of the World Economy
Globalization
Four Major Questions of the World Economy
World Development Problems
Political Economies Geographical Information Systems
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Four Major Questions of the World
Economy
What should be produced, at what scale of
output, and with what mix of inputs?
How should factors be combined? Labor,capital, resource factors, etc.
Where should production occur?
Who should get output? How should it bedivided?
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Economics Key Topics
Allocation of Scarce Resources Markets for Production, Distribution,
and Consumption
The Division of Labor Solving What, How, What Price, What
Quantity, and Where Production Takes
Place Types of Economic Systems
Neoclassical versus Behavioral andStructural Approaches
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The Circular Flow
Copyright 2004 South-Western
Spending
Goods and
services
bought
Revenue
Goods
and services
sold
Labour, land,and capital
Income
= Flow of inputs
and outputs
= Flow of dollars
Factors of
production
Wages, rent,
and profit
FIRMS
Produce and sell
goods and services
Hire and use factors
of production
Buy and consume
goods and services
Own and sell factors
of production
HOUSEHOLDS
Households sell
Firms buy
MARKETS
FOR
FACTORS OF PRODUCTION
Firms sell
Households buy
MARKETSFOR
GOODS AND SERVICES
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The Circular-Flow Diagram
Firms
Produce and sell goods and services
Hire and use factors of production
Households
Buy and consume goods and services
Own and sell factors of production
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Markets for Goods and Services
Firms sell Households buy
Markets for Factors of Production
Households sell
Firms buy
Factors of Production
Inputs used to produce goods and services
Land, labour, and capital
Markets for Goods and Services
Firms sell Households buy
Markets for Factors of Production
Households sell
Firms buy
Factors of Production
Inputs used to produce goods and services
Land, labour, and capital
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Supply-Demand Equilibrium
S
Quantity per period
D
Price
P*
Q*
The demand curve has a
negative slope because the
marginal value falls as
quantity increases
The supply curve has a positive
slope because marginal costrises as quantity increases
Equilibrium
QD = Qs
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Consumer Choice
Consumer choice theory is based
on the notion that consumers do the
best they can, given the limitationsdictated by their incomes and
consumer prices.
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Utility Maximization
The consumers decision-making process
has two steps:
1. Figure out the menu options, or alternative
combination of two goods (books and
movies).
2. Pick the combination of goods that
generates the highest level of satisfaction orutility.
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Supplyand demandare the two
words that economists use most
often. Supplyand demandare the forces
that make market economies work.
Economics in the micro context isabout supply, demand, and market
equilibrium.
PRODUCTIONPRODUCTION
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According to the Law of SupplyLaw of Supply:
Firms are willing to produce and sell a
greater quantity of a good when theprice of the good is high.
This results in a supply curve that
slopes upward. The Firms Objective
The economic goal of the firm is to maximize
profits.
PRODUCTIONPRODUCTION
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Simple profit function Profit = f(revenue or sales, costs of
production, transportation costs)
Revenue location factors Production cost location factors
Transportation cost location factors
Economies of scale
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Markets
In a market economy, people exchange
things, trading what they have for what
they want.
Although it appears that markets arose
naturally, a number of social inventions,
such as contracts, insurance, patents, and
accounting rules, have made them workbetter.
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Virtues of Markets
In a centrally planned economy, a
planning authority decides what products
to produce, how to produce them, and
who gets them.
Under a market system, prices provide
individuals the information they need to
make decisions. Prices provide signalsabout the relative scarcity of a product.
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Virtues of Markets
The decisions made in markets result from
the interactions of millions of people, each
motivated by their own interests.
Adam Smith used the metaphor of the
invisible hand to explain that people
acting in self-interest may actually
promote the interest of society as a whole.
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Shortcomings of Markets
Market failure is what happens when
markets fail to produce the most efficient
outcomes on their own. The role of
government is to correct this problem.
Market failure can also occur when buyers
and sellers have imperfect information
about the quality of goods and servicesthey are exchanging.
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The Role of GovernmentThe Role of Government
in a Market Economyin a Market Economy The role of government in a market-basedThe role of government in a market-based
economy consists of:economy consists of: Dealing with problems associated withDealing with problems associated with
market failure.market failure. Enforcing property rights and protectingEnforcing property rights and protecting
private property in order to facilitateprivate property in order to facilitate
production and exchange.production and exchange.
Establishing and enforcing rules forEstablishing and enforcing rules for
exchange in markets.exchange in markets.
Reducing economic uncertainty, andReducing economic uncertainty, and
providing for people who are unlucky.providing for people who are unlucky.
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Specialization and the
Gains from Trade Specialization and exchange makes both
people better off, illustrating one of the key
principles of economics:
PRINCIPLEof Voluntary Exchange
A voluntary exchange between two
people makes both people better off.
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Comparative Advantage
versus Absolute Advantage In the previous example, Abe is more
productive than Bea in producing both
goods. Economists say that Abe has
an absolute advantage in producingboth goods.
Despite his absolute advantage, Abe
gains from specialization and trade
because he has a comparativeadvantage in producing pizza.
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The Division of Labor
and Exchange Three reasons for productivity to increase
with specialization:
1. Repetition
2. Continuity
3. Innovation
Specialization and exchange result fromSpecialization and exchange result from
differences in productivity, which in turn comedifferences in productivity, which in turn come
from differences in innate skills and the benefitsfrom differences in innate skills and the benefits
associated with the division of labor.associated with the division of labor.
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Comparative Advantage
and International Trade Many people are skeptical about the idea
that international trade can make everyone
better off. Most economists, however, favor
international trade. In the words ofeconomist Todd Buchholz:
Money may not make the world go round, but
money certainly goes around the world. To stop it
prevents goods from traveling from where they areproduced most inexpensively to where they are
desired most deeply.
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Comparative advantage and
Increasing Returns
Comp. advantage holds that trade across
geographical units arises to take
advantage of inherent differences Increasing returns say that trade arises to
take advantage of scale and variety gains
from specialization