Intro to economics
19 October 2020
14:26
A definition of economics
"Economics is the science which studies human behaviour as a relationship between ends and scarce
means which have alternative uses." - Lionel Robbins
Marginal Cost and Benefit
Rational choices involve comparing the benefits and costs of different actions
Marginal cost is the cost of a small increase or decrease in activity
Marginal benefit is the benefit of a small increase or decrease in activity
Opportunity Costs
Rational agents make decisions with reference to opportunities forgone
o What does it cost to get married?
o What does it cost to build a railway?
o What does it cost to go to university?
Economic profit =/= accounting profit
o Accounting profit = Revenue - Costs
o Economic profit = Revenue - Costs - Opportunity costs
o = Accounting profit - Opportunity costs
Economic Method and PPC
Need to simplify methods
Consistent principles applied to a constantly changing business environment
o Make assumptions
o Derive predictions with logic and reason
o Test predictions against empirical evidence
o Search for principles that can apply in many contexts
PPC illustrates fundamental trade-offs in a 2 good economy
o Food and Clothes
o To produce more food you have to produce less clothes
o Points within the curve are inefficient (Point A)
o Points outside the curve are unattainable (Point B)
Only attainable through economic growth
Technological change, Increase in quantity of capital etc
,Demand and Supply
19 October 2020
15:03
The Demand Curve
Relationship between price and quantity demanded
Downward sloping to reflect the Law of Demand
o Rise in price will reduce the quantity demanded and a fall in price will
increase the quantity demanded
The Income Effect
o Rise in price means people feel poorer, their purchasing power has fallen,
they buy less because of this
The Substitution Effect
o Rise in price of a commodity makes it relatively more expensive compared
to other commodities so consumers switch from the first commodity to a
relatively cheaper option.
Factors that affect demand
o Demand will increase if:
Income goes up (unless inferior good, in which case demand falls)
Expectations of future price changes go up
Price of complement goes down
Price of substitute goes up
Taste move favourably for this good
Vice versa for a fall in demand
A movement along the curve is a change in quantity demanded
A shift in the curve is called a change in demand
The Supply Curve
Relationship between the price of a good and the quantity supply
Upward sloping curve
o Cost of production
Increasing production may mean increasing costs so a higher price is
needed to persuade producers to supply extra goods and justify the
higher costs
o Profits
, If producers supply a range of products, as the price of one goes up
they might switch production from another product to one that is
more profitable.
Farmer plants carrots and potatoes, if price of potatoes goes up he
might plant more potatoes and less carrots
o Entry of new firms
As the price of a good rises, more firms may start-up and supply that
good (Market curve affect)
Factors that affect supply
o Supply will increase if:
Costs of production fall
Price of alternatives products fall
Random events occur that have a good effect (Good weather for
farming)
Future prices are expected to be low
A movement along the curve is a change in quantity supplied
A shift in the curve is called a change in supply
Market Clearing
At the equilibrium there is no shortage and no surplus, also known as the market clearing
price and quantity
If price is below equilibrium, demand > supply and there will be a shortage of that good. This
will bid up price, reducing quantity demanded and increasing quantity supplied until
equilibrium is reached
If price is above equilibrium, supply > demand and there will be a surplus of that good. Firms
will undercut each other and the price will fall, increasing quantity demanded and reducing
quantity supplied until equilibrium is reached
Free markets automatically correct themselves and find their equilibrium position
Changes in Equilibrium
Anything that increases demand at each price will shift the demand curve to the right. This
will create a shortage and increase price, the end result is a higher equilibrium price and
quantity
Anything that shifts the demand curve to the left will lead to a lower equilibrium price and
quantity
If supply increases at each price the supply curve will shift to the right. This will create a
surplus so price will fall and the new equilibrium price is lower and quantity higher
If the supply curve shifts to the left this will lead to a lower equilibrium quantity and a higher
equilibrium price
Demand and Supply Shifts; Elasticities
19 October 2020
15:05
Equilibrium
No tendency to change
Stable market prices
Buyers and Sellers interests are balanced
Out of Equilibrium
19 October 2020
14:26
A definition of economics
"Economics is the science which studies human behaviour as a relationship between ends and scarce
means which have alternative uses." - Lionel Robbins
Marginal Cost and Benefit
Rational choices involve comparing the benefits and costs of different actions
Marginal cost is the cost of a small increase or decrease in activity
Marginal benefit is the benefit of a small increase or decrease in activity
Opportunity Costs
Rational agents make decisions with reference to opportunities forgone
o What does it cost to get married?
o What does it cost to build a railway?
o What does it cost to go to university?
Economic profit =/= accounting profit
o Accounting profit = Revenue - Costs
o Economic profit = Revenue - Costs - Opportunity costs
o = Accounting profit - Opportunity costs
Economic Method and PPC
Need to simplify methods
Consistent principles applied to a constantly changing business environment
o Make assumptions
o Derive predictions with logic and reason
o Test predictions against empirical evidence
o Search for principles that can apply in many contexts
PPC illustrates fundamental trade-offs in a 2 good economy
o Food and Clothes
o To produce more food you have to produce less clothes
o Points within the curve are inefficient (Point A)
o Points outside the curve are unattainable (Point B)
Only attainable through economic growth
Technological change, Increase in quantity of capital etc
,Demand and Supply
19 October 2020
15:03
The Demand Curve
Relationship between price and quantity demanded
Downward sloping to reflect the Law of Demand
o Rise in price will reduce the quantity demanded and a fall in price will
increase the quantity demanded
The Income Effect
o Rise in price means people feel poorer, their purchasing power has fallen,
they buy less because of this
The Substitution Effect
o Rise in price of a commodity makes it relatively more expensive compared
to other commodities so consumers switch from the first commodity to a
relatively cheaper option.
Factors that affect demand
o Demand will increase if:
Income goes up (unless inferior good, in which case demand falls)
Expectations of future price changes go up
Price of complement goes down
Price of substitute goes up
Taste move favourably for this good
Vice versa for a fall in demand
A movement along the curve is a change in quantity demanded
A shift in the curve is called a change in demand
The Supply Curve
Relationship between the price of a good and the quantity supply
Upward sloping curve
o Cost of production
Increasing production may mean increasing costs so a higher price is
needed to persuade producers to supply extra goods and justify the
higher costs
o Profits
, If producers supply a range of products, as the price of one goes up
they might switch production from another product to one that is
more profitable.
Farmer plants carrots and potatoes, if price of potatoes goes up he
might plant more potatoes and less carrots
o Entry of new firms
As the price of a good rises, more firms may start-up and supply that
good (Market curve affect)
Factors that affect supply
o Supply will increase if:
Costs of production fall
Price of alternatives products fall
Random events occur that have a good effect (Good weather for
farming)
Future prices are expected to be low
A movement along the curve is a change in quantity supplied
A shift in the curve is called a change in supply
Market Clearing
At the equilibrium there is no shortage and no surplus, also known as the market clearing
price and quantity
If price is below equilibrium, demand > supply and there will be a shortage of that good. This
will bid up price, reducing quantity demanded and increasing quantity supplied until
equilibrium is reached
If price is above equilibrium, supply > demand and there will be a surplus of that good. Firms
will undercut each other and the price will fall, increasing quantity demanded and reducing
quantity supplied until equilibrium is reached
Free markets automatically correct themselves and find their equilibrium position
Changes in Equilibrium
Anything that increases demand at each price will shift the demand curve to the right. This
will create a shortage and increase price, the end result is a higher equilibrium price and
quantity
Anything that shifts the demand curve to the left will lead to a lower equilibrium price and
quantity
If supply increases at each price the supply curve will shift to the right. This will create a
surplus so price will fall and the new equilibrium price is lower and quantity higher
If the supply curve shifts to the left this will lead to a lower equilibrium quantity and a higher
equilibrium price
Demand and Supply Shifts; Elasticities
19 October 2020
15:05
Equilibrium
No tendency to change
Stable market prices
Buyers and Sellers interests are balanced
Out of Equilibrium
