Micro/Macro Economics. Module 1. Introduction & Supply and Demand. Before we begin, you will need the following:

Transcription

1 Micro/Macro Economics Module 1 Introduction & upply and Demand 1 Before we begin, you will need the following: 1. This presentation (a little obvious) 2. The Audio lecture (also obvious) 3. The lesson notes 4. Your textbook 2 Business Headlines: Unemployment Inflation Recession anadian $ vs U $ 3 1

2 Business Headlines: Unemployment Inflation Recession anadian $ vs U $ Why study Economics? to understand the economy to predict business cycles appreciate the role of the government to adjust business decisions Micro-Economics Macro-Economics 4 Economics is the study of relationships within our Economy. We use graphs to illustrate these relationships: Y = f(x) Y Here, the relationship is between 2 variables X & Y The relationship is positive. As X increases, Y increases X 5 Y = - f(x) Y X Here, we show a negative relationship. As X increases, Y decreases 6 2

3 Y is a constant X Y X is a constant X Y 7 Two variables are related if, as one changes the other changes Demand = Function (rice) As price changes, demand will change Functions can be positive or negative rice 8 Building an economic model page 13 Assumption Observations redictions Test predictions (Reality check) Modify predictions and assumptions as needed Theory (assuming facts support prediction) 9 3

4 ome built-in Economic Models (assumptions) Unlimited wants Limited resources We choose to make us better off Wants are matched with outputs in an economy There are always opportunity costs Fundamental Economic oncepts 10 Implications of these models and concepts Equilibrium Dynamic (always moving) Government s role is to establish Economic olicy Improve efficiency Improve equity Improve growth Improve stability 11 Economics is a study of: page 2-5 Economic factors onsumers } Business } decision makers Government } What will be produced How will it be produced For whom will it be produced 12 4

5 Two Markets: Factors Market: Households supply : labour, land, capital to business Households get wages, interest, royalties, dividends 13 Two Markets: Factors Market: Goods Market: Business supply goods and services to consumers Factors of roduction: page 38 Land Labour apital Entrepreneurship 14 Farm goods oint B oint oint A onsumer goods roduction ossibility urve 15 5

6 Farm goods oint B oint oint A onsumer goods oint B unattainable with current factors of production levels oint A attainable but inefficient Opportunity ost: page 40 Resources or roduction given up to get something else 16 A B To determine the opportunity cost at any point, draw a tangent line at that point and measure the slope. The steeper the slope, the higher the opportunity cost. onsider the slope (Opportunity osts) at: oint A oint B oint 17 Economic Growth Uneven Growth Economic Growth (expansion) due to: apital accumulation Technological rogress Increase in the labour force (emigration?) 18 6

7 Farm Goods ountry A s F ountry B s F onsumer Goods ountry A is more efficient in producing farm goods. ountry B is more efficient in producing onsumer goods. ountry A has omparable Advantage in the production of farm goods Absolute advantage: When one country can produce all products more efficiently than another country. 19 Advantage of Trade: page 48 North America Europe loth 1 3 Food 2 4 To produce 1 unit of cloth, it costs NA, 1 unit of labour but it costs EU, 3 units of labour. To produce 1 unit of food, it takes 2 labour units in NA but 4 units of labour in EU. Notice that NA has an absolute advantage in the production of food and cloth. 20 Advantage of Trade: page 48 North America Europe loth 1 3 Food 2 4 NA shifts 2 labour units from food production to cloth production. The result is that food production decreases by 1 unit and cloth production increases by 2 units. EU shifts 6 labour units from cloth to food production. The result is that cloth production decreases by 2 units but food production increases by 1 ½ units. Net world effect of the shift of labour is cloth production is unchanged but food production increases by ½ unit. 21 7

8 Demand page 65 otential consumption What the economy intends to buy lanned expenditure on a product or service Demand = function (rice, income, season, taste, fashion..... ) Demand = function ( rice) D = f() cp eteris aribus (cp) The law of downward sloping demand. As price increases we consumers will want less of the product 22 A B Quantity D D2 D1 A movement along the demand curve: Brought about by a change of price only! -- oint A to point B A movement of the demand curve: A result of a change in income, season, taste etc. A change in the price of substitutes or complements D to D1 expanded demand 23 D to D2 contracted demand upply: page 70 Function of: rice Technology rice of factors of production rice of substitutes 24 8

9 upply: page 70 Movement along the upply curve: Brought about by change in price of the product A B B 1 A Movement of the upply curve: Brought about by a change in costs or technology 1 25 upply R I E Equilibrium Demand Quantity Equilibrium: upply = Demand Market clearing price Market clearing quantity What consumers want to buy equals what producers are willing to sell upply R I E Qe Demand Quantity rice e Only a price where upply = Demand can be sustained 27 9

10 R I E upply rice 1 rice e Demand Quantity rice 1 upply is greater than Demand urplus Only a price where upply = Demand can be sustained 28 upply R I E rice e rice 2 Demand Quantity rice 2 Demand is greater than supply hortages Only a price where upply = Demand can be sustained 29 Mathematical approach. uppose: D = 40 2Q = 10 + Q olve for upply = Demand 40 2Q = 10 + Q - 3Q = - 30 Q = 10 ubstitute Q = 10 in = 10 + Q so.. = 20 Alternative presentation: Demand = 40 2 upply = = = - 30 = 10 ubstitute p = 10 and Q = =

11 hanges in Demand Expanded Demand can result from hange in income hange in season hange in consumer tastes hange in substitute price 31 hanges in Demand Expanded Demand can result from hange in income hange in season hange in consumer tastes hange in substitute price Restricted demand can result from: Lower income hange in season Lower substitute product price 32 The effect on Market Equilibrium as a result in the change of D R I E D1 D As Demand Expands from D to D1: price will increase and quantity traded in the market increases 33 11

12 The effect on Market Equilibrium as a result in the change of Demand R I E D1 R I E D D2 D As Demand Expands from D to D1: price will increase and quantity traded in the market increases As Demand contracts from D to D2: price will decrease and equilibrium quantity will decrease 34 What causes upply to change: ince upply is predicated on costs of production: Expanded upply can result from: Lower factor input costs Government subsidy heaper raw materials More efficient technology and production 35 What causes upply to change: ince upply is predicated on costs of production: Expanded upply can result from: Lower factor input costs Government subsidy heaper raw materials More efficient technology and production Restricted upply can result from: Higher factor input costs Government Taxes (GT) More expensive raw materials (OE) Obsolete technology and production systems 36 12

13 1 D As upply expands from to 1: price decreases and equilibrium quantity increases D D As upply expands from to 1: price decreases and equilibrium quantity increases As upply ontracts from to 2 price increases and equilibrium quantity decrease 38 MODEL 4.5 March 2001, June 2001 omparative markets Different types of automobiles are imperfect substitutes for each other on the demand side, based on characteristics such as size, gas mileage, and so on. Families could choose to buy a smaller family car with good gas mileage, or a larger minivan with poor gas mileage. a. Draw two separate graphs, showing the initial market equilibriums for family cars (F) and minivans (MV). Assume that initially MV > F. b. uppose that the price of gas increases significantly, and that the increase is expected to persist for some time. Recall that family cars and minivans are imperfect substitutes for each other. Explain what will happen to each of the following, and show these changes on your graph from part (a). i) Demand, supply, price, and quantity sold in the family car market ii) Demand, supply, price, and quantity sold in the minivan market 39 13

14 Family ars Mini Vans 40 Family ars Mini Vans 41 onsider the market for steel pipes and plastic pipes, both used in the plumbing industry. Assume further that the price of the two pipes are identical. a. What is the relationship on the demand side between the two industries? b. What is the relationship on the supply side, assuming that manufacturers can produce either type as easily? c. Assume that a report suggests that plastic pipes are better than steel ones. Explain with the use of graphs, what effect this report would have on the two markets for pipes. d. What will happen to the supply side of each type of pipe after the effect of (c) has taken place

15 lastic Metal 43 lastic Metal 44 15