ECON 210 NOTLAR PDF

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2011/12

ECONOMICS NOTES 



IŞIL EROL



JETON DUKAGJINI



ECON 101 – Introduction to Economics 2011/12

Jeton DUKAGJINI

INTRODUCTION TO MICROECONOMICS Definition I : Economics is the study of the use of scarce resources to satisfy unlimited human wants. Definition II : Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided. The Methods Of Economics Positive Economics Descriptive Economy

Economic Policy 1)Efficiency 2)Equity of Fairness 3)Growth 4)Stability

Normative (Policy) Economy Economics Theory

- Alocative Efficiency - Economic Growth = Increase in Total Output

Note : Output per capita = Nation’s Output

Numbers of individuals in the country

If output grows faster than population it means that output per capita rises.

A SOCIETY’S RESOURCES 1) Natural Resources (Lands, Forrest, Water) 2) Human Resources (Mental and Physical) 3) Man-made Facilities such as tools, buildings etc.

OUTPUT

Factors Of Production

Goods (tangible)

Services (intangible)

Scarcity And Choice SCARCITY implies that choices must be made, and making choices implies the existence of costs.

Several attainable combinations : 8 Apple Candies, 1 Chocolate Candy 4 Apple Candies, 3 Chocolate Candies 2 Apple Candies, 4 Chocolate Candies

Quantity of Apple Candies

Example : A child has 50 cents to spend on candies. ( Apple Candie : 5 cents / Chocolate Candie : 10 Cents ) 12

10 8 6 4 2 0 0

1

2

3

4

5

6

Quantity of Chocolate Candies

The cost of consuming the 3rd chocolate Candy is the 2 apple Candies. Economics Notes

1

ECON 101 – Introduction to Economics 2011/12

Jeton DUKAGJINI

Note : The Opportunity Cost of using resources for a certain purpose is the benefit given up by not using them in an alternative way. It’s the cots measured in terms of other goods and services that could have been obtained instead. People (Household) income level Expenditure Prices of Goods Household Consumption Inflation Rate Prices of Housing Total output of a Country Average income level

GRAPHS Time-Series Graphs (1 Variable)

Cartesian Coordinate (2 Variables)

COORDINATE (CARTESIAN) SYSTEM Y

Y

B

𝑦2 A

𝑦1

C

𝑦1

D

𝑦2

X 𝑥1

X

𝑥2

𝑥1

POSITIVE SLOPE

𝑥2

NEGATIVE SLOPE

STRAIGHT LINES AND THEIR SLOPES L1

L4 L3 L2

Positive

Definition : Slope

Negative

Zero

Infinite

relation of different variables

L1 (Steeper) Line L2 (Flatter) Line

Economics Notes

2

ECON 101 – Introduction to Economics 2011/12

Jeton DUKAGJINI

Curved Lines And Their Slopes

(+)

(-) (+)

(-) (-)

Positive Increasingly increasing

Negative Decreasingly decreasing

(+) Decreasingly increasing (-) Increasingly decreasing

(+)

(-) Decreasingly decreasing (+) Increasingly increasing

Is measured in every single point.

Functions Consumption = f (income level)

C= f(y)

Independent Variable

Y=f(x)

Dependent Variable

y (c) 200

Example :

150

C = 0.8 Y For Y = 0 => C=0 For Y = 100 => C=80 For Y = 200 => C=160

100 50 0 0

Example :

50

100

150

200

250 x (y)

750C

C = 600 + 0.5 Y For Y=0 => C=600 For Y=100 => C=650 For Y=200 => C=700

Vertical Intercept

700 650 600 550

Y

0

100

200

300

Production Possibility Boundary ( Fronter or Curve ) Quantity of Public Goods

P1

a d c a

P2

Unattainable Combination

*Scarcity d *Choices a, b *Opportunity cost

c

a

b a

Attainable Combination Production Possibility Curve

= If we produce more and more military goods we are giving up more and more from public goods.

Quantity of Military Goods M1 Economics Notes

M2 3

ECON 101 – Introduction to Economics 2011/12

Jeton DUKAGJINI

Effect of Economic Growth On Production Possibility Curve

After Growth

Alternative Economic System 1) Traditional Economics 2) Centrally – Planed (Command) Economics 3) Free Market (Market) Economics 1) We see behavior of consumer. It is a primitive economy. It depends on traditions. 2) Everything is directed by a central authority (government). Assume that free market can’t be operated well in benefit of people, it should be controlled by a center. 3) We realize this type of economy most commonly today. Pricing System exists. All decisions are controlled by a Pricing System. Note : What we call ‘A Real Economy’, is the mix of those three economies. We can see ‘ Command Economy ’ in Cuba, North Korea, China etc. We can see ‘ Market Economy ’ in USA etc.

* F REE M ARKET E CONOMY *

HOUSEHOLDS •They are basic consumers. We expect a constant reaction Utility maximization behaviour. They are basic owners of labour.

FIRMS •They are producers. They try to maximize their profit. We expect a constant behaviour. Firms buy the labour from households and produce its goods to households.

GOVERNMENT •It has direct control to Economic actions. They create courts, laws. Most important function of Government is Market Failure.

Economics Notes

4

ECON 101 – Introduction to Economics 2011/12

Jeton DUKAGJINI

M ICROECONOMICS A ND M ACROECONOMICS

Pruduction

Prices

Income

Employment

MICRO

Production and output for individual industries.

Prices of Individual goods and Services.

Distribution of income and wealth. (Wapes in Textile Industry)

Imployment by individual bussiness. (Jobs in steal Industry )

MACRO

National output production GDP

Aggregate price level. ( Inflation )

National income. Total wapes. Total firm profits.

Employment and Unemployment in Economy.

An Overview of Microeconomics Adam Smith

“ Invisible Hand ” Social Control Mechanism

Price System More broccoli production, Less carrot production

Consumers’ preferences/tastes change Price Mechanism

The allocation of resources change.

Specialization, Exchange And Comparative Advantage David Ricardo

“Theory of Comparative Advantage”

Example: Bill and Colleen, both are gathering food and cutting wood. We suppose that Colleen is better at both tasks. Ricardo : It is still important for them to specialize and exchange. Definition : A producer has an absolute advantage over another in the production of a Daily Production Wood Food good or service if he/she can produce that product using fewer resources. Colleen 10 10 Definition : A producer has a comparative advantage over another in the production of a Bill 4 8 good or service if he/she can produce that product at a lower opportunity cost. For Bill : The opportunity cost of 8 bushels of food is 4 logs of wood. For Colleen : The opportunity cost of 8 bushels of food is 8 logs of wood. For Colleen : The opportunity cost of 10 logs of wood is 10 bushels of food. For Bill : The opportunity cost of 10 logs of wood is 20 bushels of food. Suppose that Colleen and Bill, each wanted equal # of logs and bushels in a 30-day month. Colleen : 15 days developed each task. 15 x 10 = 150 Monthly Production/No Trade Wood (logs) Food (Bushels) Bill : 10 days developed food. 10 x 8 = 80 Colleen 150 150 20 days developed wood. 20 x 4 = 80 Bill 80 80 Total 230 230 Total Production = 230 food and 230 wood Economics Notes

5

ECON 101 – Introduction to Economics 2011/12

Jeton DUKAGJINI

By Specialization on basis of ‘comparative advantage’, they can produce more of both goods. Monthly Production/After Specialization Wood (Logs) Food (Bushels) Colleen 270 30 27 days on wood ( 27 x 10 ) / 03 days on food ( 3 x 10 ) Bill 0 240 30 days on food ( 30 x 8 ) Total 270 270

Monthly Production / After exchange and specialization Wood (Logs) Food (Bushels) 270 170 30 170 0 100 240 100 270 270

Colleen Bill Total

D EMAND, S UPPLY A N D P RICE D ETERMINATION Quantity Demanded : The total amount of any particular product or service that an economy’s consumer wish to purchase in some time of period. What determines quantity demand for a particular product ?

Product's own price Average household income

Expectations

Population size

Holding all other inluencing variables constant ≡ "other things being equal", "other things given" ≡ " Ceteris Paribus "

Distribution of income among consumers

Economics Notes

Price of related producs

Tastes (preference) of consumers

6

ECON 101 – Introduction to Economics 2011/12

A Demand Schedule For Carrots Price per ton ($) QD (thousands of tons/months) 20 110 40 90 60 77.5 80 67.5 100 62.5 120 60

A B C D E F

Demand Curve (D)

Jeton DUKAGJINI

A Demand Curve For Carrots 140

Prices ($) F

120

E D

100 80

C

60

B

40

A

20

QD

0 0

20

40

60

80

100

120

Demand: => Entire relationship between price of product and QD Quantity Demanded: => A single point on Demand Curve SHIFTS IN THE DEMAND CURVE Demand Curve is plotted on the assumptions of ‘ceteris paribus’ but what if the other factors change ? Example : If income level of household increases. P

QDEMANDED = Desired amount of purchase QBOUGHT = Actual amount of purchase D2 D1 QD A Demand Curve can shift in two main ways : 1) More is bought at each price

P1 P2

A

2) Less is bought at each price

P1 B

P2 C

P3

D2

A B C

P3 D2

D1 Q1 Q2 Q3 Economics Notes

D1

Q1 Q2

Q3 7

ECON 101 – Introduction to Economics 2011/12

Jeton DUKAGJINI

- The effect of ‘Related Products’ prices: The lower the price of a product, the cheaper it becomes relative to other products that can satisfy the same need or desire. SUBSTITUTES Complementary Goods => Goods that are consumed jointly. Price of Cars

Price of Petrol

P1 P1

A B

P2

Dc

D2 D1

Q1

Q2

QD for Cars

QD for Petrol

Q1

If price of cars declines significantly then quantity demanded for petrol will increase, what will cause a shift to the right of demanded curve of petrol. Example : Suppose that broccoli and spinach are substitutes. If the price of spinach increases, how does it effect : a) Demand for spinach ? b) Demand for broccoli ? Price of Spinach Price of Spinach P1 P1

B A

P0

D1

D0 D0

Q1

Q0

QD for Spinach

Q0

Q1

QD for Broccoli

S HIFTS I N D EM AND C URVE An increase in demand [ More is demanded at each price ] * A rise in income * A rise in price of a substitute * A fall in price of a compliment * A change in tastes that favors that product * An increase in population * Redistribution of income toward groups that favors product * Expectations : If price is expected to increase Economics Notes

A decrease in demand [ Less is demanded at each price ] * A fall in income * A fall in price of a substitute * A rise in a price of a compliment * A change in tastes that disfavors that product * A decrease in population * Redistribution of income away from groups * Expectations : If prices expect to decline 8

ECON 101 – Introduction to Economics 2011/12 Px

Jeton DUKAGJINI B

P0

A

C

D2

D0

D1 Qx

Q2

*

Q0

Q1

Movements Along Demand Curve Versus Shifts of the Whole Curve

- Last week : Price of product increases due to an increased demand for carrots

*

Shift in demand

- This week : The rising price of carrots is reducing the consumers purchases of carrot

Movement along curve

Question : When there is a change in demand and in price, the change in QDEMANDED is the net effect of the shift in demand curve and movement along new demand curve. Pc

q0

q1 ( ) => effect of shift in demand

P2

P1 P0

If price increases to P1

q0 to q2 ( )

If price increases to P2

q0 to q3 ( )

A

B

D2 D1 Q3 Q0

Q2

Qc

Q1

From Household Demand To Market Demand The A’s demand :

The B’s demand : PCOFFEE/KG

PCOFFEE/KG

3.5

3.5

3.5

1.5

1.5

4

8

q

1.5

DB

DA

Economics Notes

The C’s demand : PCOFFEE/KG

3

q

DC 4

9

q 9

ECON 101 – Introduction to Economics 2011/12

Jeton DUKAGJINI

The Market’s demand : PCOFFEE/KG

3.5

DM : Demand Curve

1.5 8 Note :

q

20

q = quantity demanded by individual household. Q = Total quantity demanded in the market .

*

S UPPLY

*

- The amount of service that producers deal to sell.

≠

qActually Sold

≠

qExchanged

qSupplied

Buyers Sellers

Purchase a product/service Sale (Selling a product/service)

Supply Schedule For Carrots

A B C D E F

Price per ton Quantity supplied ($) (Thousands of tons per month) 20 5.0 40 46.0 60 77.5 80 100.0 100 115.0 120 122.5

140

Price Of Carrots ($/ton)

F

120

E

100

D

80

C

60

122.5

115

100

77.5

B

40

46

A

20

5

0 0

20

40

60

80

100

120

140

Quantity of Carrots Supplied

Economics Notes

10

ECON 101 – Introduction to Economics 2011/12

Jeton DUKAGJINI

Shifts In The Supply Curve a) Price of Inputs : If price of inputs increases then production will be less profitable (ceteris paribus). Supply will decline. b) Technology : If technology leads to decrease cost of production, profits will be higher. Supply will be more. c) Prices of Related Products : If price of cotton increases then quantity supply of wheat decreases. a) P

P

b) S1

c) P S0

S0

P0

Sw1

Sw

S1

P0

qs1

qs

qs0

qs0

qs

qs1

q

From Individual To Market Supply Firm A’s Supply :

Firm B’s Supply :

Firm C’s Supply :

PCOTTON/KG

PCOTTON/KG

PCOTTON/KG SA

SC

SB

3

3

3

1,75

1,75

1,75

10.000

30.000

qc

5.000

10.000 qc

10.000

25.000

qc

The Market’s Supply : PCOTTON/KG SM 3 1,75

25.000

Economics Notes

65.000

qc

11

ECON 101 – Introduction to Economics 2011/12

Jeton DUKAGJINI

Demand And Supply Schedule For Carrots And Equilibrium Point $ 20 40 60 80 100 120

QDEMANDED 110 90 77.5 67.5 62.5 60

QSUPPLIED 5 46 77.5 100 115 122

Excess D or S 105 44 0 32.5 52.5 62.5

𝑄𝐷 > 𝑄𝑆 Excess Demand 𝑄𝐷 = 𝑄𝑆 Equilibrium Condition 𝑄𝐷 < 𝑄𝑆 Excess Supply

Equilibrium : It is a state of balance between two conflicting forces. The price where QD is equal to QS is called Equilibrium Condition. Equilibrium Price : Is the price level where QD is equal to QS. Prices of which QD ≠ QS are called Disequilibrium Price. SHORTAGE => Upward pressure on prices

SURPLUS => Downward pressure on prices

Determination Of Equilibrium Price S

Price ($/ton) Excess Supply

120

E 60 Equilibrium (QD = QS)

Two curves intersect to each other. 20

Excess Demand

D 5

Economics Notes

60

77.5

110

Q of Carrots 122.5 (Thousands of tons/month)

12

ECON 101 – Introduction to Economics 2011/12

Jeton DUKAGJINI

The Law Of Demand And Supply

Fall in Supply

Rise in Supply

*

Rise in Demand

Fall in Demand

Effects of these changes on Equilibrium Price and Quantity exchange

Comparative Static Equilibrium Analysis

*

1) A rise in Demand causes an increase in both the equilibrium price and equilibrium quantity exchanged. 2) A fall in Demand causes a decrease in both the equilibrium price and equilibrium quantity exchanged.

1)

2)

S

S

E1

P0

E0

P0

P1 E0 D1

P1

E1 D0

D1

D0 Q0 Economics Notes

Q1

Q1

Q0 13

ECON 101 – Introduction to Economics 2011/12

Jeton DUKAGJINI

3) A rise in Supply causes a decrease in equilibrium price and an increase in equilibrium of quantity exchanged. 4) A fall in Supply causes an increase in equilibrium price and a decrease in equilibrium of quantity exchanged. 3)

4) S0

S1

E0

E1

S1

S0

P1

P0 E1

P1

E0

P0 D

Q0

D

Q1

Q1

Q0

Demand And Supply Applications means Price Rationing