Economics notes 1-5 PDF

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Week 1 What is economics? Economics is the study of the allocation and employment of scarce resources to produce goods/services that are either used for consumption or to produce more goods/services. Why is it important to study economics?  It is important because it gives us an insight on how the market-based society, we live in actually works.  Helps us understand aspects of your life. Microeconomics is the study of individuals and business decisions, while Macroeconomics looks at the decisions of countries and governments.

Positive analysis:  Positive economics is the branch the description, quantification and explanation of economic phenomena. It focuses on facts and cause-and-effect behavioural relationships and notes that economic theories must be consistent with existing observations. Normative analysis:  Normative analysis refers to the process of making recommendations about what action should be taken or taking a particular viewpoint on a topic. Normative economic statements typically contain keywords such as "should" and "ought." Circular Flow of Income model: Let’s divide all the expenditure on Australian production of goods/services over some period of time for example a year. Divide the expenditure into major sectors:  Total household consumption spending. C  Total business expenses investment expenditure. I  Government spending on goods and services. G  Go to export spending so that is expenditure by foreigners on Australian goods/services. X  Total expenditure on Australian Production. = C+I+G+X No all income generated by the production of Australian goods/services is spent in production of goods and services some of that income leaks out and is not spent immediately.  Households who spend their income but will also save some of it. S  Households will also be tax before they even get to spend the income or save it. T  Spending is also not specifically spent on Australian goods and services rather spend on goods and services that are produced overseas. M  Income not spent on Australian Goods/Services. = S+T+M The circular flow model demonstrates how money moves through society. Money flows from producers to workers as wages and flows back to producers as payment for products. In short, an economy is an endless circular flow of money. We are able to visualise the flow of income, expenditure, and leakages using the circular flow model.

Total “Leakages” (income not spent on Aus. production) = T + S + M

Equilibrium:  “Equilibrium” roughly means “balanced” or “no tendency to change”.  The economy is in equilibrium if leakages = injections S+T+M=I+G+X.  Is it guaranteed that the economy is always in equilibrium? NO Consumer goods: Consumer goods is a commodity that is used by the consumer to satisfy current wants or needs, rather than to produce another good. For example, a microwave oven or a bicycle is a final good.

Capital goods: Capital goods are physical assets that a company uses in the production process to manufacture products and services that consumers will later use. Capital goods include buildings, machinery, equipment, vehicles, and tools. Capital goods are not finished goods, instead, they are used to make finished goods. The Production Possibilities Frontier (PPF) model is a good example of how we can understand some aspects of an economy. It is very simplified - to the point of being extremely 'unrealistic' - and yet it is for precisely this reason that it can reveal some basic principles that relevant to understanding economies.

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Over here the economy is not operating as efficiently as possible because the consumer and capital goods lay below the PPF. Increase one of two consumer and capital resources to make it more efficient again.

Week 2 A market is an interaction between the demand and supply. Demand: the maximum quantities of some good or services that buyers are willing and able to purchase at a various corresponding price in some tine period. Factors that affect demand:  The number of buyers, income of buyers  the prices of related goods  tastes and preferences and price expectations. The law of demand:  Price and quantity demanded are negatively related.  At different price points there is a different demand for the product.  As the price goes down the demand of the product goes up. Why the law of demand?

Substitution effect: The substitution effect is the decrease in sales for a product that can be attributed to consumers switching to cheaper alternatives when its price rises. A product may lose market share for many reasons, but the substitution effect is purely a reflection of frugality. Income effect: When prices of roses are lower, purchasing power of consumers increase and they can purchase more quantity of the same amount. Important = if the goods are not normal and are presumed to luxury a fall in price could lead to a fall in demand Non price factors that affect demand:  Number of buyers  Income  Geographic location  Price expectations  Prices of complementary good  Taste and preferences Supply: The maximum quantities of x that sellers are willing and able to offeror sale at various corresponding prices in some period of time. What are the factors which affect supply?  The numbers of sellers  Prices of the input  Technology available  Price of alternative goods  Price expectations Why the law of supply? As prices go up the supply of x also goes up The suppliers do not think they are getting adequately paid Competition- Higher prices ensure greater profits margins and encourage new competitors to enter the market and operators. Which in turn increases aggregate supply. Capacity Addition- Capacity is the maximum level of output that a company can sustain to make a product or provide a service  

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Non price factors that affect: Number of sellers Expectation of prices Price alternatives Prices of inputs Technological advancements

When Non price factors change the supply curve will change and if it goes to the left it’s a decrease in supply and when it’s too the right it’s an increase in supply.

How does the market operate?

Market here refers to the institutionalised relationship between buyers and sellers. The market operates in a complicated manner when the price of a product/service goes down the demand will increase, however the supply of the product/service will decrease because the suppliers do not want to offer their product for a cheap price. This is when the concept of the invisible hands comes in and equals out the price, demand and supply of product/service but this is achieved over a long period of time. Week 3 The meaning of elasticity: Elastic is a term used in economics to describe a change in the behaviour of buyers and sellers in response to an effect on the variable due to a change to the cause variable and this can be measured in percentages. There are 5 main concepts of elasticity in economics, and the include:  Price elasticity in demand  Income elasticity of income  Cross price elasticity of demand  Price elasticity of supply  Adversativity elasticity of demand Calculating elasticity: 

IF THE EFFECT IS GREATER THAN THE CAUSE THEN IT IS CONSIDERED ELASTIC.

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IF THE EFFECT IS LESS THAN THE CAUSE THEN INTURN IT IS CONSIDERED TO BE INELASTIC BECAUSE IT WILL BE LESS THAN 1.

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IF THE EFFECT IS THE EQUAL TO THE CAUSE CONSIDERED TO BE UNIT ELASTIC. BECAUSE IT WILL

BE Depending on the detraction of the change (Increase/Decrease) there is a different level of responsiveness which is not reliable, and in order to that kind of eliminate a discrepancy the utilisation of the midpoint equation is best.

Calculating Price elasticity in demand:

Determinants of price elasticity of demand: There are two major factors that can influence the price elasticity of demand are Expenditure as a proportion of income, and number and closeness of substitutes available.

Income elasticity of demand:

Inferiors Goods/services are things that are not needed and can be changed when individual’s income increases. when the income of individuals increases the quantity demand of the inferior product will decrease.

Cross price elasticity of demand: In economics, the cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the quantity demanded for a good to a change in the price of another good, ceteris paribus.  

Complementary Products: Sold separately but used together. For example, a phone and a sim card. Substitute Good: Products that are perceived similar by customers. For example, Coffee and Tea.

n = Quantity Demand of B (%) / Price of A (%) 

If the cross-price elasticity is positive then it will be a Substitute. An example is of coffee as it can be said to be a substitute for tea, so it the price of coffee goes up the people will go towards the tea as it is cheaper making it a positive relationship as due to coffee being more expensive people started to purchase tea.

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If the cross-price elasticity is negative then it will be a Complementary Products. An example is when product X increases in price, demand for product Y falls.

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If the cross-price elasticity is 0 then it will be no relationship.

Advertising elasticity of demand:

Week 4

Total costs: One of the basic assumptions that most economist make is that firms which produce goods/services are doing so in an attempt to maximise profits. Profits = The difference between the revenue generated by the sales of goods and services and that cost of providing the good and service. That gap between them is economic profit. Many economists posit a law associated with the physical production of goods/services which is referred to as the Law of diminishing marginal returns which applies in the short run. Production process = Employing certain quantity of resources or inputs and utilising them in order to produce some quantity of outputs:  Raw Materials  Workers  Machines  Tools

Simplified version= Labour + Capital (Tools, Machines) = Product. We can also talk about a division in time whether a short-term period or a long-term period. Short-term is a situation in which one of the inputs is fixed and cannot be changed, we would assume for simplicity that:  Capital cannot be changed.  The only way a firm can increase its output is by adding additional workers to the capitals or factories.  Not enough time build new factories. Long-term is a situation in which the inputs are not fixed and both can be changed, so in this case we assume for simplicity that:  The firm can change all inputs in the production process  It can increase outputs by adding more worker to the factories  It also has the time it builds new factories. We could divide total costs as fixed and variable cost:  Costs of the fixed input = Fixed cost. E.g., price of machinery multiplied by the number of machines. This doesn’t change as the output changes.  Costs of the Variable input = Variable cost. E.g., wage rate multiplied by amount of the labour employed. This goes up as more labour is employed to produce more outputs. There is a pattern to the amount of labour employed in amount of labour employed in particular there is a law which governs the amount of labour employed the law is referred to as the law of diminishing marginal returns (to a variable input): At some point, each additional unit of labour will contribute ever-less o total output than pervious units of labour. The law of DMR implies: at some point, each additional unit of output will require ever-more units of additional labour.

Marginal and average costs: short-run: Marginal costs id the cost of an additional unit of output. The change TC due to producing an additional unit of output.

Average costs:

Average costs: long run     

All input can be changed The “scale” of operations can increase Thus, no fixed inputs Thus, no fixed costs, Only ATC and Mc curve As a firm increases in “scales”, its short run AC shif

Costs of increasing the scale of operations first we are able to say that as increases its scale it’s possible that it could enjoy what are called internal economics of scale.

Week 5 Characteristics of a market structure:  How many buyers and sellers re in the market?  What kind of products are being produced by the firm?  Are the firms producing very similar or different products to each other?  The degree of knowledge possessed by the percipients in that market  The freedom of entry and exit of the market  Are there any barriers for entering the market for new firms? The answers to these questions define the structure of a particular market There are two types of market structures, and they include Perfect competition and Monopoly.

Perfect competition:    

Many firms and buyers in the market Product being produced by the firms in a perfectly competitive market are exactually the same product and amount as every other firm in the market place. The knowledge possessed by agents in the perfectly competitive market is perfect to everything relevant to them. Freedom of entering and existing the marketplace for buyers and seller is perfect of all firms meaning no barriers to enter or exit.

When these assumptions in place we get an outcome that states that the firms in this kind of market have no market power that means they have no power to influence the market price they simply just accept the going market price. They are price takers.

For economist the outcome of a perfectly competitive market is very desirable, that is the main outcome is that all of the firms make no profit they all just break even, and they produce at the lowest possible average cost they can. In order to maximise Profit in a perfectly competitive market in the short-run The firm must try to make MR = MC as long as price is higher than average cost.

Monopoly: Monopoly refers to a market structure in which there is a single producer or seller that has a control on the entire market. 

Single firm supply for the whole industry. Example: Windows

Major characteristics: 1. Barriers to entry: 

Economies of scale: decreasing average total cost

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Lower cost for an established firm: high start-up cost

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Brand loyalty, product differentiation

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Ownership of key factors of production, input, unique resource/s or outlet/sight

– Legal protection: government license or franchise, patents and copyrights – Product differentiation. – Mergers and takeovers – Aggressive tactics 2. Price Maker 3. The demand curve of the monopolist is Average Revenue (AR), which slopes downward. Firm and industry demand curves are same. MR falls below AR

• Equilibrium price and output: – Equilibrium output achieved when MC = MR

Perfect competition: The market as a whole: 

A market is a composition of systems, institutions, procedures, social relations or infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services to buyers in exchange for money

Monopoly vs perfect competition: 

which best serves the consumer interest?

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Monopoly price and output both in SR and LR:

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higher prices/lower output → Price Maker – Costs under monopoly:

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costs may be higher – barriers to entry

 costs may be lower – economies of scale 

upper-normal profit for research and development and investment – competition for corporate control.

 Innovation and new products 

Perfect competition: → Price Taker

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P=MC=AR=MR → efficient allocation of resources,

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Supernormal profit can be earned in the short run but normal profit in the long run

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Perfect competition may not achieve economies of scale due to its size and invest in new innovation and research and development

Week 6...