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ECEconomics for Business2015 – 16Table of ContentsTable of Contents Table of Contents Topic • Demand • Elasticity • Supply Topic • Constant returns production function • Increasing returns production function • Vulnerability Topic • Market structure Topic • Business cycle • Circular flow of income •...

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EC1310 Economics for Business 2015 – 16

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Table of Contents Table of Contents ............................................................................................................................ 2! Topic 1 ............................................................................................................................................ 3! •! Demand ................................................................................................................................. 3! •! Elasticity................................................................................................................................ 3! •! Supply ................................................................................................................................... 4! Topic 2 ............................................................................................................................................ 5! •! Constant returns production function .................................................................................... 5! •! Increasing returns production function ................................................................................. 5! •! Vulnerability ......................................................................................................................... 6! Topic 3 ............................................................................................................................................ 6! •! Market structure .................................................................................................................... 6! Topic 4 ............................................................................................................................................ 7! •! Business cycle ....................................................................................................................... 7! •! Circular flow of income ........................................................................................................ 8! •! Aggregate demand and Aggregate supply ............................................................................ 9! •! Employment ........................................................................................................................ 10! •! Inflation ............................................................................................................................... 11! Topic 5 .......................................................................................................................................... 11! •! Business cycle ..................................................................................................................... 11! •! Fiscal and monetary policies ............................................................................................... 11! •! Interest rate transmission mechanism ................................................................................. 12! •! Exchange rate transmission mechanism ............................................................................. 12! •! Depreciation ........................................................................................................................ 13!

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Topic 1 • Demand'

Causes of shift in demand curve : -increase in income -rise in price of substitute goods -fall in price of complementary goods -change in tastes -expectation of rise in price

• Elasticity'

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Inelastic goods: petrol (weak substitutes of car), salt and diamonds (infrequent buy), good produced by monopoly, tap water (necessity with 0 alternatives), peak rail tickets, cigarettes (addiction), apple iphones or ipads (premium for the products) Elastic goods: Heinz soups (alternatives), shell petrol (from other petrol station), tesco bread… Income elastic demand: luxury goods (Porsche, organic, homemade) Income inelastic: inferior (tesco value, milk powder)

Income elasticity of D Calculate YED = PA x (Y/QA) Measurement -Normal goods (positive elasticity) -Inferior goods (negative elasticity) Determinants “Degree of necessity” of the good Applications Importance of the perceptions of to business the production

Cross-price elasticity of D CED = e x (PB / QA) -Substitute goods (positive elasticity) -Complementary goods (negative elasticity)

-Closeness of complements or substitutes -Time period -Effects of changes in competitors’ princing strategy -Strategies to make a product less cross elastic

• Supply'

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Causes of shift in supply curve : -Fall in costs of production -Reduced profitability of alternative products that could be supplied -Increased profitability of goods in joint supply

Topic 2 • Constant'returns'production'function'

• Increasing'returns'production'function'

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• Vulnerability' Type 1 a) the importance will be

when. SRATC

b) returns to labour ie CRLvDRLvIRL. IRL effect appears at low level of variable cost ad output of a production. DRL when increased in costs. c) the behaviour of labour costs (variable costs) A steep SRATC experiences more volatility, slope is driven by the scale of fixed assets. It is imposed (natural disasters, terrorism).

which is determined by the share of

Topic 3 • Market'structure' Market structures Number of firms (size)

Perfect competition

Freedom of entry

Easy Perfect knowledge

Nature of product Implications for D curve Profit making possibility Government intervention Control over pricing

Homogeneous (undifferentiated) Horizontal, price taker None

Very many (small)

Monopolistic competition Many, several

Oligopoly

Monopoly

Few (large) dominant 317

Easy No barriers to entry Differentiated

Difficult Interdependence

One (very large) More than 25% of market share Very difficult Barriers to entry Unique

Downwards sloping - elastic Low/medium

Undifferentiated or differentiated Downward sloping inelastic Medium/strong

None

None

Medium

Strong

None

Low

Moderate/substantial

Substantial

Downwards sloping – most inelastic Strong

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Examples

Feature commodity markets (cabbages, carrots)

Restaurants, hairdressers

Aircraft industry, petrol, banking, razors

Local water company, train operators (over particular routes)

Assumptions of the perfectly competitive model a)Large number of firms (each firm’s output is small in relation to the size of the market, work independently). Many sellers and buyers. Price takers. Many buyers and sellers. b)Homogeneous good (same good, buyer doesn’t care about seller) Identical product. c)No barriers to entry (free to enter and exit, based on attractiveness) d)Perfect information (immediate access to resources, know all the prices) and perfect resource mobility.

Topic 4 • Business'cycle' Potential output: GDP that could be produced by an economy if all its resources were fully employed, productive capacity of the economy (by looking at the Production Possibility Frontier). Potential economic growth: % increase in the economy’s capacity (shift of the hole curve). Actual output: the amount of a product that a production facility actually produces. Actual growth: % increase in actual output (how much we can produce will all of our resources, move from x to y)

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• Circular'flow'of'income'

Withdrawals (W) = Savings (S) + Taxation (T) + Imports (M). Injections (J) = Government expenditure (G) + Exports (X) + Investment (I) Multiplier = k x ∆I Mpw = mps + mpt + mpm.

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• Aggregate'demand'and'Aggregate'supply'

Aggregate Demand = Consumption + Investment + Government expenditure + Exports – Imports Any change in these components will shift the aggregate demand curve.

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• Employment'

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• Inflation'

Topic 5 • Business'cycle'

• Fiscal'and'monetary'policies' Fiscal policy: intervention from the government with the use of investment (to spend), tax and borrowing. There is an expansionary when increasing government expenditure to push the demand up and a deflationary by decreasing the government expenditure to escape inflation. Monetary policy: use of interest rates and ease of credit. This is a way to stabilise the money and to prevent inflation.

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• Interest'rate'transmission'mechanism' (Money supply effect on interest rates, investment and national income)

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• Exchange'rate'transmission'mechanism' (Money supply to exchange rate)

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• Depreciation' '

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->Supply of the currency getting bigger or the D for the pound getting smaller. The exchange rate will fall. -> Higher inflation in the UK than abroad, so D for imports would increase, price level in UK is higher than in other countries, buy in other countries, supply the UK currency, D for pounds go down. -> A rise in UK incomes, spend more on imports, buy from abroad, inflation. -> A fall in UK interest rates -> Relative investment prospects improving abroad: better to I in US because economy recovering more quickly, UK firms want dollars and supply pounds in UK to get dollars -> Speculation that rate will fall: investors will use as an opportunity to make money.

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EC1310 Economics for Business Elizabeth Jones Made by Lauren Ivins

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