Textbook notes - Essentials of Economics PDF

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Textbook notes from whole study period 2 of economics...

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INTRODUCTION (pg 1-19) WEEK ZERO 1.1    

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Economist are always developing new methods to analyse economic issues Wants are unlimited, the resources needed to fulfils those wants are limited Three key econmis ideas; People are rational, people respond to economis incentives and optimal deciosns are made at the margin PEOPLE ARE RATIONAL; econmis assumes that consumer and firm use as much of the available info as they can to achieve their goals. They weigh the benefit and cost of each action and choose the action only if the benefit outweigh the cost. PEOPLE RESPONG TO RECONMIC INCENTIVES; consumers and firm acts come from a variety of motives; religion, envy and compassion. OPTIMAL DECIOSNION ARE MADE AT THE MARGIN; economist reason that the optimal decision is to continue any acivity up to the point where the marginal benefit equal the marginal cost (MB = MC).

1.2          

OPPORTUNITY COST; the highest valued alternative that must be given up to engage in an activity CENTRALLY PLANNED ECONOMICS; an economy controlled by the government whom decided how economic resources will be allocated MARKET ECONOMY; an economy in which the decision of the households and firms interacting will cause allocation of resources MIXED ECONOMY; an economy which most economic decisions result from interaction between households and firms in markets, but the government plays a significant role in the allocation of resources. Market economic are often more efficient then centrally plan economics PRODUCTIVE EFFIENCY; a good or service is produced using the least amount of resources ALLOCATIVE EFFIENCY; a product reflects consumer preferences DYNAMIC EFFIENCY; occurs when new technology and innovation are adopted over time CONSUMER SOVEREIGNTY; in a market economy it is only the consumers who decide what goods and services will be produced There is often a ‘trade-off’ between efficiency and equity

1.3 

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DEVELOP AN ECONMIC MODEL; decide on the assumptions to be used, formulate a testable hypothesis, use economic data to test the hypothesis, revise the model if it fails to explain economic data, retain the revised model to help answer similar economic question in future cases. All economic models are based off assumptions, not all assumptions relate to all consumers POSITIVE ANALYSIS; concerned with what is and involves value-free statements that can be checked using facts (a reduction of taxation rates will lead to an increase in spending by individuals) NOMATIVE ANALYSIS; concerned with and involves making value judgements which cannot be tested (individuals should receive reduction in taxation as they are able to decide who to spend money to maximise their satisfaction better then a government can)

1.4   

MICROECONOMICS; the study of households and firms making choices, how they interact in markets and how governments attempt to influence choice. MACROECONOMICS; the study of the economy as a whole, including topics such as inflation, unemployment and economic growth Economic models can be used to analyse decision making

Conclusion -

Economics is essentially a group of useful ideas about how individuals make choices. Ideas are put into pactice with economic models

SUMMARY (pg 16-19)

WEEK ONE 2.2 MAKING THE CONNECTION -

Price mechanism; the system in a free market where price changes lead to producers changing production in accordance with the level of consumer demand Entrepreneur; someone who operates a business, bringing together factors of production, labour, capital and natural resources to produce goods and services Entrepreneurs first determine what goods and services they believe consumers want and then decide how those goods and services might be produced most profitably Entrepreneurs make a vital contribution to economic growth through their roles in responding to consumer demand and introducing new products A free market has no government intervention allows production of goods and service to not be restricted, however governments need to provide secure rights In poorer countries business are not safe from having this businesses seized or having their profits and assets taken by criminals this is not the case for wealthier country as there is government protection Property rights; the rights of an individual or firms have to exclusive use of their property, including the right to buy and sell

WEEK TWO 3.1 DEMAND SIDE OF THE MARKET -

Demand schedule; a table showing the relationship between the price of a product and the quantity of the product demanded Quantity demanded; the amount of good or service that a consumer is willing and able to purchase at a given price Market demand; the demand by all the consumers of a given good or service Law of demand; holding everything else constant when the price of a product fall the demanded will increase and when the price of a product rises the demand will decrease Substitution effect; the change in demand of a good or service that results from a change in price. Holding constant the effect of price change on consumer purchasing power Income effect; the change in demand of a good or service that results from the effect of a change in price on consumer purchasing power, holding all other factors constant Things which change market demand are; income, prices, taste, population, expected future prices Normal goods; a good or service which the demand increases as income rises and decreases as income falls Inferior goods; a good or service which the demand increases as income falls and decreases as income rises Substitutes; a good or service which can be used for the same or similar purposes Complements; a good or service that are used together

3.2 THE SUPPLY SIDE OF THE MARKET -

Market supply; the supply by ALL firm of a given good of service

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Law od supply; holding everything else constant an increase in the price of a product causes an increase in the quantity supplied, and a decrease in the price of a product causes a decrease in the quantity supplied Variables which shift supple are; price of inputs, technology, number of firms, expected future prices

Supply -

Refers to the shift in of the supply curve The supply curve shifts due to one of the variables other than the price of the product affects the willingness of suppliers to sell the product

Quantity supplied -

A movement along the supply curve as a result of a change in the products price

Demand -

Shift of the demand curve A shift occurs if there is a change in one of the variable other than the price of the product which effect suppliers willingness to sell the product

Quantity demanded -

Refers to a movement along the demand curve as result of a change in the products price

3.3 MARKET EQUALIBRIM -

Market equilibrium; where quantity demanded equal quantity supplied a shift in a demand or supply curve causes a change in equilibrium price, the change in price does not cause a further shift in demand or supply

3.4 THE EFFECT OF DEMAND AND SUUPLY -

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a shift to the right of a supply curve creates a surplus at the original equilibrium a shift to the left of a supply curve creates the equilibrium price to rise and the equilibrium quantity to fall a shift of the demand curve to the right is caused by population and income growth, with this comes a shortage at the original equilibrium price to eliminate this the equilibrium price rises and so does the equilibrium quantity if the demand curve shifts to the left caused by a substitutes good makes the equilibrium price and quantity will both decrease

WEEK THREE

4.1 the price of elasticity -

the responsiveness of the quantity demanded to change in price, measured by dividing the percentage change in the quantity demanded by the percentage of change in the products price

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the slop of the demand curve can be used to measure the price elasticity, it tells us how much quantity demand changes as price changes

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calculating the price of elasticity of demand for a price decrease = percentage change in price will be negative and percentage change in quantity will be positive calculating the price elasticity of demand for a price increase = the percentage change in price will be positive and percentage change in demand will be negative.

Elastic demand -

demand is elastic when the percentage changes in quantity demanded is greater then the percentage change in price (greater then 1) it is a response to changes in price

inelastic demand -

demand is inelastic when the percentage change in quantity demanded is less then the percentage change in price (less then 1) not responsive to price

unit-elastic demand -

demand is unit-elastic when the percentage change in quantity demanded is equal to the percentage change in the price (equal to 1)

the midpoint formula -

ensures that there is only one value of the price elastic of demand between the same two point on the same demand curve uses the average of the initial and final quantity and the average of the initial final price Q1 and P1 are initial quantity and price, Q2 and P2 are the final quantity and price

When demand curves intersect, the flatter curve is more elastic. Slope is calculates using changes in quantity and price, whereas elasticity is calculated using percentage changes When two demand curves intersect -

One with the smaller slope is more elastic The one with a larger slope us less elastic

Perfectly inelastic demand -

Demand is perfectly inelastic when a change in price results in no change in quantity It is completely unresponsive to price changes and the price elasticity of demand = 0 Price can change but quantity remains the same

Perfectly elastic demand -

When a change in price results in an infinite change in quantity demanded Complete horizontal line An increase in price leads to quantity demanded to be 0

4.2 determinations of the price elasticity of demand -

Reason for price elasticity; Availability Time Whether the product is luxury or necessity Market Share of expenditure

Availability -

Of substitutes is the most important determination of price elasticity of demand If a product has more substitutes available, it will have more elastic demand Id there is fewer substitutes available it will have less elastic demand

Pass of time -

Consumers take some time to adjust their buying habits when prices change The more time that passes the more elastic the demand for a product becomes

Luxuries vs necessities Market

Luxuries will usually have more elastic demand than necessities

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The more narrowly we define a market, the more elastic demand will be The more range of brands and products the more demand can change

Share of goods -

Goods and services that take only a small fraction of consumers budget tend to have less elastic demand then those which take a larger fraction

4.3 relationship between price elastic and total revenue Total revenue -

Total amount of funds received by a seller of a good or service calculated by multiplying price per unit by the number of units sold

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Price elasticity can help firms calculate how changes in price will affect total revenue

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When demand is inelastic, price and total revenue move in the same direction; an increase in prices raise total revenue and a decrease in price reduces total revenue

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When demand is elastic, price and total revenue move inversely; increase in price reduces total revenue, and a decrease in price raises total revenue

5.4 the economic impact of taxes The effect of taxes on economic efficiency -

When a good or service is taxes less of it will be bought This effects the quantity demanded This is done so to reduce smoking Some reduction in the consumer and producer surplus becomes tax revenue for the government Deadweight loss from tax is referred to the excess burden of the tax. Tax is efficient if its imposes a small excess burden relative to the tax revenue it raises...