Professional Documents
Culture Documents
Chapter 1 Lecture 1
Economy. . .
. . . The word economy comes from a Greek word for one who manages a household.
Founder of economics
Adam smith is the founder economics (From 16 June 1723 died 17 July 1790 ). He wrote a very first book of economics named Wealth of Nations Wealth of Nations: the first modern work of economics. It earned him an enormous reputation and would become one of the most influential works on economics ever published. Smith is widely cited as the father of modern economics and capitalism.
Economics
Economics is the study of scarcity and efficiency. Economics is the study of how society manages its scarce resources. Economics is the study of how societies use scarce resources to produce commodities and distribute them among different people.
Economics
Definition of economics "the science which studies human behavior as a relationship between ends and scarce means which have alternative uses." by Lionel Robbins
Macroeconomics
How much it would cost for a university or college to offer a new course the cost of the instructors salary, the classroom facilities, the class materials, and so on.
Having determined the cost, the school can then decide whether or not to offer the course by weighing the costs and benefits.
Scarcity . . .
. . . means that society has limited resources and therefore cannot produce all the goods and services people wish to have.
Scarcity is the situation in which there is not enough of something to satisfy all the desires for that thing.
Efficiency
Economic efficiency describes how well a system generates desired output with a given set of inputs and available technology. Efficiency is improved if more output is generated without changing inputs, or in other words, the amount of "waste" is reduced.
Absence of waste.
Resources
The basic resources that are available to a society are factors of production:
Natural resources Human resources Capital resources Time resources
Natural resources
It includes good fertile land , rivers , mountains, water fall, sunshine and things that are inside the curst of the earth.
Human resources
All those able bodies, people who are able to work and contribute to production. it is most important factor to contributes to production and in the growth of economy. Worker must acquire education, skill and knowledge.
Capital resources
It includes machine, plants, tools, roads, bridges and highways. it is also important factor to contributes to production and in the growth of economy.
Time resources
It is also very important resource, because utilization of limited time to produce goods and services to fulfill the needs and wants of economic requirements.
Economic Problems
Economic Problems
What to produced? What goods and services should be produce. those goods and services are needed by the economy. How to produced?
Which resources are utilize (Land, labour, capital & organization) to produced goods and services these are required for economy
Economic Problems
For Whom to Produce? Is production done for army or for producers or for households. Goods( Guns and butter) and services education) are required for military or society.
Economics
Chapter 1 Lecture 2
Capital goods are goods used to produce other goods and services. Consumer goods are goods produced for present consumption.
Economic Systems
Economic systems are the basic arrangements made by societies to solve the economic problem. They include:
Command economies
Laissez-faire economies Mixed systems Islamic system
Command economy
In a command economy or Socialism, a central government either directly or indirectly sets output targets, incomes, and prices. All decisions of what, how and for whom to produce are taken by state.
Possibilities A B C D E F
Butter (Million) 0 10 20 30 40 50
The production possibility frontier curve has a negative slope, which indicates a trade-off between producing one good or another. Points inside of the curve are inefficient
Outward shifts of the curve represent economic growth. An outward shift means that it is possible to increase the production of one good without decreasing the production of the other
Division of labour
Division of labour: means the splitting up of the process of production into sub processes. The complete task of product making is not perform by an individual but by the group of workers taken up a certain parts of production. it is also known as specialization. Concept of division of labour is given by Adam Smith, he explain with the example of pin making factory
Chapter 3 Lecture 3
Consumer Demand
Demand in economics means that desire which is backed by ability to buy and willingness to buy.
Law of Demand
Other things remains the same a fall in price is accompanied by an increase in quantity demanded and conversely a rise in price is followed by fall in quantity demanded.
Schedule of Demand
Schedule of demand shows a series of price of goods and services and quantity demanded at those price.
Possibilities A B C Price 5 4 3 Quantity demanded 9 10 12
D
E
2
1
15
20
Demand Curve
DD is demand curve and it is downwards sloping showing inverse relationship between price and quantity demanded.
Determinants of Demand
Consumer income Size of population Prices of related goods Tastes Expectations
Determinants of Demand
Substitutes & Complements
When a fall in the price of one good (Coffee) reduces the demand for another good (tea), the two goods are called substitutes. When a fall in the price of one good (milk) increases the demand for another good (tea), the two goods are called complements.
along the demand curve. Caused by a change in the price of the product.
Shift in Demand
Change in Demand
A
shift in the demand curve, either to the left or right. Caused by a change in a determinant other than the price.
y a bx
where: y = Value of the dependent variable x = Value of the independent variable a = Populations y-intercept b = Slope of the population regression line
n xy x y n x ( x)
2 2
or
y b x a n
a y bx
Correlation
The correlation coefficient is a quantitative measure of the strength of the linear relationship between two variables. The correlation ranges from + 1.0 to - 1.0. A correlation of 1.0 indicates a perfect linear relationship, whereas a correlation of 0 indicates no linear relationship.
[n( x ) ( x) ][ n( y ) ( y ) ]
2 2 2 2
n xy x y
Demand forecasting
Y = a + bX or Qdx = F(Px,Y, Pc,Ps,T,N,..)
a = - bX or (a) = (Y - b(X)) / N
b = nYX (Y) ( X)/ nX2- (X)2 Where b = The slope of the regression line a = The intercept point of the regression line and the y axis. n = Number of values or elements X = Price Y = Quantity Demanded
Demand forecasting
Y(Q) 8 9 X(P) 5 4 YX 40 36 X2 25 16 Y 12.2 3 66 (X)(Y) nYX nX2 990 855 275
11
15 18 61
3
2 1 15
33
30 18 157
9
4 1 55
X
YX X2 b
15
225 55 -2.70
(X)2
225
21.3
Forecasted Demand
6
A
B C D E
1
2 3 4 5
18.6
15.9
Price
5 4 3 2 1 0 0 5 10 QDx 15 20
Problem
The manager of a seafood restaurant was asked to establish a pricing policy on lobster dinners. Experimenting with prices produced the following data:
Obtain the regression line and interpret its Forecasted demand. Determine the correlation coefficient and interpret it
Sold (y) 200 Price (x) 6.00
190
188
6.50
6.75
180
170 162 160
7.00
7.25 7.50 8.00
155
156 148 140 133
8.25
8.50 8.75 9.00 9.25
Chapter 3 Lecture 4
Law of Supply
Other things remains the same a fall in price is accompanied by an decrease in quantity Supplied and conversely a rise in price is fallowed by increase in quantity Supplied.
Schedule of Supply
Schedule of supply shows a series of price of goods and services and quantity supplied at those price.
Possibilities A B C Price 5 4 3 Quantity Supply 18 16 12
D
E
2
1
7
0
Supply Curve
SS is Supply curve and it is upwards sloping showing same/positive relationship between price and quantity supplied.
Determinants of Supply
Price
along the supply curve. Caused by a change in the price of the product
Shift in Supply
Change in Supply
A shift
in the Supply curve, either to the left or right. Caused by a change in a determinant other than the price.
Equilibrium
Equilibrium in economics we understand a state of balance or on interaction between two opposite forces working in the opposite direction settle at one point that is equilibrium price. The term price equilibrium is market price.
Schedule of Equilibrium
Possibilities A B C D Price 5 4 3 2 Quantity demanded 9 10 12 15 Quantity supplied 18 16 12 7 State of the market Surplus 9mn Surplus 6mn Equilibrium Scarcity 8mn
20
Scarcity 20mn
Equilibrium
The equilibrium price come at the intersection of demand and supply curve at point C. The equilibrium price and quantity comes where the units supply equal to amount demand
Chapter 4 Lecture 5
Elasticity . . .
is a measure of how much buyers and sellers respond to changes in market conditions allows us to analyze supply and demand with greater accuracy.
elasticity of demand is the percentage change in quantity demanded given a percent change in the price. is a measure of how much the quantity demanded of a good responds to a change in the price of that good. of quantity demand due to change in price is known as elasticity of demand.
It
Responsiveness
EP (%Q)/(%P)
Q/Q P Q EP P/P Q P
Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones then your elasticity of demand would be calculated as:
Types of Elasticity
Cross elasticity
elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers income. It is computed as the percentage change in the quantity demanded divided by the percentage change in income.
Q/Q I Q EI I/I Q I
Ranges of Elasticity
Inelastic Demand
Percentage
change in price is greater than percentage change in quantity demand. Price elasticity of demand is less than one.
Elastic Demand
Percentage
change in quantity demand is greater than percentage change in price. Price elasticity of demand is greater than one.
Demand
$5 1. An increase in price... 4
Demand
Inelastic Demand
- Elasticity is less than 1
Price
Elastic Demand
- Elasticity is greater than 1
Price
the good is a luxury. the longer the time period. the larger the number of close substitutes. the more narrowly defined the market.
revenue is the amount paid by buyers and received by sellers of a good. Computed as the price of the good times the quantity sold.
TR = P x Q
$4
P x Q = $400
P
(total revenue)
Demand
100
Quantity
An increase in price will reduce total revenue A decrease in price will increase total revenue
If e < 1, then the % change in QD < % change in price, and demand is said to be inelastic
An increase in price will increase total revenue A decrease in price will decrease total revenue
Supply Elasticity
Utility
Chapter 5 Lecture 6
Utility
The value a consumer places on a unit of a good or service depends on the pleasure or satisfaction he or she expects to derive form having or consuming it at the point of making a consumption (consumer) choice. In economics the satisfaction or pleasure consumers derive from the consumption of consumer goods is called utility. Consumers, however, cannot have every thing they wish to have. Consumers choices are constrained by their incomes.
[
Within the limits of their incomes, consumers make their consumption choices by evaluating and comparing consumer goods with regard to their utilities.
Over a given consumption period, the more of a good a consumer has, or has consumed, the less marginal utility an additional unit contributes to his or her overall satisfaction (total utility). Alternatively, we could say: over a given consumption period, as more and more of a good is consumed by a consumer, beyond a certain point, the marginal utility of additional units begins to fall.
The fundamental condition of maximum satisfaction or utility is the equi-marginal principles, it state that a consumer having a fixed income and facing given market prices of goods will achieve maximum satisfaction or utility when the marginal utility of the last dollar spend on each good is exactly the same as the marginal utility of the last dollar spent on the any other good.
Income= 10 Prices of both good A & B = 1units Marginal utility of money is =14 utils
24 units 22
20 18
3rd =14
4th=14 5th=14
3
4 5
20
18 16
16
14
6th =14
14
Indifference Analysis
Ordinal utility : People are able to rank each possible bundle in order of preference. People are not required to make quantitative statements about how much they like various bundles.
Assumptions
Our consumer is rational person. His aim is to maximize his satisfaction. Money is limited & price are given. He makes purchase in combination of 2 basket of good A & B simultaneously. He is indifferent to select a combination of the 2 goods he makes different combination & all the goods giving him equal level of satisfaction.
Indifference Curve
Indifference curve that is a tool of which shows different combinations of two goods given to consumer same level of satisfaction or a curve that shows combinations of two goods among which an individual is indifferent. The slope of the indifference curve is the ratio of marginal utilities of the two goods.
Indifference Curve
The absolute value of the slope of an indifference curve is called the marginal rate of substitution.
D E
4 5
1. 1
6 5 4
Indifference curves slope downward to the right. If it sloped upward it would violate the assumption that more of any commodity is preferred to less.
B
3
2 1 1 2 3
Point A,B,C,D are given our consumer same level of satisfaction and hence he is indifferent & all combinations are equally preferred.
D IC
4 5 Food (units per week)
Law of diminishing marginal rate of substitution the scarcer a good, the greater its relative substitution value; its marginal utility rises relative to marginal utility of the good that has become plentiful. The rate at which one good must be added when the other is taken away in order to keep the individual indifferent between the two combinations.
C D
E
3+1 4+1
5
21 1.1/2 - 0.1/2
1
1:1 1:1/2
A
6 5 4
-3
MRS = 3
Indifference curves are convex because as more of one good is consumed, a consumer would prefer to give up fewer units of a second good to get additional units of the first one. MRS is measured by the slope of the indifference curve:
1
3
B
MRS = 1
-1
2
1
-1/2
C
MRS = 1/2
1
1 2 3 4 5
MRS C
Food (units per week)
Consumers will have a whole group of indifference curves, each representing a different level of satisfaction. If he/she prefers more to less, Consumer is better off with the indifference curve that is extreme to the right.
Indifference Map
Clothing (units per week) An indifference map is a set of indifference curves that describes a persons preferences for all combinations of two commodities. IC3 show higher level of satisfaction to her then IC1 and IC2.
IC3
IC2 IC1
Food (units per week)
Consumers Choice
Consumer buy clothing and foods. She/he wants to maximize her/his utility given a budget constraint.
A budget constraint shows the consumers purchase opportunities as every combination of two goods that can be bought at given prices using a given amount of income.
Budget Constraint
Clothing cost $1 and Food cost $1.5 each. Sophie has $6 income to spend. She can buy 6 cloth units or 4 food units or some combination of each.
Budget Constraint
The slope of the budget constraint is the ratio of the prices of the two goods.
Pc = $1
Pf = $2
I = $80
A B
60
C
40
D
20
E
0 10 20 30 40
Pc = $1
Pf = $2
I = $80
A B
60
C
40
D
20
E
0 10 20 30 40
Sophie will maximize her satisfaction by consuming on the highest indifference curve as possible, given her budget constraint. The best combination is the point where the indifference curve and the budget line are tangent and that point shows equilibrium of consumer.
The best combination is the point where the slope of the budget line/price ratio equals the slope of the indifference curve/MRS of two goods.
At point B U3 the budget line and the indifference curve are tangent and no higher level of satisfaction can be attained.
Changes in Income
An increase in income will cause the budget constraint out in a parallel fashion Since px/py does not change, the MRS will stay constant as the worker moves to higher levels of satisfaction
Increase in Income
If x decreases as income rises, x is an inferior good
Quantity of y
C B
As income rises, the individual chooses to consume less x and more y Note that the indifference curves do not have to be oddly shaped. The assumption of a diminishing MRS is obeyed.
U1
U3 U2
Quantity of x
The price change alters the individuals real income and therefore he must move to a new indifference curve
the income effect
U1
Production
Chapter 6 Lecture 10
Production Function
1. Production - short run
Productive efficiency The Law of diminishing marginal returns
Production
By production in economics we understands the creations of utility. Utility can be created in three ways.
Form utility: can be created by changing the shape of the matter & performing an act of production (e.g. log of wood). 2. Place utility: the worker creates utility by changing the place of that matter (e.g. Coal miner).
1.
Production
3. Time utility: can be created by taking the product over long period of time (e.g. crops is harvested, preservation of grains).
Productivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input. Productivity is a measure of output from a production process, per unit of input.
Productive capacity
Productive capacity: in economy is determent by the size & quality of labor force. By Quality & quantity capital stock(FOPs) By nation technical knowledge The ability to use the knowledge The nature of public & private institutions
Production Function
Production Function: means the relationship b/w amount of input required to the amount of output that can be obtained is called Production Function. To explain it further we can say that for given state of engineers & scientific/ technological knowledge of production function significance the maximum amount of that can be produce with quality of inputs.
Production Function
e.g. the task of ditch digging is perform in USA where large & expensive tractor is driven by person along with supervisor the ditch which is 50ft length & 5ft in depth can be dough in 2 hours. Where as the same task is performed in China where 50 worker with one hand pickle complete the task in one whole day. In USA the task is capital intensive & where as in China the task is labour intensive.
The L of D.M.R express a very basic relationship as more & more labour is add to fixed area of land, machine & other input the labour has less & less of other factor to work with. Marginal product falls because the land get crowded, the machine is over work so the marginal product of labour declines
7 8
1350 1450
150 100
D.M.R
300
Marginal Returns
250
D.M.R
I.M.R
Return To Scale
The laws of Returns to Scale study the behavior of production when all the productive factors or inputs are increased or decreased simultaneously in the same ratio. We analyze here the effect of doubling, trebling and so on of all the inputs of productive resources on the output of the product.
Return To Scale
costs are those costs that do not vary with the quantity of output produced. Variable costs are those costs that do change as the firm alters the quantity of output produced.
Short
Fixed Costs (TFC) Total Variable Costs (TVC) Total Costs (TC)
TC = TFC + TVC
0 1 2 3 4 5 6 7 8 9 10
$ 3.00 3.30 3.80 4.50 5.40 6.50 7.80 9.30 11.00 12.90 15.00
$3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00
$ 0.00 0.30 0.80 1.50 2.40 3.50 4.80 6.30 8.00 9.90 12.00
Total-Cost Curve...
$16.00 $14.00 $12.00
Total-cost curve
Total Cost
10
12
Average Costs
Average
costs can be determined by dividing the firms costs by the quantity of output produced. The average cost is the cost of each typical unit of product.
Fixed Costs (AFC) Average Variable Costs (AVC) Average Total Costs (ATC)
0 1 2 3 4 5 6 7 8 9 10
$3.00 1.50 1.00 0.75 0.60 0.50 0.43 0.38 0.33 0.30
$0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20
$3.30 1.90 1.50 1.35 1.30 1.30 1.33 1.38 1.43 1.50
Marginal Cost
Marginal
cost (MC) measures the amount total cost rises when the firm increases production by one unit. Marginal cost helps answer the following question:
How
Marginal Cost
(Change in total cost) MC = (Change in quantity) = TC
MC
Costs
$2.00 $1.50 $1.00 $0.50
AC AVC
AFC
0 2 4 6 8 10 12
$0.00
The
average-total-cost curve is U-shaped. The marginal-cost curve crosses the average cost curve at the minimum of average cost.
costs between fixed and variable costs depends on the time horizon being considered.
In
the short run some costs are fixed. In the long run fixed costs become variable costs.
Economies of scale 0
Diseconomies of scale
Quantity of Cars per Day
Isoquants
An isoquant
is a contour line which joins together the different combinations of two factors of production that are just physically able to produce a given quantity of a good.
An isoquant
45 40 35
30 25 20 15 10 5 0 0 5 10 15 20 25
Units Units of K of L 40 5 20 12 10 20 6 30 4 50
30
35
fig
40
45
50
g
K = 2
MRS = 2
MRS = K / L
10 8 6 4 2 0 0 2
L = 1
isoquant
4 6 8 10 12 14
fig
16
18
20
22
An isoquant map
30
20
10
I5 I2
20
fig
I3
I4
I1
Isocosts
Actual output also depends on costs isocosts
An isocost
30
25
20
15
10
TC = 300 000
0 0 5 10 15 20 25
fig
30
35
40
Assumptions
30 25
20 15
TC = 300 000
TC = 400 000
10 5 0 0 10 20 30
fig
TC = 500 000
40
50
25 20 15 10 5 0 0 10 20 30
fig
TPP1
40
50
are many buyers and sellers in the market. The goods offered by the various sellers are largely the same. Firms can freely enter or exit the market.
actions of any single buyer or seller in the market have a negligible impact on the market price. Each buyer and seller takes the market price as given.
Thus,
TR = (P X Q)
MR =TR/ Q
For competitive firms, marginal revenue equals the price of the good.
goal of a competitive firm is to maximize profit. This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue.
MC
MC2
ATC
P=MR1 AVC
P = AR = MR
MC1
Q1
QMAX
Q2
Quantity
Market Price
S1
a $10
D0 q4 q3 q2 q1 10 units
qF
Q1
Q2
QM
MC
P2 P1
ATC
AVC
Q1
Q2
Quantity
refers to a short-run decision not to produce anything during a specific period of time because of current market conditions. Exit refers to a long-run decision to leave the market.
costs are costs that have already been committed and cannot be recovered.
firm shuts down if the revenue it gets from producing is less than the variable cost of production.
Shut down if TR < VC Shut down if TR/Q < VC/Q Shut down if P < AVC
AVC
the long-run, the firm exits if the revenue it would get from producing is less than its total cost.
ATC
AVC Firm exits if P < ATC
Quantity
Monopoly
Chapter 15
Copyright 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.
Monopoly
While a competitive firm is a price taker, a monopoly firm is a price maker.
Monopoly
A firm
is considered a monopoly if . . . it is the sole seller of its product. its product does not have close substitutes.
The government gives a single firm the exclusive right to produce some good.
Patents, Copyrights and Government Licensing.
Costs of production make a single producer more efficient than a large number of producers.
Natural Monopolies
Quantity of Output
Demand
Quantity of Output
A Monopolys Revenue
Total Revenue
P x Q = TR
Average Revenue
TR/Q = AR = P
Marginal Revenue
TR/Q = MR
A Monopolys Marginal Revenue A monopolists marginal revenue is always less than the price of its good.
The
demand curve is downward sloping. When a monopoly drops the price to sell one more unit, the revenue received from previously sold units also decreases.
A Monopolys Marginal Revenue When a monopoly increases the amount it sells, it has two effects on total revenue (P x Q).
output effectmore output is sold, so Q is higher. The price effectprice falls, so P is lower.
The
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Marginal revenue 1 2 3 4 5 6 7 8
Quantity of Water
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Monopoly price
P = MR = MC
P > MR = MC
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
C Demand
the market power of the large and powerful trusts of that time period. the governments powers and authorized private lawsuits.
Marginal cost
Demand
0 Quantity
Price Discrimination
Price discrimination is the practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same. In order to do this, the firm must have market power.
Price Discrimination
Oligopoly
Chapter 16
Copyright 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.
Imperfect Competition
Imperfect competition includes industries in which firms have competitors but do not face so much competition that they are price takers.
Many firms
One firm Few firms Type of Products? Differentiated products
Monopolistic Competition
Identical products
Perfect Competition
Monopoly
Oligopoly
Novels Movies
Wheat Milk
sellers offering similar or identical products Interdependent firms Best off cooperating and acting like a monopolist by producing a small quantity of output and charging a price above marginal cost There is a tension between cooperation and self-interest.
A Duopoly Example
A duopoly is an oligopoly with only two members. It is the simplest type of oligopoly.
Total Revenue $ 0 1,100 2,000 2,700 3,200 3,500 3,600 3,500 3,200 2,700 2,000 1,100 0
market would be driven to where the marginal cost is zero: P = MC = $0 Q = 120 gallons The price and quantity in a monopoly market would be where total profit is maximized: P = $60 Q = 60 gallons
120 gallons, but a monopolist would produce only 60 gallons of water. So what outcome then could be expected from duopolists?
monopoly outcome.
Collusion
The
two firms may agree on the quantity to produce and the price to charge.
two firms may join together and act in unison.
Cartel
The
However, both outcomes are illegal in the United States due to Antitrust laws.
output effect: Because price is above marginal cost, selling more at the going price raises profits. The price effect: Raising production lowers the price and the profit per unit on all units sold.
the number of sellers in an oligopoly grows larger, an oligopolistic market looks more and more like a competitive market. The price approaches marginal cost, and the quantity produced approaches the socially efficient level.
theory is the study of how people behave in strategic situations. Strategic decisions are those in which each person, in deciding what actions to take, must consider how others might respond to that action. Show its a Beautiful Mind at this point!-The bar scene
the number of firms in an oligopolistic market is small, each firm must act strategically. Each firm knows that its profit depends not only on how much it produced but also on how much the other firms produce.