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Advanced Economics Week #1

Advanced Economics Week #1. Spring 2012. Advanced Economics 3/19/12 http://mrmilewski.com. OBJECTIVE: Examine course syllabus & beginning of class administration stuff. I. Administrative Stuff -Welcome Back  -Syllabus II. Structure of the Class III. Textbook

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Advanced Economics Week #1

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  1. Advanced Economics Week #1 Spring 2012

  2. Advanced Economics 3/19/12http://mrmilewski.com • OBJECTIVE: Examine course syllabus & beginning of class administration stuff. • I. Administrative Stuff -Welcome Back  -Syllabus • II. Structure of the Class • III. Textbook • Notice: 62 Days until the Senior’s Last Day!

  3. Advanced Economics 3/20/12http://mrmilewski.com • OBJECTIVE: Examine the fundamental economic concepts from Chapters#1&2. • I. Journal#1 pt.A -Watch the following: -Colorado Students Begin to Learn Financial Discipline • II. Journal#1 pt.B -notes on microeconomics (Chapters#1&2) • Notice: 61 Days until the Senior’s Last Day!

  4. The Fundamental Economic problem is: • Scarcity -the condition that results from society not having enough resources to produce all the things people would like to have. • Since people have unlimited wants & limited resources, scarcity leads to choices. 1.) What to produce? 2.) How to produce? 3.) For whom to produce?

  5. The Factors of Production • LAND – the gifts of nature • LABOR – people with all their efforts & abilities • CAPITAL – the tools, equipment, machinery, and factories used in the production of goods & services • ENTREPRENEURS – a risk taker in search of profits who does something new with existing resources

  6. The Circular Flow of Economic Activity http://upload.wikimedia.org/wikipedia/commons/thumb/b/b8/Circular_flow_of_goods_income.png/350px-Circular_flow_of_goods_income.png

  7. Division of Labor Adam Smith – Wealth of Nations 1776 • Division of Labor – work is arranged so individuals do fewer tasks than before. • Specialization – factors of production perform tasks more efficiently than others. • Human Capital – the sum of the skills, abilities, health, and motivation of the people. http://cdn.fuuzio.com/assets/Fuuzio-Main-Site-Template/images/adam-smith.jpg

  8. Production Possibilities Frontier • PPF is a diagram that represents various combinations of goods and/or services an economy can produce when all productive resources are fully employed. • See Figure 1.6 page23 http://upload.wikimedia.org/wikipedia/commons/thumb/4/4c/PPF_opportunity_cost.svg/220px-PPF_opportunity_cost.svg.png

  9. Trade-offs & Opportunity Costs • Trade-offs – alternate choices • Opportunity costs – the cost of the next best alternative use of money, time, or resources when one choice is made rather than another. http://reason.com/assets/mc/psuderman/2012_02/simpdoc.gif

  10. Types of Economic Systems

  11. Roles in Market Economy • Entrepreneur – -organizes land, labor, and capital in order to make a profit • Consumer – -determines what is made “the customer is always right” • Government – -protector of private property, enforcer of contracts, and definer of fairness -provider of services like defense, education, and public welfare -consumer of goods -regulator charged with preserving competition -promoter of national goals

  12. Advanced Economics 3/21/12http://mrmilewski.com • OBJECTIVE: Examine the fundamental economic concepts from Chapters#3&4. • I. Journal#2 pt.A -Watch the following: -Video: Wants vs. Needs • II. Journal#2 pt.B -notes on microeconomics (Chapters#3&4) • III. Notice: 60 Days until the Senior’s Last Day!

  13. Price stability • Price stability adds a degree of certainty to the future. • If inflation–a rise in the general level of prices–occurs, workers need more money to pay for food, clothing, and shelter. • How inflation works: -Wendy’s Jr. Cheese Deluxe -Cost $.99

  14. CPI • Consumer Price Index – an index used to measure price changes for a basket of frequently used common items. • The CPI reports on price changes for 90,000 items in 364 categories from 85 geographic areas of the country and are compared to their 1982-84 base year prices. • Produce Price Index – measure price changes paid by domestic consumers for their inputs and is based on a sample of about 100,000 commodities and uses 1982 as the base year. http://www.danielstrading.com/resources/newsletter/2011/03/15/comparitive-consumer-price-index.png

  15. Types of Firms • Sole proprietorship – a business owned and run by one person. • Partnerships – business jointly owned by two or more persons. • There are two types of partnerships: *general partnerships – all partners actively run the business *limited partnership – at least one partner is not active in running the business • Corporation – a form of business organization that is recognized by the law as having all the legal rights of an individual. • They have the right to buy & sell property, enter into legal contracts, and to sue & be sued.

  16. What is demand? • Demand – the desire, ability, and willingness to buy a product. • In a market economy, you compete with other consumers who demand the same products as you. • If a lot of people demand the same product, the price will rise. • If there are a lot of the same product, and very few people who demand it, the price will fall.

  17. Simplistic view of demand • As price increases, demand decreases • As price decreases, demand increases • This is an inverse relationship • When an inverse relationship is graphed, the slope is negative

  18. Demand Changes • Change in quantity demanded – movement along the demand curve

  19. Demand Changes • Change in demand – shift in the demand curve

  20. Elasticity • Elasticity – a measure of responsiveness that tells how a dependent variable such as quantity responds to an independent variable such as price. • 3 Types of Demand Elasticity • Elastic Demand - A small change in price causes a big change in quantity demanded • Inelastic Demand - A big change in price causes a small change in quantity demanded • Unit Elastic Demand - Any change in price causes a proportional change in quantity demanded

  21. Advanced Economics 3/22/12http://mrmilewski.com • OBJECTIVE: Examine the fundamental economic concepts from Chapter#4. • I. Journal#3 pt.A -Watch the following: -How Uncertainty, Speculation Factor Into Gas Prices • II. Journal#3 pt.B -notes on microeconomics (Chapter#4) • Notice: 59 Days until the Senior’s Last Day!

  22. Change in Demand v. Change in Quantity Demanded

  23. Elastic Demand • A small change in price causes a big change in quantity demanded. • Slope is less than -1 • Example -fresh foods (green beans, tomatoes, apples)

  24. Inelastic Demand • A big change in price causes a small change in quantity demanded. • Slope is greater than -1 • Examples: -table salt -gasoline

  25. Unit Elastic Demand • Any change in price causes a proportional change in quantity demanded. • Slope equals -1

  26. Elasticity Formulas • Formula to determine elasticity % change in Q = elasticity % change in P • Formula to determine % change in P or Q (NEW P or Q) – 1 = decimal equivalent (OLD P or Q) • Answer x 100 = % Change in P or Q.

  27. Example #1 • The manufacturer of a pain medication reduces the price for medication by 30% and the percent change in quantity demanded is 30%. What is the elasticity for the pain medication? • % change in Q = 30% • % change in P = -30% • Elasticity = -1

  28. Example #2 • A Chinese Buffet increased prices from $4.95 all you can eat to $5.95 all you can eat. The number of big eaters went from 58 to 36. What is the elasticity for All You Can Eat Chinese? • First we need to figure out the % change in P & the % change in Q.

  29. Chinese Buffet • % change in P • NEW P = 5.95 • OLD P = 4.95 (5.95) – 1 = (4.95) • .20 • 20% • % change in Q • NEW Q = 36 • OLD Q = 58 (36) – 1 = (58) • -.37 • -37%

  30. Chinese Buffet • % change in Q =-37% • % change in P =20% -37% = 20% • Elasticity = -1.85 • The elasticity for the Chinese Buffet is elastic

  31. If you owned the Chinese Buffet, would you keep the price of the Buffet at 5.95? • 5.95 x 36 = $214.20 • 4.95 x 58 = $287.10

  32. Law of Supply • The principle that suppliers will normally offer more for sale at higher prices and less at lower prices. • As price goes up, quantity produced also goes up

  33. Supply Curve • At high prices more will be supplied. At lower prices, less will be supplied. • Price and quantity supplied are directly related. • The drawing to the right is a typical supply curve.

  34. Change in supply • A change in supply occurs when something happens to cause suppliers to offer different amounts of products for each price in the market.

  35. Advanced Economics 3/23/12http://mrmilewski.com • OBJECTIVE: Examine the fundamental economic concepts from Chapters#5&6. • I. Journal#4 pt.A -Watch the following: -NBR • II. Journal#4 pt.B -notes on microeconomics (Chapters#5&6) • Notice: 58 Days until the Senior’s Last Day!

  36. What can cause a change in supply to the right? • Lower cost of inputs such as cheaper labor or cheaper packaging • More productive/better trained labor. • New technology like more fuel efficient delivery vehicles, better/faster machines • Lower taxes/government subsidies (subsidy is a government payment to an individual or business to encourage or protect a certain economic activity.)

  37. What can cause a change in supply to the left? • More expensive labor • Higher taxes • Less efficient workers • Broken technology • Withdrawal of subsidies

  38. Supply Elasticity

  39. Supply Elasticity • Supply elasticity is caused by the ability of a producer to change output. • If producers can increase output quickly, supply is elastic. • If producers can not increase output quickly, supply is inelastic.

  40. Theory of Production • The relationship between the factors of production (land, labor, capital, entrepreneurs) and output of goods and services. • Short run – change in the variable of labor • Long run – change in land & capital

  41. Law of Variable Proportions • Stage I – Increasing returns *output rises at an increasingly faster rate (each new worker makes more than the previous worker did) • Stage II – Diminishing returns *output rises at a diminishing rate (each new worker increases output, but not as much as the previous worker did) • Stage III – Negative returns *output decreases as each new worker is added

  42. Marginal Costs & Profits

  43. Where will profits be maximized? • When marginal cost & marginal revenue are equal.

  44. How is price determined? • Price is determined by the intersection of supply & demand.

  45. Prices as Signals • Price – the monetary value of a product as established by supply & demand. • Price is a signal that helps us make economic decisions. • High prices are a signal for producers to produce more and consumers to buy less. • Low prices are a signal for producers to produce less and consumers to buy more.

  46. Figure 6.3b Figure 6.3a Inelastic Demand v. Elastic Demand

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