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Unit 1 Notes
THE SCOPE AND METHOD OF ECONOMICS
Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided. WHY STUDY ECONOMICS There are many reasons to study economics, including (a) to learn a way of thinking, (b) to understand society, and (c) to be an informed citizen. Economics has three fundamental concepts that, once absorbed, can change the way you look at everyday choices: opportunity cost, marginalism, and the working of efficient markets. Opportunity cost: The best alternative that we forgo, or give up, when we make a choice or a decision. Marginalism: The process of analyzing the additional or incremental costs or benefits arising from a choice or decision. Efficient market: A market in which profit opportunities are eliminated almost instantaneously. THE SCOPE OF ECONOMICS: Microeconomics: The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units—that is, firms and households. Macroeconomics: The branch of economics that examines the economic behavior of aggregates—income, employment, output, and so on—on a national scale. Microeconomics looks at the individual unit—the household, the firm, the industry. It sees and examines the “trees.” Macroeconomics looks at the whole, the aggregate. It sees and analyzes the “forest.” THE METHOD OF ECONOMICS Economics asks and attempts to answer two kinds of questions: positive and normative. Positive economics: An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works. Normative economics: An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. Also called policy economics.
THEORIES AND MODELS
Ockham’s razor: The principle that irrelevant detail should be cut away. Ceteris paribus, or all else equal A device used to analyze the relationship between two variables while the values of other variables are held unchanged. Post hoc, ergo propter hoc Literally, “after this (in time), therefore because of this.” A common error made in thinking about causation: If Event A happens before Event B, it is not necessarily true that A caused B ECONOMIC POLICY Four criteria are frequently applied in judging economic outcomes:
- Efficiency (verimlilik): An efficient economy is one that produces what people want at the least possible cost.
- Equity (Fairness): fairness implies a more equal distribution of income and wealth. For others, fairness involves giving people what they earn.
- Growth (büyüme)
- Stability (değişmezlik): Economic stability refers to the condition in which national output is growing steadily, with low inflation and full employment of resources.
(Aka summary at 47)
Unit 2 notes
THE EONOMIC PROBLEM: SCARCITY AND CHOICE
Economics explores how individuals make choices in a world of scarce resources and how those individual’s choices come together to determine three key features of their society: ■■ What gets produced? ■■ How is it produced? ■■ Who gets what is produced? Things that are produced and then used in the production of other goods and services are called capital resources, or simply capital. factors of production (or factors) The inputs into the process of production. Another term for resources. production The process that transforms scarce resources into useful goods and services.
THE ECONOMIC PROBLEM
three basic questions facing all economic systems: (1) What gets produced? (2) How is it produced? and (3) Who gets it? ECONOMIC SYSTEMS AND THE ROLE OF THE GOVERNMENT command economy: An economy in which a central government either directly or indirectly sets output targets, incomes, and prices. laissez-faire economy literally from the French: “allow [them] to do.” An economy in which individual people and firms pursue their own self- interest without any government direction or regulation. Some markets are simple and others are complex, but they all involve buyers and sellers engaging in exchange. The behavior of buyers and sellers in a laissez- faire economy determines what gets produced, how it is produced, and who gets it. Free marketı var eden koşullar: consumer sovereignty The idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase). No central directive or plan is necessary. individual Production Decisions: Free enterprise: Under a free market system, individual producers must also determine how to organize and coordinate the actual production of their products or services. Thus, in a free market economy, competition forces producers to use efficient techniques of production and to produce goods that consumers want. Distribution of Output: In a free market system, the distribution of output—who gets what—is also determined in a decentralized way. To the extent that income comes from working for a wage, it is at least in part determined by individual choice. Price Theory: Many of the independent decisions made in a market economy involve the weighing of prices and costs, so it is not surprising that much of economic theory focuses on the factors that influence and determine prices.
Supply in output markets supply in input markets Demand in input markets demand in output markets Input and output markets are connected through the behavior of both firms and households. Firms determine the quantities and character of outputs produced and the types and quantities of inputs demanded. Households determine the types and quantities of products demanded and the quantities and types of inputs supplied DEMAND IN PRODUCTS OUTPUT MARKET quantity demanded The amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price. Changes in the price of a product affect the quantity demanded per period. Changes in any other factor, such as income or preferences, affect demand. Thus, we say that an increase in the price of Coca-Cola is likely to cause a decrease in the quantity of Coca-Cola demanded. However, we say that an increase in income is likely to cause an increase in the demand for most goods. demand schedule Shows how much of a given product a household would be willing to buy at different prices for a given time period.
demand curve A graph illustrating how much of a given product a household would be willing to buy at different prices. law of demand The negative relationship between price and quantity demanded: Ceteris paribus, as price rises, quantity demanded decreases; as price falls, quantity demanded increases during a given period of time, all other things remaining constant.
demand curves always slope downward.
Economists use the concept of utility to explain the slope of the demand curve. As we consume more of a product within a given period, it is likely that each additional unit consumed will yield successively less satisfaction. the utility you gain from a second ice cream cone is likely to be less than the utility you gained from the first, the third is worth even less, and so on. This law of diminishing marginal utility is an important concept in economics. If each successive unit of a good is worth less to you, you are not going to be willing to pay as much for it. Thus, it is reasonable to expect a downward slope in the demand curve for that good. In sum; It is reasonable to expect quantity demanded to fall when price rises, ceteris paribus, and to expect quantity demanded to rise when price falls, ceteris paribus. Demand curves have a negative slope. To summarize what we know about the shape of demand curves:
FROM HOUSEHOLD DEMANDS TO MARKET DEMANDS
market demand The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service SUPPLY IN PRODUCTS/ OUTPUT MARKET Firms supply goods and services like soda because they believe it will be profitable to do so. Supply decisions thus depend on profit potential. Because profit is the difference between revenues and costs, supply is likely to react to changes in revenues and changes in production costs.
Price and Quantity Supplied
quantity supplied: The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period. law of supply The positive relationship between price and quantity of a good supplied: An increase in market price, ceteris paribus, will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied. Price and demand are inverse proportional, but Supply and price is direct proportional. supply curve A graph illustrating how much of a product a firm will sell at different prices. Supply curves slope upward
MARKET EQUILIBRIUM
The operation of the market, however, clearly depends on the interaction between suppliers and demanders. At any moment, one of three conditions prevail in every market: (1) The quantity demanded exceeds the quantity supplied at the current price, a situation called excess demand; (2) the quantity supplied exceeds the quantity demanded at the current price, a situation called excess supply; or (3) the quantity supplied equals the quantity demanded at the current price, a situation called equilibrium. At equilibrium, no tendency for price to change exists.
EXCESS DEMAND
When excess demand occurs in an unregulated market, there is a tendency for price to rise As price rises above $1.75, two things happen: (1) The quantity demanded falls as buyers drop out of the market and perhaps choose a substitute, and (2) the quantity supplied increases as farmers find themselves receiving a higher price for their product and shift additional acres into soybean production.
CHANGES IN EQUILIBRIUM
SUM FOR UNIT 3
Here are some important points to remember about the mechanics of supply and demand in product markets:
- A demand curve shows how much of a product a household would buy if it could buy all it wanted at the given price. A supply curve shows how much of a product a firm would supply if it could sell all it wanted at the given price.
- Quantity demanded and quantity supplied are always per time period—that is, per day, per month, or per year.
- The demand for a good is determined by price, household income and wealth, prices of other goods and services, tastes and preferences, and expectations.
- The supply of a good is determined by price, costs of production, and prices of related products. Costs of production are determined by available technologies of production and input prices.
- Be careful to distinguish between movements along supply and demand curves and shifts of these curves. When the price of a good changes, the quantity of that good demanded or supplied changes—that is, a movement occurs along the curve. When any other factor that affects supply or demand changes, the curve shifts, or changes position.
- Market equilibrium exists only when quantity supplied equals quantity demanded at the current price.
UNIT 4
DEMAND AND SUPPLY APPLICATIONS
THE PRICE SYSTEM RATIONING AND ALLOCATING RESOURCES
price system, performs two important and closely related functions. First, it provides an automatic mechanism for distributing scarce goods and services. That is, it serves as a price rationing device for allocating goods and services to consumers when the quantity demanded exceeds the quantity supplied. Second, the price system ultimately determines both the allocation of resources among producers and the final mix of outputs. price rationing The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.
No matter how good the intentions of private organizations and governments, it is difficult to prevent the price system from operating and to stop people’s willingness to pay from asserting itself. Every time an alternative is tried, the price system seems to sneak in the back door. With favored customers and black markets, the final distribution may be even more unfair than what would result from simple price rationing PRICES AND ALLOCATION OF RESOURCES Price changes resulting from shifts of demand in output markets cause profits to rise or fall. Profits attract capital; losses lead to disinvestment. Higher wages attract labor and encourage workers to acquire skills. At the core of the system, supply, demand, and prices in input and output markets determine the allocation of resources and the ultimate combinations of goods and services produced. PRICE FLOOR price floor A minimum price below which exchange is not permitted. minimum wage A price floor set for the price of labor
SUPPLY AND DEMAND ANALYSIS
The basic logic of supply and demand is a powerful tool of analysis. As an extended example of the power of this logic, we will consider a proposal to impose a tax on imported oil. Effects of tax will be observed.
