Economics 1301

1. Economics 1301 Basic Issues in Economics

2. Administrative Detail • Jim Holcomb • BUSN 240 • 747-7787 • jholcomb@utep.edu • Office Hours • 1:30 – 3:00 PM M-R Econ 1301

3. Economics • The study of how people use their limited resources to try to satisfy their unlimited desire • Huh? Econ 1301

4. Human Misery • 2/3 of the world’s population faces near starvation on a daily basis • 1 in 10 infants die before their 1st birthday in Ethiopia, Pakistan, Tanzania versus less than 1 in 100 in US • Why? Econ 1301

5. Our Limited Means • The most important concept in economics - Scarcity • Scarcity means that there isn’t enough of anything to satisfy the wants of everyone. • Resources are scarce • Resources are the ingredients of the process of producing goods and services Econ 1301

6. Resources • Land • Raw Materials • Labor Resources • People • Capital Resources • manufactured resources Econ 1301

7. Scarcity Forces Choices • There just isn’t enough money or time to do everything • Alternatives must be considered Econ 1301

8. Choice Implies Cost • Choice implies a tradeoff or sacrifice • Cost is the sacrifice made to acquire something • The Opportunity Cost of a choice is the best alternative given up after the choice is made Econ 1301

9. Opportunity Cost • TANSTAAFL • 2nd most important idea in economics • The cost of NOT selecting the next best alternative Econ 1301

10. Opportunity Cost • The cost of NOT selecting the next best alternative • Dollar Cost • Time Cost • External Cost • OC places the value on resources • Price represents the OC Econ 1301

11. Choice Also Implies Competition • When desires exceed resources, desires must compete for what is available • Competition is a contest for command over scare resources Econ 1301

12. Net Advantage • People choose their actions on the basis of expected benefits and expected costs to themselves (Net advantage) • Their choices alter the net advantage of everyone else • Events are the result of choices. • The emphasis in on choice. People choose. Econ 1301

13. Social Cooperation • Motives for behavior • Self-Interest (not selfishness) • prefer more to less • A process of continual adjustment to changing net advantage Econ 1301

14. Choices Represented by a Model • Model (also called a theory) • simplification of reality • observable behavior • assumptions • implications Econ 1301

15. Production Possibilities bread • Combinations of things that can be produced with the economy’s resources • Choices • Opportunity Cost • Preferences • Rules Milk Econ 1301

16. Economic Systems • Framework in which economic decisions are made • Who produces how much for whom? • Pure Market Economy • Pure Command Economy • Mixed Economy Econ 1301

17. Market Economy • Private ownership of resources • private property rights • Decentralized decision-making • Choices are left to private resource owners Econ 1301

18. Resource Allocation in a Market-Based Economy • Buyers and sellers voluntarily agree to exchange goods and services • But, the game does have rules • Market structure Econ 1301

19. Markets & Structure • Sellers’ side (Supply) • Buyers’ side (Demand) Econ 1301

20. Market Structure: Sellers • Number of firms in a market • Competitive • Monopoly • In-between Econ 1301

21. Competitive Market • Many buyers and sellers • no one can control the price • Identical products • Price free to adjust • No discrimination by buyers or sellers • Very easy entry and exit from market Econ 1301

22. Monopoly • Single seller • No close substitute • Protective barriers to entry Econ 1301

23. Imperfect Competition • Relatively few firms • Similar products • relatively easy entry and exit Econ 1301

24. Markets: Demand • Quantities of a product that consumers are willing to purchase at various prices, • Other things equal. • Income • preferences • prices of other goods • expectations about future prices Econ 1301

25. Law of Demand • Given a choice, would you rather pay $10 or 50¢ for a Coke? • Other things equal, the higher the price of a good the lower is the quantity demanded • The Case of the Confused Clerk Econ 1301

26. Demand Curve Econ 1301

27. A Technical (but important) Distinction • Change in Quantity Demanded • Movement Along a Demand Curve • Caused by change in price • Change in Demand • Shift of Whole Demand Curve • Caused by anything other than price Econ 1301

28. Change in Quantity Demanded • Caused by a change in the price of good • Shown by movement along a demand curve P A B D Q Econ 1301

29. Change in Demand • Caused by change in anything other than the price of the good • Shown by shift of demand curve Econ 1301

30. Things Other Than Price? • Change in Income • Change in Prices of Related Goods • Change in Tastes • Change in Expectation • Change in Numbers of Consumers Econ 1301

31. Markets: Supply • Quantity of a Product that Sellers are Willing to Sell at Various Prices, Other Things Equal • Other Things? • Cost of Production • Sellers’ Expectations • Number of Sellers Econ 1301

32. Supply Curve Econ 1301

33. Law of Supply • The higher the price of a product, the larger will be the quantity supplied, other things being equal. Econ 1301

34. That Same Technical Distinction • Change in Quantity Supplied • Caused by a change in price of this good • Movement along a supply curve • Change in Supply • Caused by anything other than price • Shift of a supply curve Econ 1301

35. Change in Quantity Supplied • Caused by change in price of this good • Shown by movement along supply curve P B A Q Econ 1301

36. Change in Supply • Caused by change in anything other than price • Usually cost • Shown by shift in Supply Curve Econ 1301

37. Economic Costs • Long run v. Short run • Fixed v. Variable • Total, Average, and Marginal Costs Econ 1301

38. Market = Supply & Demand Econ 1301

39. Competitive Equilibrium & Social Well-Being • Equilibrium • No one wants to change anything • Quantity Demanded equals the Quantity Supplied Econ 1301

40. Equilibrium: The Saga Continues • Everyone is completely happy (in economic sense) • Resource Owners • Owners of Firms • Consumers • Intentions of buyers and seller coincide Econ 1301

41. Economic Nirvana • At equilibrium, consumers feel that firms are using precisely the right number of resources in production of this good. • Scarce resource are being used correctly, from society’s point-of-view. Econ 1301

42. But How Does (or can) This Happen? • Consider what happens if price is above the “true but unknown” equilibrium Econ 1301

43. Answer--Price Above Equilibrium • Consumers decrease quantity demanded “Not worth it” • Firms see unintended inventory accumulation “stuff not selling” • Firms put stuff on SALE!! • WHY? Econ 1301

44. Price “Below” Equilibrium • Consumers rush to buy “BARGAIN” • Stores sell out and order more • New stuff arrives at higher price • Buyers decrease quantity demanded Econ 1301

45. Equilibrating Process • Resources move from low-valued uses to higher-valued uses as if guided by some “invisible hand.” • When left alone, market forces tend to ensure social economic well-being. • Always? Econ 1301

46. Always? • Supply and Demand in “free” economies sometimes are not “free” • Monopoly • Regulation • Government Intervention Econ 1301

47. THE STOCK MARKET This material is not is the text. Use the WSJ for much of the references

48. Stocks • Stocks are pieces of corporate pie. • When you buy stocks, or shares, you own a slice of the company • A corporation’s stockholders all have equity in the company. • Why do they buy stock? Econ 1301

49. Common Stock • Ownership shares • Sold initially by company then traded among investors • Investors buy the shares expecting dividends • AND, hope the price of the stock will go up Econ 1301

50. Why common stock? • Corporations trade ownership and control to investors whose motive is dividends and profits • In return, they get investment money to build or expand their business Econ 1301