Week 2

1. Week 2 PLA 12 Economics

2. Definition of terms Economic models are simplified versions of a more complex reality • irrelevant details are stripped away …are used to • show relationships between variables • explain the economy’s behavior • devise policies to improve economic performance

3. Definition of terms Aggregation • Means to sum up or combine data to a single entity • The GDP is an aggregation of the whole production of final goods and services (for a specific time period, e.g. one year) of an economy

4. Development ofUS GDP

5. Definitions of terms Whatis a variable? • A quantitythatcantake on morethanonevalue. Different in time andplace! Example: thepriceof a good (Digital Camera in €)

6. Definitonofterms The input and output of models • The values of endogenous variables are determined in the model. • The values of exogenous variables are determined outside the model: the model takes their values & behavior as given.

7. Definition of terms Society and Scarce Resources • The management of society’s resources is important because resources are scarce. • Scarcity. . . means that society has limited resources and therefore cannot produce all the goods and services people wish to have.

8. Scarcity • http://www.youtube.com/watch?v=yoVc_S_gd_0&feature=player_detailpage

9. In class assignment One example for scarcity • 15min • What problems are linked to it • Solutions?

10. Definition ofgoods

11. Definition of terms Nonrivalry • The cost of extending the service or providing the good to another person is (close to) zero Nonexcludability • It is impossible to exclude anyone from enjoying the benefits of a public good, or from defraying (=pay) its costs (positive and negative externalities). Neither can anyone willingly exclude himself from their remit.

12. Definition of terms Externalities • Effects of one person’s action on another, such that a decision makes another better or worse off by changing their utility or cost. • Beneficial effects are positive externalities • harmful ones are negative externalities

13. Definition of terms Externalities (Example) • Side effects of smoking like passive smoking, are negative externalities for the non-smoking people. • This could also be called costs for the involuntarily “effected” people; costs in terms of unhealthier life conditions

14. Definitions of terms The market A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. • Households decide what to buy and who to work for. • Firms decide who to hire and what to produce.

15. History Economics in history (1) • Francois Quesnay (french; 1694-1774) was physician and published in 1758 the “Tableau économique”, which is often called the first analytical attempt to describe the workings of the economy.

16. History SimplifiedexampleofQuesnays“Tableau économique”

17. History Economics in history (2) • Adam Smith (1723-1790) made the observation that households and firms interacting in markets act as if guided by an “invisible hand.” • Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social costs of their actions. • As a result, prices guide decision makers to reach outcomes that tend to maximize the welfare of society as a whole.

18. Demand& Supply

19. Example :Supply & demand for new cars • shows how various events affect price & quantity of cars • assumes the market is competitive: each buyer and seller is too small to affect the market price • Variables: (international notation) Qd = quantity of cars that buyers demand Qs = quantity that producers supply P = price of new cars Y = aggregate income Ps = price of steel (an input)

20. The demand for cars demand equation: Q d = D (P,Y ) • shows that the quantity of cars consumers demand is related to the price of cars and aggregate income

21. A list of the variables that affectQd Digression: functional notation • General functional notationshows only that the variables are related. Q d = D (P,Y ) • A specific functional form shows the precise quantitative relationship. • Example: D (P,Y ) = 60 – 10P + 2Y

22. The market for cars: Demand D D D P Price of cars The demand curve shows the relationship between quantity demanded and price, other things equal. Q Quantity of cars

23. The market for cars: Supply P Price of cars S The supply curveshows the relationship between quantity supplied and price, other things equal. D Q Quantity of cars

24. The market for cars: Equilibrium P Price of cars S equilibrium price Q Quantity of cars D equilibriumquantity

25. The effects of an increase in income P Price of cars S P2 P1 D2 D1 Q Quantity of cars Q1 Q2 An increase in income increases the quantity of cars consumers demand at each price… …which increases the equilibrium price and quantity.

26. The effects of a steel price increase P Price of cars S2 S1 P2 P1 D Q Quantity of cars Q2 Q1 An increase in Ps reduces the quantity of cars producers supply at each price… …which increases the market price and reduces the quantity.

27. Read theArticleand find oneyourself Read thearticle „Sellingsex“ & wediscussSupplyand Demand Who find a moreentertainingone? Wincoffeecoins!

28. Where does the demandcomesfrom? Take a micro-economicperspective!

29. Anyquestionsleft ?