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Boyes & Melvin, 9 th Edition. Chapter 1-3 Review. 1. Economics . Everything is scarce. Economics is the study of how best to allocate scarce resources among competing uses. Chapter 1-3 Review. 2. Economics.
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Boyes & Melvin, 9th Edition Chapter 1-3 Review 1
Economics • Everything is scarce. • Economics is the study of how best to allocate scarce resources among competing uses. Chapter 1-3 Review 2
Economics • is a study of human behavior. How we spend our money indicates what we think is important. Chapter 1-3 Review 3
Rational Behavior • The theory that people act in their own best interest. Chapter 1-3 Review 4
Marginal • Marginal means “extra” or “additional” Chapter 1-3 Review 5
Marginal Cost • Additional costs involved in producing one additional item, or taking an additional action. Chapter 1-3 Review 6
Marginal Benefit • Additional benefits that result from producing one additional item, or taking an additional action. Chapter 1-3 Review 7
Marginal Analysis • Use Marginal Cost & Marginal Benefit in making decisions. • If the Marginal Benefit > Marginal Cost, you do it. Chapter 1-3 Review 8
What you give up to do something else. The economic value of your next-best alternative What are you not doing? May be non-financial Opportunity Costs Chapter 1-3 Review 9
Chapter 3 Supply and Demand
Maximizing Behavior • Consumers maximize their utility (satisfaction) given limited resources. • Businesses try to maximize profits by using resources efficiently in producing goods. • Government maximizes general welfare of society. Chapter 1-3 Review 11
Economic interactions with others occur because: • We can’t produce all of the goods we need or desire. • We have limited time, energy, and resources to produce things we could make for ourselves. Chapter 1-3 Review 12
Market • Where buyers (demanders) and sellers (suppliers) meet Chapter 1-3 Review 13
Supply • The ability and willingness to produce a good or service at different price levels in a given time period. Chapter 1-3 Review 14
Demand • The ability and willingness to consume a good or service at different price levels in a given time period. Chapter 1-3 Review 15
Individual Demand • A demand exists only if someone is willing and able to pay for a good. • When people purchase a product there is an opportunity cost. Chapter 1-3 Review 16
Law of Demand • The quantity of a good demanded in a given time period increases as its price falls. Chapter 1-3 Review 17
Demand Schedule • A table showing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period. Chapter 1-3 Review 18
Demand Schedule PriceQuantity Purchased $1 8,000 $2 4,000 $3 2,000 $4 500 $5 1 Chapter 1-3 Review 19
Demand Curve • A curve describing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period. Chapter 1-3 Review 20
Demand Curves • Demand curves show us how changes in market prices alter consumer behavior. Chapter 1-3 Review 21
Demand Curve Chapter 1-3 Review 22
Determinants of Demand • Tastes & Preferences • Income • Expectations • Number of buyers • Price of related goods • Substitutes Coke and Pepsi • Compliments Peanut Butter, Jelly, and Bread Chapter 1-3 Review 23
Shifts in Demand • The determinants of demand can and do change. • A shift in demand is a change in the quantity demanded at any (every) given price. Chapter 1-3 Review 24
Shifts in Demand Chapter 1-3 Review 25
Movements vs. Shifts • Changes in quantity demanded • movements along a demand curve, in response to price changes for that good. • Changes in demand • shifts of the demand curve due to changes in tastes, income, other goods, or expectations. Chapter 1-3 Review 26
The Market Demand Curve • Market demand represents the combined demands of all market participants. • The separate demands of individual consumers is added up to determine the total quantity demanded at any given price. Chapter 1-3 Review 27
Law of Diminishing Marginal Utility • As consumption increases, the amount of usefulness/enjoyment goes down. • 2 beers is better than 1 but after 6 or 7 you aren’t getting as much enjoyment out of each one. Chapter 1-3 Review 28
Supply • To understand the complete market, we must also look at market supply. • The market supply depends on the behavior of all the individuals willing and able to supply a good at some price. Chapter 1-3 Review 29
Market Supply • The total quantities of a good that sellers are willing and able to sell at alternative prices in a given time period. Chapter 1-3 Review 30
Law of Supply • Larger quantities will be offered for sale at higher prices. Chapter 1-3 Review 31
Supply Schedule PriceQuantity Produced $1 15 $2 600 $3 2,000 $4 6,000 $5 12,000 Chapter 1-3 Review 32
Market Supply • The market supply curve is just a summary of the supply intentions of all producers. Chapter 1-3 Review 33
Supply Curve Chapter 1-3 Review 34
Determinants of Supply • Price of inputs • Factor costs • land, labor, capital, know how • Technology • Other goods • Taxes and subsidies • Expectations • Number of sellers Chapter 1-3 Review 35
Shifts of Supply • Changes in the quantity supplied • movements along the supply curve. • Changes in supply • shifts in the supply curve. Chapter 1-3 Review 36
Shifting Supply Curve Chapter 1-3 Review 37
Equilibrium • ”Market clearing” balance • The Price level where Quantity Supplied is equal to Quantity Demanded. Chapter 1-3 Review 38
Equilibrium Chapter 1-3 Review 39
Market Surplus • quantity supplied > quantity demanded at a given price. • created when the seller’s asking prices are too high - above the equilibrium price. Chapter 1-3 Review 40
Surplus P Qd Qs Qe Chapter 1-3 Review 41
Market Shortage • quantity demanded > quantity supplied at a given price. • created when the seller’s asking prices are too low - is below the equilibrium price. Chapter 1-3 Review 42
Shortage P Qs Qd Qe Chapter 1-3 Review 43
The “Invisible Hand” • To overcome a surplus or shortage, buyers and sellers will change their behavior. • This happens automatically • No government interference is necessary • Adam Smith! Chapter 1-3 Review 44
Demand Shifts: Increase Dnew Pnew Qnew Chapter 1-3 Review 45
Demand Shifts: Decrease Dnew Pnew Qnew Chapter 1-3 Review 46
Supply Shifts: Increase Snew Pnew Qnew Chapter 1-3 Review 47
Supply Shifts: Decrease Snew Pnew Qnew Chapter 1-3 Review 48
Effect of Shifting Supply or Demand on Equilibrium QuantityPrice Dincreases increases Ddecreases decreases Sincreases decreases Sdecreases increases Chapter 1-3 Review 49
Supply increase, Demand increase Snew Dnew Pnew Qnew Chapter 1-3 Review 50