A =An Introduction to Economics 23(Lecture 1- the price mechanism 1)

8/8/2019 A =An Introduction to Economics 23(Lecture 1- the price mechanism 1)

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Basic Economic TextbooksBasic Economic Textbooks

Most of this is taken loosely from G F StanlakeMost of this is taken loosely from G F StanlakeIntroductory Economics (1985) pub. Longman andIntroductory Economics (1985) pub. Longman andEconomics and Property by Danny Myers pub. byEconomics and Property by Danny Myers pub. by

Estates GazetteEstates GazetteEconomics for the Built Environment by Marcus WarrenEconomics for the Built Environment by Marcus Warrenis also good and is in the libraryis also good and is in the library

Apart from the above any economics textbook deals with Apart from the above any economics textbook deals withthe basic stuff. Lipsey, Samuelson, Sloman.the basic stuff. Lipsey, Samuelson, Sloman.Property and Construction Economics by three of your Property and Construction Economics by three of your lecturers Eccles, Sayce and Smith is also a goodlecturers Eccles, Sayce and Smith is also a goodintroduction.introduction.


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An Introduction to Economics An Introduction to EconomicsEconomics is about the satisfaction of Economics is about the satisfaction of materialmaterialwantswantsEconomists avoid value judgements in favour of Economists avoid value judgements in favour of economic analysiseconomic analysisPeople cannot have all the things that they want.People cannot have all the things that they want.There is thereforeThere is therefore scarcity.scarcity.The Production Possibility Curve shows what aThe Production Possibility Curve shows what asocietysociety couldcould produce with its existing resourcesproduce with its existing resourcesof land, labour, capital and technical knowledgeof land, labour, capital and technical knowledgeMicro economicsMicro economics is concerned with individualis concerned with individualparts of the economy mainly the firm.parts of the economy mainly the firm. MacroMacroeconomicseconomics looks at the whole economylooks at the whole economy


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ScarcityScarcity

Economics is the social science studyingEconomics is the social science studyinghuman behaviour, and, in particular, thehuman behaviour, and, in particular, theway in which individuals and societiesway in which individuals and societieschoose among alternative uses of scarcechoose among alternative uses of scarce

resources to satisfy wantsresources to satisfy wants


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Scarcity and Economic GoodsScarcity and Economic Goods

Scarcity exists because we cannot have all thatScarcity exists because we cannot have all thatwe want from nature without sacrificewe want from nature without sacrificeWe use scarce resources, such as land, capital,We use scarce resources, such as land, capital,and entrepreneurship, to produce economicand entrepreneurship, to produce economicgoodsgoodsEconomic goods are those that are desired butEconomic goods are those that are desired but

re not directly obtainable from nature to there not directly obtainable from nature to theextent demanded or desiredextent demanded or desiredScarcity requires us to chooseScarcity requires us to choose


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O pportunity CostO pportunity Cost

Choosing one thing requires you to giveChoosing one thing requires you to giveup something elseup something else

O pportunity cost is the highest valueO pportunity cost is the highest valuealternative that had to be sacrificed for thealternative that had to be sacrificed for theoption that was chosenoption that was chosenWhat is your opportunity cost of attendingWhat is your opportunity cost of attendingthis lecture?this lecture?


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Production possiblitiesProduction possiblities

Expected gradein DevelopmentandConstruction

Expected grade in Economics

F

A

B

C

D

E

E D C B A

All 4 hours on D + C

3 hours D + C 1 hour Economics

2 hours D + C 2 hours Economics

1 hour D+C 3 hours Economics

All 4 hours Economics


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The Production PossibilityThe Production Possibility

CurveCurve Agricultural

Production

Manufactured Products

0

6

60

The economy can eitherproduce 6m tonnes of foodand no manufacturedproducts or 60m tonnes of manufactured products and

no food, or somewhere inbetween


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But even the best economists cannot predict the economiceffects of a disaster such as B ird Flu


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The Use of Graphs in EconomicsThe Use of Graphs in Economics

A graph is a visual representation of the A graph is a visual representation of therelationship between two or more variablesrelationship between two or more variables

A table will show the relationship for say peoples A table will show the relationship for say peoplesweight and height. This should demonstrate aweight and height. This should demonstrate aDIRECT RELATI ON SHIP. As one rises so doesDIRECT RELATI ON SHIP. As one rises so doesthe other the other If weight fell when height rose there would be anIf weight fell when height rose there would be anINV ERSE RELATI ON SHIPINV ERSE RELATI ON SHIP

We can chart the relationship between the priceWe can chart the relationship between the priceof lager and the quantity purchased in a similar of lager and the quantity purchased in a similar wayway


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Lager Lager

Price

Quantity Purchased

The higher the price theless lager is purchased

The curve is called a

DEMA N D CUR V E as itshows the amount of theproduct that will bedemanded by consumers

Demand


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Price

Quantity

The higher the pricethe more lager manufacturers will bewilling to supply. Therelationship betweenthe price of the productand the amountsupplied is shown by

the SUPPLY CUR V E

Lager

Supply


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Lager Lager S

D

Pricep1

Quantity

Q1

If the price of lager isp1 the quantity bothsupplied andpurchased will be

q1. The marketCLEARS.at thisEQUILIBRIUM priceand quantity


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Economic SystemsEconomic Systems

Traditional economiesTraditional economies

Market economiesMarket economiesCommand economiesCommand economiesMixed economiesMixed economies


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Mixed EconomiesMixed Economies

Characterised by government interventionCharacterised by government interventionGovernment intervenes to counteract theGovernment intervenes to counteract theunacceptable features of laissez faireunacceptable features of laissez faire

Depending on the government in power marketDepending on the government in power marketinequalities can be addressedinequalities can be addressedThe State deals with the burden of economicThe State deals with the burden of economicchange (or does it?)change (or does it?)

Government may intervene to change theGovernment may intervene to change theallocation of resources that the free market mayallocation of resources that the free market mayproduce.produce.


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The Factors of ProductionThe Factors of ProductionLandLandLabour Labour CapitalCapital

WorkingWorkingFixedFixedSocialSocial

Capital is of varying typesCapital is of varying typesWorking capital is theWorking capital is thestock of raw materials,stock of raw materials,partly finished goods andpartly finished goods and

finished goods held byfinished goods held byproducersproducersFixed capital is theFixed capital is theequipment used inequipment used inproductionproductionSocial capital is notSocial capital is notdirectly concerned withdirectly concerned withproduction such asproduction such asschools, houses etc.schools, houses etc.


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ProductionProduction

All the factors of production come together All the factors of production come together to produce goods and servicesto produce goods and servicesThe firm is faced with costs to be incurredThe firm is faced with costs to be incurredin production which will translate intoin production which will translate intoearnings and profitearnings and profitProfit is the financial return on anProfit is the financial return on an

investment. There isinvestment. There is normal profitnormal profit andandsupernormal profit.supernormal profit. These are explainedThese are explainedlater.later.


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The Firms Costs and RevenuesThe Firms Costs and Revenues Average revenue Average revenue is how much the firm receives onis how much the firm receives onaverage. Total revenue form sales is divided by totalaverage. Total revenue form sales is divided by totaloutputoutput

Average cost Average cost is the total cost divided by the total output.is the total cost divided by the total output.

Economic theory assumes that within average cost thereEconomic theory assumes that within average cost thereis an element of is an element of profitprofit which iswhich is JUSTJUST enough to keep theenough to keep thefirm operatingfirm operatingMarginal revenueMarginal revenue is the additional revenue gained formis the additional revenue gained formselling one more unit of outputselling one more unit of outputMarginal costMarginal cost is the cost of producing one more unit of is the cost of producing one more unit of outputoutputTotal costTotal cost is fixed cost (such as rent)+ variable costis fixed cost (such as rent)+ variable cost(such as labour cost)(such as labour cost)


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Price, V alue, and CostPrice, V alue, and CostPricePrice is determined by supply and demand in the freeis determined by supply and demand in the freemarket.market.V alueV alue can be determined by what someone will pay incan be determined by what someone will pay inthe free market which is itsthe free market which is its exchange valueexchange value (same as(same asprice) or its individual usefulness or price) or its individual usefulness or use valueuse value ..CostCost can be fixed or variable or that which has beencan be fixed or variable or that which has beengiven up when one item is chosen for another. This isgiven up when one item is chosen for another. This isopportunity costopportunity cost ..

Quantity surveyors sometimes think that if somethingQuantity surveyors sometimes think that if somethingcosts 8m to build then that is its value but cost andcosts 8m to build then that is its value but cost andvalue are entirely different things.value are entirely different things.


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What price in the free marketWhat price in the free market

(and are markets ever free?)(and are markets ever free?)

S upply

Demand

Price peritem of production

Quantity demanded and supplied

The Equilibrium Price

0


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ProductionProduction

The firm chooses how much to supply to theThe firm chooses how much to supply to themarket to maximise profitmarket to maximise profit

BUTBUT

As successive units of one factor are added to As successive units of one factor are added tofixed amounts of other factors the increments infixed amounts of other factors the increments in

total output will at first rise and then declinetotal output will at first rise and then decline

This is the Law of Diminishing ReturnsThis is the Law of Diminishing Returns


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How does the firm decide what toHow does the firm decide what toproduce and at what price to offer produce and at what price to offer

the product?the product?

We look at theWe look at the short runshort run first. The shortfirst. The short

run is the period of time in which the firmrun is the period of time in which the firmcannot alter its current size of plant.cannot alter its current size of plant.TheThe long runlong run is the period long enough for is the period long enough for

the firm to adjust all its inputs to a changethe firm to adjust all its inputs to a changein conditionsin conditions


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The Short and Long RunThe Short and Long Run

TheThe Short RunShort Run is a period of time duringis a period of time duringwhich at least one factor of production iswhich at least one factor of production isfixed. A shipping line wants to carry morefixed. A shipping line wants to carry morepassengers in response to a rise inpassengers in response to a rise inpopularity of cruise holidays. In the shortpopularity of cruise holidays. In the shortrun there would not be time to build morerun there would not be time to build more

ships so it would have to run moreships so it would have to run moresailings. In the long run more ships wouldsailings. In the long run more ships wouldbe built.be built.


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The Long RunThe Long Run

TheThe Long RunLong Run is a period of time longis a period of time longenough for all inputs to be varied. A firmenough for all inputs to be varied. A firmcan build a new factory and buy newcan build a new factory and buy newmachines.machines.Time will varyTime will vary if it takes a shipping lineif it takes a shipping lineone year to build new ships then the shortone year to build new ships then the shortrun is a period up to a year and the longrun is a period up to a year and the longrun more than a year.run more than a year.


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Shipping ExampleShipping Example

Price

Quantity

Short Run Long Run

D1

S1

D2

D1D2

S1

S2

Documents

A =An Introduction to Economics 23(Lecture 1- the price mechanism 1)