Lesson One Peter Rumble Bangor Transfer Abroad Programme BUS 111 – Micro Economics

Lesson One

Peter Rumble

Bangor Transfer Abroad Programme

BUS 111 – Micro Economics

BUS 111 - Micro Economics

It’s the economy - stupid

"It's the economy, stupid" is a slight variation of the phrase "The economy, stupid" which James Carville had coined as a campaign strategist of Bill Clinton's successful 1992 presidential campaign against sitting president George H. W. Bush.

Carville's original phrase was meant for the internal audience of Clinton's campaign workers as one of the three messages to focus on, the other two messages being "Change vs. more of the same" and "Don't forget health care.”


It’s the economy – stupid continues

Clinton's campaign had advantageously used the then-prevailing recession situation in the US as one of the campaign means to successfully unseat George H. W. Bush. In March 1991, days after the ground invasion of Iraq, 90% of polled Americans approved of President Bush's job performance.[1] Later the next year, Americans' opinions had turned sharply; 64% of polled Americans disapproved of Bush's job performance in August 1992.[1]


Economics Introductory Thoughts

What is Economics? Micro – Economics Macro – Economics Ten Principles



Micro Economics

This is concerned with the individual parts – the demand and supply of goods and services

Focuses on households (consumer expenditure) and firms (organisations)

How markets work.



Macro Economics

This is concerned with the economic aggregate demand and supply – the grand totals of households /individuals and firms activities.

The impact nationally of prices- inflation, employment and savings/ investments

International aspects.


Economics?

Handling scarce resourcesFactors of production..LabourLandCapitalEnterpreneurial skill

Maximising Wealth – Well being


Maximising Wealth

Economic Choices – Production Possibilities Frontiers

Rice or Wheat?

Computers or Cars? Page 26

Computers or Rice?


The Circular Flow

The simple circular flow model of the economy is designed to

understand the basic operations of the economy


58

7 6

43

2 1

Households

Businesses

Markets for factors

of production

Markets for good

and services


The simple circular flow

In the simple circular flow model two players of the economic game:

Households and Businesses.

Households are: sellers of all inputs, or factors of production, and buyers of

all output of good and services.

Businesses are: buyers of all inputs and sellers of all output.


Flow 1 – Households sell their land , labor and capital in the market as factors of production.

Flow 2 – Businesses buy these factors of production and use them to make goods and

services.

Flow 3 – Businesses sell the goods and services made.

Flow 4 - Households buy the goods and services.

So, when we start at the households and go counterclockwise from 1 to 4 we will follow the

flows of what are called “real” things – the resources and the goods and services made.

These are what are really important in the economy because these are the items used to

create our standard of living.


So, when we start at the households and go counterclockwise from 1 to 4 we will follow the flows of what are called “real” things – the resources and the goods and services made. These are

what are really important in the economy because these are the items used to create our standard of living

Consumption


Next we look at flows 5 through 8 and these are financial flows and we see a connection between

spending, revenues, and income.

Flow 5 – The households payment after selling resources in the factor markets is called income.

Flow 6 – When the households buy stuff they pay for it and the term used in the national economy sense to represent this buying is spending or consumption expenditure. The households buy from businesses in

the markets for output of good and services.

Flow 7 – When the businesses sell goods and services to household the businesses bring home revenue. (So, if we ignore government for now,

expenditure = revenue).


Flow 8 – When businesses take in revenue from sales then they use the money to pay for the resources they have purchased in

the markets for factors of production. Here we talk about costs of business

So the flows 5 through 8 are the financial flows that correspond to our “real” flows.

The simple circular flow model is a simple model of the day to day operations of the

economy.


Flows 1 through 4 are flows of inputs (resources) and output (goods and services).

Flows 5 through 8 are flows of money.

The flow of money is one way we account for the flow of resources and goods and services.


Analogy – A grocery store Denis

We look at the revenue of a grocery store to get a feel for the output amount – but we know

the output is made up of items like milk, noodles , drinks etc…

We look at expenses to get a feel for amount of inputs used – but we know the inputs are

hours of labor (wages), electricity used, rents paid and so on.


Final thoughtThe economy is large and complex. Each individual business has a pretty decent grip on what resources are being used and can probably make a list of what those resources are on a sheet of paper – you know,

labor, cash registers, etc

Each individual household knows what goods and services are being bought and can probably make a list of those items on a sheet of paper – you know,

cookies, milk, etc.

In large complex economies it would be difficult to get these lists from businesses and households. But we have come up with ways to get at the money flows.

Often our focus will be on money flows when we really want to talk about the lists.


The Circular Flow

Basic model but in reality it is more complex – Government Trade Advertising, The Invisible Hand,

Not complicated…. Just complex


The “10” principles

1 and 2 – People face trade offs The cost of something is what you give up

to get it - OPPORTUNITY COST.



3 Rational people (firms) think at the

MARGIN.

The marginal benefit depends on how many units already “owned” and rarity of item - Peter’s mugs!!!



4 People respond / need incentives.

Costs and benefits.

Tangible versus intangible.



5 Trading can make everyone better off.

Specialisation



6 & 7 Markets are usually a good way to

organize economic activity

Governments can sometimes improve market outcomes. PROPERTY RIGHTS.



8 A countries standard of living depends

on its ability to produce goods and services

PRODUCTIVITY



9 Prices will rise when Governments

PRINT too much money

INFLATION – QUANTITATIVE EASING



10 Economies face a short/medium run

trade off between Inflation and Employment

The Business Cycle.


Markets

A market is a group of buyers and sellers of a particular good or service.

The terms supply and demand refer to the behavior of people . . . as they interact with one another in markets.

And Economics, especially Microeconomics is about how supply and demand interact in markets.


Market Types or Structures

Competitive MarketsProducts are the same,price takers

Monopoly Monopolistic Competition Oligopoly


Demand Curve

$3.002.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10

12

11

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

0


Why does the Demand Curve Slope Downward?

Law of DemandInverse relationship between price and

quantity. Law of Diminishing Marginal Utility.

Utility is the extra satisfaction that one receives from consuming a product.

Marginal means extra.Diminishing means decreasing.


Market Demand

Market demand refers to the sum of all individual demands for a particular good or service.

Graphically, individual demand curves are summed horizontally to obtain the market demand curve.


Ceteris Paribus

Ceteris paribus is a Latin phrase that means all variables other than the

ones being studied are assumed to be constant. Literally, ceteris paribus means “other things being equal.”

The demand curve slopes downward because, ceteris paribus, lower prices

imply a greater quantity demanded!


Two Basic Rules for Movements vs. Shifts

Rule OneWhen an independent variable changes and that

variable does not appear on the graph, the curve on the graph will shift.

Rule TwoWhen an independent variable does appear on the

graph, the curve on the graph will not shift, instead a movement along the existing curve will occur.

Let’s apply these rules to the following cases of supply and demand!


Change in Quantity Demanded versus Change in Demand

Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of

the product.


Changes in Quantity Demanded

0

D1

Price of Cigarettes per Pack

Number of Cigarettes Smoked per Day

A tax that raises the price of cigarettes

results in a movement along the

demand curve.

A

C

20

2.00

$4.00

12


Change in Quantity Demanded versus Change in Demand

Change in Demand A shift in the demand curve, either to

the left or right. Caused by a change in a

determinant other than the price.


Determinants of Demand

Market price Consumer income Prices of related goods Tastes Expectations What are some examples?

BUS 111 - Micro EconomicsConsumer Income

Normal Good

$3.002.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10

12

11



0

Increasein demand

An increase

in income...

D1

D2

BUS 111 - Micro EconomicsConsumer Income

Inferior Good

$3.002.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10

12

11



0

Decreasein demand

An increase

in income...

D1D2


Prices of Related GoodsSubstitutes & Complements

When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes.

When a fall in the price of one good increases the demand for another good, the two goods are called complements.

BUS 111 - Micro EconomicsChange in Quantity Demanded

versus Change in Demand

Variables that Affect Quantity

Demanded

A Change in This Variable . . .

Price Represents a movementalong the demand curve

Income Shifts the demand curve

Prices of relatedgoods

Shifts the demand curve

Tastes Shifts the demand curve

Expectations Shifts the demand curve

Number ofbuyers

Shifts the demand curve


Supply Curve

$3.002.502.00

1.501.00

0.50

21 3 4 5 6 7 8 9 10

12

11



0


Law of Supply

The law of supply states that there is a direct (positive) relationship between

price and quantity supplied.


Supply

Quantity supplied is the amount of a good that sellers are willing and able

to sell.

BUS 111 - Micro EconomicsChange in Quantity Supplied

1 5



0

S

1.00A

C$3.00

A rise in the price of ice cream cones

results in a movement along the supply curve.


Market Supply

Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.

Graphically, individual supply curves are summed horizontally to obtain the market supply curve.


Determinants of Supply

Market price Input prices Technology Expectations Number of producers What are some examples?

BUS 111 - Micro EconomicsChange in Supply



0

S1 S2

S3

Increase in Supply

Decrease in Supply


Change in Quantity Supplied versus Change in Supply

Variables that Affect Quantity Supplied

A Change in This Variable . . .

Price Represents a movement along the supply curve

Input prices Shifts the supply curve

Technology Shifts the supply curve

Expectations Shifts the supply curve

Number of sellers Shifts the supply curve


Supply

Demand



Equilibrium of Supply and Demand

21 3 4 5 6 7 8 9 10 12110

$3.002.502.00

1.501.00

0.50

Equilibrium




21 3 4 5 6 7 8 9 10

12110

$3.002.50

2.00

1.501.00

0.50

Supply

Demand

Surplus

Excess Supply


Excess Demand

Quantity ofIce-Cream Cones

Price ofIce-Cream

Cone

$2.00

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Supply

Demand

$1.50

Shortage


Three Steps To Analyzing Changes in Equilibrium

Decide whether the event shifts the supply or demand curve (or both).

Decide whether the curve(s) shift(s) to the left or to the right.

Examine how the shift affects equilibrium price and quantity.

How an Increase in Demand Affects the Equilibrium

Price ofIce-Cream

Cone

2.00

0 7 Quantity ofIce-Cream Cones

Supply

Initialequilibrium

D1

1. Hot weather increasesthe demand for ice cream...

D2

2. ...resultingin a higherprice...

$2.50

103. ...and a higherquantity sold.

New equilibrium

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.


S2

How a Decrease in Supply Affects the Equilibrium

Price ofIce-Cream

Cone

2.00

0 1 2 3 4 7 8 9 11 12 Quantity ofIce-Cream Cones

13

Demand

Initial equilibrium

S1

10

1. An earthquake reducesthe supply of ice cream...

Newequilibrium

2. ...resultingin a higherprice...

$2.50

3. ...and a lowerquantity sold.

Documents

Lesson One Peter Rumble Bangor Transfer Abroad Programme BUS 111 – Micro Economics