Advanced Economics Week #1

Advanced Economics Week #1

Spring 2012

Advanced Economics 3/19/12http://mrmilewski.com

• OBJECTIVE: Examine course syllabus & beginning of class administration stuff.

• I. Administrative Stuff-Welcome Back -Syllabus

• II. Structure of the Class• III. Textbook• Notice: 62 Days until the Senior’s Last Day!

Advanced Economics 3/20/12http://mrmilewski.com

• OBJECTIVE: Examine the fundamental economic concepts from Chapters#1&2.

• I. Journal#1 pt.A-Watch the following:-Colorado Students Begin to Learn Financial

Discipline• II. Journal#1 pt.B

-notes on microeconomics (Chapters#1&2)• Notice: 61 Days until the Senior’s Last Day!

The Fundamental Economic problem is:• Scarcity - the condition that results from society not

having enough resources to produce all the things people would like to have.

• Since people have unlimited wants & limited resources, scarcity leads to choices.1.) What to produce?2.) How to produce?3.) For whom to produce?

The Factors of Production• LAND – the gifts of nature• LABOR – people with all their efforts & abilities• CAPITAL – the tools, equipment, machinery, and

factories used in the production of goods & services

• ENTREPRENEURS – a risk taker in search of profits who does something new with existing resources

The Circular Flow of Economic Activity

http://upload.wikimedia.org/wikipedia/commons/thumb/b/b8/Circular_flow_of_goods_income.png/350px-Circular_flow_of_goods_income.png

Division of Labor• Division of Labor – work

is arranged so individuals do fewer tasks than before.

• Specialization – factors of production perform tasks more efficiently than others.

• Human Capital – the sum of the skills, abilities, health, and motivation of the people.

http://cdn.fuuzio.com/assets/Fuuzio-Main-Site-Template/images/adam-smith.jpg

Adam Smith – Wealth of Nations 1776

Production Possibilities Frontier• PPF is a diagram that

represents various combinations of goods and/or services an economy can produce when all productive resources are fully employed.

• See Figure 1.6 page23

http://upload.wikimedia.org/wikipedia/commons/thumb/4/4c/PPF_opportunity_cost.svg/220px-PPF_opportunity_cost.svg.png

Trade-offs & Opportunity Costs • Trade-offs – alternate

choices• Opportunity costs –

the cost of the next best alternative use of money, time, or resources when one choice is made rather than another. http://reason.com/assets/mc/psuderman/2012_02/simpdoc.gif

Types of Economic Systems

Roles in Market Economy• Entrepreneur –

-organizes land, labor, and capital in order to make a profit • Consumer –

-determines what is made “the customer is always right”• Government –

-protector of private property, enforcer of contracts, and definer of fairness-provider of services like defense, education, and public welfare-consumer of goods-regulator charged with preserving competition-promoter of national goals

Advanced Economics 3/21/12http://mrmilewski.com

• OBJECTIVE: Examine the fundamental economic concepts from Chapters#3&4.

• I. Journal#2 pt.A-Watch the following:-Video: Wants vs. Needs

• II. Journal#2 pt.B-notes on microeconomics (Chapters#3&4)

• III. Notice: 60 Days until the Senior’s Last Day!

Price stability• Price stability adds a degree of certainty to the

future.• If inflation–a rise in the general level of prices–

occurs, workers need more money to pay for food, clothing, and shelter.

• How inflation works:-Wendy’s Jr. Cheese Deluxe-Cost $.99

CPI• Consumer Price Index – an index

used to measure price changes for a basket of frequently used common items.

• The CPI reports on price changes for 90,000 items in 364 categories from 85 geographic areas of the country and are compared to their 1982-84 base year prices.

• Produce Price Index – measure price changes paid by domestic consumers for their inputs and is based on a sample of about 100,000 commodities and uses 1982 as the base year.

http://www.danielstrading.com/resources/newsletter/2011/03/15/comparitive-consumer-price-index.png

Types of Firms• Sole proprietorship – a business owned and run by one

person. • Partnerships – business jointly owned by two or more

persons.• There are two types of partnerships:

*general partnerships – all partners actively run the business*limited partnership – at least one partner is not active in running the business

• Corporation – a form of business organization that is recognized by the law as having all the legal rights of an individual.

• They have the right to buy & sell property, enter into legal contracts, and to sue & be sued.

What is demand?• Demand – the desire, ability, and willingness to

buy a product.• In a market economy, you compete with other

consumers who demand the same products as you.• If a lot of people demand the same product, the

price will rise.• If there are a lot of the same product, and very few

people who demand it, the price will fall.

Simplistic view of demand• As price increases, demand decreases• As price decreases, demand increases• This is an inverse relationship• When an inverse relationship is graphed,

the slope is negative

Demand Changes• Change in quantity

demanded – movement along the demand curve

Demand Changes

• Change in demand – shift in the demand curve

Elasticity• Elasticity – a measure of responsiveness that tells

how a dependent variable such as quantity responds to an independent variable such as price.

• 3 Types of Demand Elasticity Elastic Demand - A small change in price causes a

big change in quantity demanded Inelastic Demand - A big change in price causes a

small change in quantity demanded Unit Elastic Demand - Any change in price causes a

proportional change in quantity demanded

Advanced Economics 3/22/12http://mrmilewski.com

• OBJECTIVE: Examine the fundamental economic concepts from Chapter#4.

• I. Journal#3 pt.A-Watch the following:-How Uncertainty, Speculation Factor Into Gas

Prices• II. Journal#3 pt.B

-notes on microeconomics (Chapter#4)• Notice: 59 Days until the Senior’s Last Day!

Change in Demand v. Change in Quantity Demanded

Elastic Demand• A small change in price causes a big change

in quantity demanded.• Slope is less than -1• Example

-fresh foods (green beans, tomatoes, apples)

Inelastic Demand• A big change in price causes a small change

in quantity demanded.• Slope is greater than -1• Examples:

-table salt-gasoline

Unit Elastic Demand• Any change in price causes a proportional

change in quantity demanded.• Slope equals -1

Elasticity Formulas• Formula to determine elasticity

% change in Q = elasticity% change in P

• Formula to determine % change in P or Q(NEW P or Q) – 1 = decimal equivalent(OLD P or Q)

• Answer x 100 = % Change in P or Q.

Example #1• The manufacturer of a pain medication

reduces the price for medication by 30% and the percent change in quantity demanded is 30%. What is the elasticity for the pain medication?

• % change in Q = 30%• % change in P = -30%• Elasticity = -1

Example #2

• A Chinese Buffet increased prices from $4.95 all you can eat to $5.95 all you can eat. The number of big eaters went from 58 to 36. What is the elasticity for All You Can Eat Chinese?

• First we need to figure out the % change in P & the % change in Q.

Chinese Buffet• % change in P• NEW P = 5.95• OLD P = 4.95

(5.95) – 1 =(4.95)

• .20• 20%

• % change in Q• NEW Q = 36• OLD Q = 58

(36) – 1 =(58)

• -.37• -37%

Chinese Buffet• % change in Q =-37%• % change in P =20%

-37% = 20%

• Elasticity = -1.85

• The elasticity for the Chinese Buffet is elastic

If you owned the Chinese Buffet, would you keep the price of the Buffet at 5.95?

• 5.95 x 36 = $214.20• 4.95 x 58 = $287.10

Law of Supply• The principle that suppliers will

normally offer more for sale at higher prices and less at lower prices.

• As price goes up, quantity produced also goes up

Supply Curve• At high prices more

will be supplied. At lower prices, less will be supplied.

• Price and quantity supplied are directly related.

• The drawing to the right is a typical supply curve.

Change in supply• A change in supply

occurs when something happens to cause suppliers to offer different amounts of products for each price in the market.

Advanced Economics 3/23/12http://mrmilewski.com

• OBJECTIVE: Examine the fundamental economic concepts from Chapters#5&6.

• I. Journal#4 pt.A-Watch the following:-NBR

• II. Journal#4 pt.B-notes on microeconomics (Chapters#5&6)

• Notice: 58 Days until the Senior’s Last Day!

What can cause a change in supply to the right?• Lower cost of inputs such as

cheaper labor or cheaper packaging

• More productive/better trained labor.

• New technology like more fuel efficient delivery vehicles, better/faster machines

• Lower taxes/government subsidies (subsidy is a government payment to an individual or business to encourage or protect a certain economic activity.)

What can cause a change in supply to the left?• More expensive labor• Higher taxes• Less efficient workers• Broken technology• Withdrawal of

subsidies

Supply ElasticityType of Elasticity Change in Quantity

Supplied Due to a Change in Price

Elastic More than proportional

Unit Elastic Proportional

Inelastic Less than proportional

Supply Elasticity• Supply elasticity is caused by the ability of

a producer to change output. • If producers can increase output quickly,

supply is elastic.• If producers can not increase output

quickly, supply is inelastic.

Theory of Production• The relationship between the factors of

production (land, labor, capital, entrepreneurs) and output of goods and services.

• Short run – change in the variable of labor• Long run – change in land & capital

Law of Variable Proportions• Stage I – Increasing returns

*output rises at an increasingly faster rate (each new worker makes more than the previous worker did)

• Stage II – Diminishing returns*output rises at a diminishing rate (each new worker increases output, but not as much as the previous worker did)

• Stage III – Negative returns *output decreases as each new worker is added

Where will profits be maximized?• When marginal

cost & marginal revenue are equal.

How is price determined?• Price is determined

by the intersection of supply & demand.

Prices as Signals• Price – the monetary value of a product as

established by supply & demand.• Price is a signal that helps us make

economic decisions.• High prices are a signal for producers to

produce more and consumers to buy less.• Low prices are a signal for producers to

produce less and consumers to buy more.

Inelastic Demand v. Elastic DemandFigure 6.3a Figure 6.3b