Lecture 16 Nov

7/30/2019 Lecture 16 Nov

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Some key topics

Why locating businesses properly helpsguarantee profitability

Why land use patterns arise in cities

Why regional economies grow or decline

How large, global corporations are

reshaping the geography of production

How industrial systems are being reshaped

by the information revolution

Why geography matters in economics!!


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Geographic Perspectives

Economic Geography of the World Economy

Globalization

Four Major Questions of the World Economy

World Development Problems

Political Economies Geographical Information Systems


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Four Major Questions of the World

Economy

What should be produced, at what scale of

output, and with what mix of inputs?

How should factors be combined? Labor,capital, resource factors, etc.

Where should production occur?

Who should get output? How should it bedivided?


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Economics Key Topics

Allocation of Scarce Resources Markets for Production, Distribution,

and Consumption

The Division of Labor Solving What, How, What Price, What

Quantity, and Where Production Takes

Place Types of Economic Systems

Neoclassical versus Behavioral andStructural Approaches


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The Circular Flow

Copyright 2004 South-Western

Spending

Goods and

services

bought

Revenue

Goods

and services

sold

Labour, land,and capital

Income

= Flow of inputs

and outputs

= Flow of dollars

Factors of

production

Wages, rent,

and profit

FIRMS

Produce and sell

goods and services

Hire and use factors

of production

Buy and consume

goods and services

Own and sell factors

of production

HOUSEHOLDS

Households sell

Firms buy

MARKETS

FOR

FACTORS OF PRODUCTION

Firms sell

Households buy

MARKETSFOR

GOODS AND SERVICES


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The Circular-Flow Diagram

Firms

Produce and sell goods and services

Hire and use factors of production

Households

Buy and consume goods and services

Own and sell factors of production


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Markets for Goods and Services

Firms sell Households buy

Markets for Factors of Production

Households sell

Firms buy

Factors of Production

Inputs used to produce goods and services

Land, labour, and capital

Markets for Goods and Services

Firms sell Households buy

Markets for Factors of Production

Households sell

Firms buy

Factors of Production

Inputs used to produce goods and services

Land, labour, and capital


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Supply-Demand Equilibrium

S

Quantity per period

D

Price

P*

Q*

The demand curve has a

negative slope because the

marginal value falls as

quantity increases

The supply curve has a positive

slope because marginal costrises as quantity increases

Equilibrium

QD = Qs


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Consumer Choice

Consumer choice theory is based

on the notion that consumers do the

best they can, given the limitationsdictated by their incomes and

consumer prices.


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Utility Maximization

The consumers decision-making process

has two steps:

1. Figure out the menu options, or alternative

combination of two goods (books and

movies).

2. Pick the combination of goods that

generates the highest level of satisfaction orutility.


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Supplyand demandare the two

words that economists use most

often. Supplyand demandare the forces

that make market economies work.

Economics in the micro context isabout supply, demand, and market

equilibrium.

PRODUCTIONPRODUCTION


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According to the Law of SupplyLaw of Supply:

Firms are willing to produce and sell a

greater quantity of a good when theprice of the good is high.

This results in a supply curve that

slopes upward. The Firms Objective

The economic goal of the firm is to maximize

profits.

PRODUCTIONPRODUCTION


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Simple profit function Profit = f(revenue or sales, costs of

production, transportation costs)

Revenue location factors Production cost location factors

Transportation cost location factors

Economies of scale


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Markets

In a market economy, people exchange

things, trading what they have for what

they want.

Although it appears that markets arose

naturally, a number of social inventions,

such as contracts, insurance, patents, and

accounting rules, have made them workbetter.


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Virtues of Markets

In a centrally planned economy, a

planning authority decides what products

to produce, how to produce them, and

who gets them.

Under a market system, prices provide

individuals the information they need to

make decisions. Prices provide signalsabout the relative scarcity of a product.


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Virtues of Markets

The decisions made in markets result from

the interactions of millions of people, each

motivated by their own interests.

Adam Smith used the metaphor of the

invisible hand to explain that people

acting in self-interest may actually

promote the interest of society as a whole.


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Shortcomings of Markets

Market failure is what happens when

markets fail to produce the most efficient

outcomes on their own. The role of

government is to correct this problem.

Market failure can also occur when buyers

and sellers have imperfect information

about the quality of goods and servicesthey are exchanging.


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The Role of GovernmentThe Role of Government

in a Market Economyin a Market Economy The role of government in a market-basedThe role of government in a market-based

economy consists of:economy consists of: Dealing with problems associated withDealing with problems associated with

market failure.market failure. Enforcing property rights and protectingEnforcing property rights and protecting

private property in order to facilitateprivate property in order to facilitate

production and exchange.production and exchange.

Establishing and enforcing rules forEstablishing and enforcing rules for

exchange in markets.exchange in markets.

Reducing economic uncertainty, andReducing economic uncertainty, and

providing for people who are unlucky.providing for people who are unlucky.


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Specialization and the

Gains from Trade Specialization and exchange makes both

people better off, illustrating one of the key

principles of economics:

PRINCIPLEof Voluntary Exchange

A voluntary exchange between two

people makes both people better off.


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Comparative Advantage

versus Absolute Advantage In the previous example, Abe is more

productive than Bea in producing both

goods. Economists say that Abe has

an absolute advantage in producingboth goods.

Despite his absolute advantage, Abe

gains from specialization and trade

because he has a comparativeadvantage in producing pizza.


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The Division of Labor

and Exchange Three reasons for productivity to increase

with specialization:

1. Repetition

2. Continuity

3. Innovation

Specialization and exchange result fromSpecialization and exchange result from

differences in productivity, which in turn comedifferences in productivity, which in turn come

from differences in innate skills and the benefitsfrom differences in innate skills and the benefits

associated with the division of labor.associated with the division of labor.


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Comparative Advantage

and International Trade Many people are skeptical about the idea

that international trade can make everyone

better off. Most economists, however, favor

international trade. In the words ofeconomist Todd Buchholz:

Money may not make the world go round, but

money certainly goes around the world. To stop it

prevents goods from traveling from where they areproduced most inexpensively to where they are

desired most deeply.


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Comparative advantage and

Increasing Returns

Comp. advantage holds that trade across

geographical units arises to take

advantage of inherent differences Increasing returns say that trade arises to

take advantage of scale and variety gains

from specialization

Lecture 16 Nov

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