The Basic Economic Problem
What Economics is really about
Economics is a social science that studies the allocation of scarce resources Scarcity – an unlimited demand for limited resources
There simply isn’t enough to go around
What are some of the resources that you have?
In the economy, there are two roles that are played out
PRODUCER – also called manufacturers, suppliers, or sellers. CONSUMER – also called buyers or users
Which are you?
From the Producers’ Perspective
How do we decide who will get the limited stuff that we have? Allocation Methods –
From the Consumer’s Perspective
From the Consumer’s Perspective
How do consumers get what they want?
Cost – having to give up something in order to get what you want. Cost does NOT equal price
Price always involves money, costs can be anything
Types of Costs
External Cost – a cost that someone else creates, but you have to pay for it. Sunk – a cost that you cannot get back
Marginal – the added cost of doing an additional thing
Opportunity – the value of the greatest sacrificed alternative Production Possibilities
Marginal Opportunity Cost
Per-Unit Opportunity Cost
Marginal Cost – the added cost of doing an additional thing Marginal Benefit – the added benefit from doing an additional thing Law of Increasing Marginal Cost – as units of production are increased, the marginal cost of doing additional work will also increase Law of Diminishing Marginal Returns – as units of production increase, the benefit derived from additional work will decrease. Demand
Demand – the amount of a good or a service that consumers are willing and able to buy [at every available price.] Quantity Demanded (Qd) – the amount of a good or a service that consumers are willing and able to buy at a specific price. Demand schedule – a list of various prices and quantities demanded The Law of Demand – as the price of a product rises, the quantity demanded will fall and vice versa The Price Effect – A change in the price of a product will only affect Qd, not demand. Changes in demand
Ceteris paribus – “all other things held constant”
When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curb. Rather, the entire demand curve shifts. A shift means that at the same prices, more people are willing and able to purchase that good. Changes in price don’t shift the curb
5 Shifters (Determinates) of Demand:
1. Tastes and Preferences
2. Number of Consumers
3. Price of Related Goods
5. Future Expectations
Prices of Related Goods
Substitutes are goods used in place of one another
If the price of one increases, the demand for the other will decrease and vice versa Compliments are two goods that are bought and used together
If the price of one increase, the demand for the other will fall Income
1. Normal Goods
As income increases, demand increases
As income falls, demand falls
2. Inferior Goods
As income increases, demand falls
As income falls, demand increased
Elasticity of Demand
Elasticity refers to how sensitive quantity is to change in price. The Law of Demand tells us how a change in price will affect Qd, elasticity tells us how much it will affect it. For a producer, it is a matter of knowing which strategy will produce greater revenue. Raising the price or lowering the price? Elastic Demand
The percentage change in quantity demanded is greater than the percentage change in price Products are considered luxuries are generally elastic.
Expensive products are generally more elastic.
What pricing strategy would bring out greater revenue?
The percentage change in quantity demanded is less than the percentage change in price Products that are considered necessities are generally inelastic. Cheaper products are generally more...
Please join StudyMode to read the full document