ECON 151/151G

NZD GDP

- Small due to population size
- Countries with higher GDP have higher purchasing power

Purchasing Power

- Ability to buy things

Less children in richer countries

- Less children => less costs => higher quality of life
Children can receive the best education and support
- People are wanting more qualifications => more studying and working much harder. Less time for children

Opportunity cost

- Value of an activity/goods/service given up in order to get something else
- Not all needs can be satisfied
- Everything is scarce
- Choices have to be made
- Value of the next best alternative

Low birth rates

- When the population becomes "older" on average (fewer young people)
- Retirement benefit comes from taxes
- Not enough young people => not enough salary/tax for benefit
- Raises retirement age

Cost-Benefit Principle (Marginalism)

- Take an action if and only if the extra benefits are at least as great as the extra cost
- Costs and benefits are not just money

Marginal Cost

- Increase in total cost from one addition unit of activity

Marginal Benefit

- Increase in total benefit from one additional unit of activity

Sunk costs

- Cannot be recovered
Examples: time, paying for something you don't like

Correlation vs Causation

- If two things go together, it does not mean one causes the other
- Sometimes the correlations are purely coincidental

Correlation

- Relation between two things

Causation

- One thing makes another thing happen

Ceteris Paribus

- When looking at an effect of X on Y, only look at what happens to Y when X changes and everything else is constant
- ONLY CHANGE ON THING AT A TIME

Occam's Razor

- Make as few assumptions or involve as few other variables as possible

Role of assumptions

- Models are simplifications of reality, making simplifying assumptions
- Real world is too complex, need models which focus on important part of reality

Production Possibilities Frontier (PPF)

- A graph that shows various combinations of output that the economy can possibly product given the available factors of production and the available production technology
- Simplifying assumption: economy produces only two goods
- An economy producing on the PPF is efficient
- Graph shows tradesoffs (produce more of one good and less both the other)

Example:
- Cannot produce outside the graph
- Point D is impossible (not enough resources)
- Point B is not utilising all resources
- Point C/A are ideal points, pick either more computers or more cars produced

Interdependence

- Relying on others to produce what we consume, which requires trade

Grains from trade

- Leave the specialist to do the things
- Get the best quality item for the best price

Absolute Advantage (AA)

The comparison among producers of a good according to their productivity
- held by producer who can produce the good using the least amount of resources in absolute terms

Comparative Advantage (CA)

The comparison among producers of a good according to their opportunity cost
- held by the producer who can produce it at the lowest opportunity cost (this is what economy uses!)

Gains from Trade - Application

- Combine both trader's PPF to find who should make how many

Topic 2

Topic 2 - Demand, supply, and market equilibrium

Market Equilibrium

- Equilibrium may change if demand and/or supply changes

Demand

- Consumers wanting to buy

Supply

- Sellers want to sell

Elastic

- Sensitive to price
- Will make a decision depending on the price

Inelastic

Insensitive to price
- Will pay for given price (e.g. gas)

Market

- A group of buyers and sellers of a particular good or service
- Buys determine demand
- Sellers determine Supply
- Can be real (shopping centres) or online (TradeMe/NZ Stock Exchange)

Market Price

- Exchange goods and services for money
- Tells us how many dollars we receive per unit sold and how much $ we must give up per unit bought
- Assume people are "price-takers" (cannot negotiate price)

Quantity Demanded

Amount of a good that buyers are willing and able to purchase at every price

Determinants of Demand

Consumer Income - ability to pay
Prices of related goods - willingness to pay
Substitutes - Cook and Pepsi, Driving vs taking the bus
Complements - hamburgers and burger buns, cars and tyres
Tastes - willingness to pay; how much you value the good

Law of Demand

- states there is an inverse relationship between price and quantity demanded
- demand schedule is a table that shows the relationship between price of a good and quantity demanded

Demand Curve

- Downward sloping line relating to price and quantity demanded

Downwards because:
- lower prices imply a greater quantity demanded
- diminishing marginal benefit (consume more of the same good, less happiness from extra units)
- opportunity cost
- income effect (prices go up, have less money to spend on everything and buy less goods)
- substitutions effect

Ceteris Paribus

- All variables other than the ones being studied are assumed to be constant
- Demand curve slopes downward because lower prices imply greater quantity demanded

Linear Demand curve

- The demand curve is most likely not linear but it is possible to approximate using a straight line
- Makes calculations easier

Change in Quantity Demanded

- Movement along the demand curve
- Caused by a change in price of a product

Change in Demand

- A shift in the demand curve, either to the left (decrease) or right (increase)
- Caused by a change in a determinant other than price
- Increase of consumer income will cause an increase in demand

Substitutes and Complements

- When a fall in price of one good reduces the demand for another good, the two goods are substitutes
- When a fall in price of one good increases the demand for another good, the two goods are complements

Rule of Thumb

- If the thing changes is one of the axis labels it will cause a MOVEMENT ALONG the curve
- If the thing that changes is not on the axis labels it will cause a SHIFT of the WHOLE CURVE

Supply

- Relationship between prices and quantity a firm can put on the market
- Technology and costs of production are major factors
- Law of Supply states that there is a positive relationship between price and quantity supplied

Supply Schedule/Curve

- Upward sloping line relating price to the quantity supplied

Why:
- Market price is higher than the production price.

Supply Determinants

- Cost of production
- Number of suppliers
- Technology
- Envrionment

Change in Quantity Supplied

- Movement along the supply curve
- Caused by a change in market price of the product

Change in Supply

- A shift in the supply curve to the left (decrease) or right (increase)
- Cause by a change in determinant other than price

Equilibrium Price

- The price that balances supply and demand. On graph the price at which supply and demand intersect.
- Sometimes called the Market clearing price

Equilibrium Quantity

- The quantity that balances supply and demand. On graph its the quantity at which demand and supply intersects

Market Equilibrium

- Quantity demanded by consumers = quantity supplied by producers
- No tendency for market to move away from a stable equilibrium

Market Adjustment

- Excess Supply (surplus) Qs>Qd
- Excess Demand (shortage) Qs

Excess Demand

Excess Supply

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