ECON 151/151G

NZD GDP

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<Qd

• Market forces will cause prices to adjust

Excess Demand

Excess Supply

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