ECON Chapter 1-4

Economics

is about unlimited wants and our limited resources. How we allocate scarce resources. The resources that we want are based on the choices that we make.

Equilibrium

When demand of goods and supply of goods are equal.

Law of supply

Law of Demand

Production efficiency

is when we cannot produce more of one good without producing less of the other good.

All points on the PPF

are efficient for this reason point

If the point is inside the PPF curve

it is either unemployed or misallocated.

Every choice along the PPF involves

A tradeoff

Demand

refers to a consumer's desire to
purchase a good or service, backed up with the
willingness and ability to pay the price.

If person demands something it means

• They have the money/ability to buy it

• they must desire/want for a product or service

  • has made the decision to buy it

Demand

desire plus the willingness and ability to buy

Law of Demand

• the higher the price of a good, the smaller is the quantity demanded

• The lower the price of a good, the
  larger is the quantity demanded

other things” that must
remain the same for the Law of Demand
to work?

1. The prices of related goods
2. Expected future prices of the good
3. Income
4. Expected future income and credit
5. Population
6. Preferences

Other things or

“Ceteris Paribus”

Prices of Related Goods

When the price of a substitute increases, or when the
price of a complement falls, the demand for a good
increases.

substitute

is a good that is used in the place of another good. Example: Taxi instead of a bus

complement

is a good that is used together with another good. Example: Butter with Bread

Expected Future Prices

If the price of a good is expected to rise in the
future, and the good can be stored, current
demand for the good increases even when price
rises and vice versa.

Income

When income increases, consumers buy more of most
goods, and the demand curve shifts rightward:

normal good

is one for which demand increases
as income increases. Example: shoes, clothes

inferior good

is a good for which demand decreases as income increases. Example: Karwa Bus

Expected Future Income and Credit

When income is expected to increase in the
future or when credit is easy to obtain, the
demand might increase now

Population

The larger the population, the greater is the
demand for all goods

Preferences

People with the same income have different
demands if they have different preferences

Supply

Supply reflects a decision about what goods and
service to produce (with the available technology
and resources)

The Law of Supply

Other things remaining the same, the higher
the price of a good, the greater is the quantity
supplied; and the lower the price of a good, the
smaller is the quantity supplied

The Law of Supply

• The prices of factors of production
• The prices of related goods produced
• Expected future prices
• The number of suppliers
• Technology
• State of nature

Market Equilibrium

is a situation in which opposing forces balance each other.

point of equilibrium

When the price of buyers and sellers is equal and the
point where the Demand & Supply curve intersect.

Surplus

When supply exceeds Demand

Shortage

When Demand exceeds Supply

The market price corrects

shortages and surpluses

Summary

Key Concepts

1. Growth in trade
2. Inward-looking policies
3. Economic Liberalization
4. Immigration and Economic Impact

Globalization is

• the spread of business & trade from domestic to
  global markets

• the way in which national economies are getting
  more interconnected with each other

Technology & Transport

The process of getting “interconnected” and
“interdependent”

The importance of Globalization
includes

1. Growth in world trade
2. Inward looking domestic protectionist
policies
3. Economic Liberalization
4. Immigration

After WWII governments cooperated to create international institutions like:

• MF

• World Bank

• WTO

Inward-looking “Protectionist” plans

• It is done to develop domestic industries
  - The use of the “Infant industry” argument*

• It is done by Import substitution
  - Substitute imports with domestic goods

  • Concerns about protectionism
    - Raises price of capital
    - Increases price of goods for consumers

Economic Liberalization

Globalization leads to economic liberalization which is the
removal of trade restrictions.

Deregulation

The reduction of tariffs by countries.

Immigration

• Immigration is another way by which globalization
  has increased.

  • Immigration into OECD (richer) countries has risen steadily.

Three financial statements for forecasting are:

• Pro forma income statement

• The cash budget

• Pro forma balance sheet

May be used:

Percent-of-sales method for forecasting on a less precise basis.

Financial Forecasting

Ability to plan ahead and make necessary
adjustments before events occur

Pro forma financial statements

enable a firm to estimate future receivables, inventory, and payables, as well as anticipated profits and borrowing requirements

Statements are often required by

bankers, other lenders as guide for the future

To determine production requirements

+ Projected sales
+ Desired ending inventory
– Beginning inventory
= Production requirements

Key Concepts

Gross Domestic Product
Gross National Income
Real and Nominal Measures
Human Development Index

Gross Domestic Product (GDP)

is the total value of goods and services
produced in a country in a given year without
any adjustment for the depreciation of capital.

GDP equals

the sum of income earned domestically by both nationals and foreign citizens working in the country.

Nominal GDP

changes due to changes in productions and changes in prices. It is measured in current prices.

Real GDP

reflects only production changes in the economy by using constant prices. So, it is measured in constant prices

Measures of Output

• Output
  - Sum of value added in each sector

• Income
  - Sum of payments to factors of production*

  • Expenditure
    - Sum of expenditures on final goods and
    services

INCOME = EXPENDITURE

True or False

Cycle

Goods and Services - > HouseHolds → Labor and Capital → Firms → Goods and Services

GDP (Gross Domestic Product)

Output produced within a geographic location
(US, Italy, etc.)

GNI (GNP) – Gross National Income
(Product)

• Output produced by citizens of a geographic
  region

  • Value must be remitted back to country

Underground economic activity

• Illegal activities

• Tax avoidance

Measurements are incomplete due to

• Underground economic activity

• Non-market transactions

• Negative consequences of production

Summary

Need for consistent set of data

• Real and Nominal Variables

• GDP and GNI

• Value added = Income = Total Expenditure

• Human Development Index