Lecture 1 Slides

Slide 1.1

Economics or Business and Management

Grifths Grift hs and Wall: Economics Economics or Business Business and Manage Management ment 3rd 3rd edition edition

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What is Economics+ •

Economics studies ho# indi$iduals" %rms" go$ernment" and other organi&ations #ithin our societ' ma(e ma(e choices" and ho# these t hese choices determine societ')s use o its resources*

Grifths Grift hs and Wall: Economics Economics or Business Business and Manage Management ment 3rd 3rd edition edition

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Slide 1.3

Mar(ets and ,esou esource rce llocation

Grifths Grift hs and Wall: Economics Economics or Business Business and Manage Management ment 3rd 3rd edition edition

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Slide 1.4

!carcit' !car cit' and /hoice

•

Wants are unlimited

•

Means -resources. are limited

•

/hoice et#een alternati$es

•

ortunit' /ost

Grifths Grift hs and Wall: Economics Economics or Business Business and Manage Management ment 3rd 3rd edition edition

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Slide 1.5

ortunit' cost ndi$idual : u'ing more $ideo games ma' mean less aid music do#nloads

4irm:  using more caital e5uiment to roduce chocolates ma' mean less used to roduce s#eets

Go$ernment:  using ta6 re$enue to uild more hositals ma' mean less ne# schools Grifths Grift hs and Wall: Economics Economics or Business Business and Manage Management ment 3rd 3rd edition edition

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o# are /hoices Made+ • • • • • •

7 concets that e6lain ho# choices are made: trade8o9s incenti$es e6change inormation distriution

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Trade-ofs •

deciding to send more on one thing lea$es less to send on something else< de$oting more time to stud'ing economics lea$es less time to stud' h'sics

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ncenti$es •

•

•

n ma(ing choices" indi$iduals resond to incentives.  the rice o =en MP3la'ers alls relati$e to the rice o iPods" there is a greater incenti$e to u' a =en*  the salaries or engineers rise relati$e to the salaries o eole #ith an MB" there is an increased incenti$e to choose to stud' or an engineering degree rather than a usiness degree*

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E6change •

When #e exchange #ith others" our range o choices ecomes larger*

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normation •

Ma(ing intelligent choices re5uires that #e ha$e" and utili&e" inormation*

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?istriution •

4inall'" the choices #e ma(e>aout ho# much education to get" #hat occuation to enter" and #hat goods and ser$ices to u'>determine the distribution o #ealth and income in our societ'*

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Slide 1.12

Production ossiilit' rontier -PP4. •

!ho#s the alternati$e cominations o the t#o roducts that the countr' can roduce i it ull' utilises all o its resources*

•

 oint inside the PP4 #ould signi' that the econom' #as under8utilising its resources*

•

 oint outside the PP4 #ould signi' a comination o the t#o roducts that is unattainale under resent technolog'*

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Slide 1.13

Production ossiilit' rontier    r   a   e   '   r   e   2 1   s   r   e    t   u   2   m   o    / 2



Production ossiilit' rontier @

,

M

!2

!1 /ars er 'ear

Grifths and Wall: Economics or Business and Management 3rd edition

,)

! )

!

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Slide 1.14

ncrease in roducti$e caailit' -1. •

•

 shit out#ards in the PP4 reresents the ailit' to roduce more goods and ser$ices #ith the same inuts*  Ahis ma' e the result o technological change or other roducti$e imro$ements*

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Slide 1.15

ncrease in roducti$e caailit' -2.

/lothing

  

4  



4ood

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Slide 1.16

Ahe mar(et •

 Ahe mar(et or a roduct is not a articular lace ut an' situation #here the u'ers and sellers engage in e6change*

•

 Ahe mar(et ma' e local" regional" national or international*

•

 Ahe mar(et ma' ha$e no e6act location" as #ith e6change $ia the internet*

•

We can ha$e roduct mar(ets" e*g* chocolate ars or laour mar(ets #here indi$iduals #ith articular s(ills sul' their ser$ices to %rms #ho demand those Grifths and Wall: s(ills* Economics or Business and Management 3rd edition © Pearson Education Limited 2011

•

ndi$iduals ma(e decisions that reCect their o#n desires as the' resond to the incenti$es the' ace* • 4irms ma(e decisions that ma6imi&e their ro%ts" and to do so the' stri$e to roduce the goods that consumers #ant at the lo#est ossile cost* •  Ahis rocess determines #hat is roduced" ho# it is roduced" and or #hom* Grifths and Wall: Economics or Business and Management 3rd edition

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• • •

•

n the #hole" mar(ets ensure that societ')s resources are used efcientl'* Mar(ets ma' lead to outcomes that societ' ma' %nd inade5uate* 4or e6amle there ma' e too much ollution" too much ine5ualit'" and too little concern aout education" health" and saet'*  When the mar(et is not ercei$ed to e #or(ing #ell" eole oten turn to go$ernment

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,ole o the Go$ernment •

Go$ernments la' a critical role in all mar(et economies* 4or e6amle" go$ernments ro$ide the legal structure #ithin #hich ri$ate %rms and indi$iduals oerate* @o one #ould oen a store i others could siml' steal things o9 the shel #ith imunit'< the store o#ner needs to (no# there is a legal s'stem that he can use to rosecute thet*

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,ole o the Go$ernment •

Go$ernments also regulate usinesses in man' #a's* Ahere are regulations to ensure %rms do not discriminate ' race or se6" do not mislead consumers" and are careul aout the saet' o their #or(ers* • Go$ernments can sul' ser$ices such as education and mail ser$ice* •  Ahe Go$ernment can e a maDor urchaser in some industries" such as the deence industr'* Grifths and Wall: Economics or Business and Management 3rd edition

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,ole o the Go$ernment •  Ahe

go$ernment also sulies goods and ser$ices that the ri$ate sector does not" such as the national deence" roads" and currenc'*

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,ole o the Go$ernment • • • •

Go$ernment ro$ides assistance to those in need through 8 unemlo'ment ene%ts 8 social securit' 8 $arious #elare rogrammes

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,ole o the Go$ernment •

•

ntil recentl'" go$ernments in countries such as the ormer !o$iet nion and /hina attemted to control racticall' all maDor decisions regarding resource allocation* E$en in Euroe" not long ago man' go$ernments ran oil comanies" coal mines" and the telehone s'stem* ncreasingl'" ho#e$er" go$ernments ha$e sold these enterrises to the ri$ate sector" a rocess called ri$ati&ation*

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Mar(ets •

3 maDor mar(ets • 8 roduct mar(et • 8 laour mar(et • 8 caital mar(et  Ao economists" eole are usuall' consumers in the roduct mar(et" #or(ers in the laour mar(et" and orro#ers or lenders in the caital mar(et* Grifths and Wall: Economics or Business and Management 3rd edition

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Micro and Macro Economics •  Ahe

•

•

t#o maDor ranches o economics are microeconomics and macroeconomics* Microeconomics ocuses on the eha$ior o the %rms" households" and indi$iduals that ma(e u the econom'* Macroeconomics ocuses on the eha$iour o the econom' as a #hole*

Grifths and Wall: Economics or Business and Management 3rd edition

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•

•

•

Economists use models to stud' ho# the econom' #or(s and to ma(e redictions aout #hat #ill haen i something is changed*  model can e e6ressed in #ords or e5uations and is designed to mirror the essential characteristics o the articular henomena under stud'*  correlation e6ists #hen t#o $ariales tend to change together in a redictale #a'* o#e$er" the simle e6istence o a correlation does not ro$e that one actor causes the other to change

Grifths and Wall: Economics or Business and Management 3rd edition

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•

•

Positi$e economics is the stud' o ho# the econom' #or(s* ?isagreements in ositi$e economics centre on the aroriate model o the econom' or mar(et and the 5uantitati$e magnitudes characteri&ing the models* @ormati$e economics deals #ith the desirailit' o $arious actions* ?isagreements in normati$e economics centre on di9erences in the $alues laced on the $arious costs and ene%ts o di9erent actions*

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Slide 1.28

?emand •

Mar(et demand is the total amount o the roduct that consumers are #illing and ale to urchase at a articular rice o$er a gi$en eriod o time*

•

4actors inCuencing demand include:  –

Price o the roduct  – Price o other roducts  – ousehold income  –  Aastes  – d$ertising*

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Slide 1.29

Mo$ement along the demand cur$e •

Mo$ement along the demand cur$e is the result o a rise or all in the rice o the roduct itsel*

•

 Ahe terminolog' #e use to descrie this mo$ement along the demand cur$e is to sa' that there has een either an expansion or contraction in demand or the roduct*

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Slide 1.30

E6ansionFcontraction in demand Price -ence er ar.

H 0 7 0

E    6     2   a  n   s  i    o  n  

I 0 3 0

/    o  n   t    r    a  c   t    i    o  n  

2 0 1 0

?



12 2 I H 10 J uantit' demanded -million ars er #ee(.

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Slide 1.31

!hit in demand •

 Ahe demand cur$e #ill shift  to the right -increase. or let -decrease. i there is a change in the Kconditions o demand)*

•

 Ahese Kconditions o demand) include:  –

Price o other roducts

 –

ouseholdFnational income

 –  Aastes  –

o consumers

Etc*

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Slide 1.32

ncreaseFdecrease in demand

?ecreas e ncrease    L    f   o   e   c    i   r    P

P1

?2 ?1



1

2

uantit' o  demanded er time eriod

-. !hit in a demand cur$e Grifths and Wall: Economics or Business and Management 3rd edition

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Slide 1.33

ncrease in demand •

!hit u#ards and to the right

•

/hange in conditions o demand  –

,ise in rice o sustitute

 –

4all in rice o comlement

 –

,ise in real income -normal roduct.

 –

4all in real income -inerior roduct.

 –

/hange o tastes in a$our o roduct

Grifths and Wall: Economics or Business and Management 3rd edition

,ise in ad$ertising e6enditure

DEMAN D

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Slide 1.34

?ecrease in demand •

!hit do#n#ards and to let

•

/hange in conditions o the demand  –

4all in rice o sustitute

 –

,ise in rice o comlement

 –

4all in real income -normal roduct.

 –

,ise in real income -inerior roduct.

 –

/hange o tastes against roduct

Grifths and Wall: Economics or Business and Management 3rd edition

DEMAN D

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Slide 1.35

?emand 4unction

6  4 -P " P" N " A "  * * *.

uantit' demanded o roduct 

?eends uon -  4.

 N 8 real household income

P 8 o#n rice o 

 A 8 tastes o consumers

P 8 rice o other roducts

 8 ad$ertising e6enditure on 

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Slide 1.36

?eri$ation o mar(et demand -1. •

•

Mar(et demand cur$e is the total amount that consumers demand at a articular rice o$er a gi$en eriod o time*  Ahe mar(et demand cur$e is deri$ed rom summing the indi$idual demand cur$es hori&ontall'*

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Slide 1.37

?eri$ation o the demand cur$e -2.

   .    t    i   n   u   r   e   2   e   c   n   e   2      e   c    i   r    P

7 0 I 0 3 0 2 0 1 0

?

0

20 I0 uantit' demanded o roduct  -units er month.

Individual A

I 0 3 0 2 0 1 0

0

?B 17 30 I7

7 0 I 0 3 0 2 0 1 0

0

uantit' demanded o roduct  -units er month.

Individual B

Grifths and Wall: Economics or Business and Management 3rd edition

Mar(et demand

10 20 30 I0 70 H0 O0 J0 uantit' demanded o roduct  -units er month.

Market demand  Individual A ! Individual B © Pearson Education Limited 2011

Slide 1.38

!ul' •

Mar(et sul' is the total amount o the roduct that roducers are #illing and ale to ro$ide at a articular rice o$er a gi$en eriod o time*

•

4actors inCuencing sul' include:  –

Price o the roduct

 –

Price o other roducts

 –

/osts o roduction

 –

 Aastes o roducers

 –

 Aa6 on roduct

 –

!usid' on roduct*

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Slide 1.39

ncreaseFdecrease in sul' Mo$ements along and shits in a sul' cur$e    L    f   o   e   c    i   r    P

   L    f   o   e   c    i   r    P

!

!1

ncrease

!2

?ecrease

P2 E6ansion

P1

P1 /ontraction



1

2

uantit' o 

-a. Mo$ement along a sul' cur$e



1

2

uantit' o 

-. !hit in a sul' cur$e

Grifths and Wall: Economics or Business and Management 3rd edition

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Slide 1.40

Mo$ement along and a shit in the sul' cur$e •

Mo$ement along the sul' cur$e is result o a rise or all in the rice o the roduct*

•

Shift  in sul' is the result o:  –

 riseFall in the rice o a sustitute in roduction

 –

 riseFall in the rice o a comlement in roduction

 –

 riseFall in the rice o a actor o roduction

 –

/hange in technolog'

 –

ntroduction o a ta6 or susid' on the roduct

 –

/hange in roducer tastes

Grifths and Wall: Economics or Business and Management 3rd edition

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Slide 1.41

ncrease in sul' •

!hit do#n#ards and to the right

•

/hange in conditions o sul'  –

4all in rice o sustitute in roduction

 –

,ise in rice o comlement in roduction

 –

4all in costs o roduction

 –  Aa6

reduction

 –

!usid' increase

 –

/hange o tastes o roducers in a$our

 –

Etc*

Grifths and Wall: Economics or Business and Management 3rd edition

"#$$%  & 

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Slide 1.42

?ecrease in sul' •

!hit do#n#ards and to the right

•

/hange in conditions o sul'  –

4all in rice o sustitute in roduction

 –

,ise in rice o comlement in roduction

 –

4all in costs o roduction

 –  –

 Aa6 reduction !usid' increase

 – and Wall: Economics or Business and Management 3rd edition Grifths

/hange o tastes o roducers in

"#$$%  & 

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Slide 1.43

!ul' 4unction

6  4 -P " P" /" An" A "AP * * *.

6  5uantit' sul' o roduct  ?eends uon -  4.  An 8 costs o roduction P 8 rice o roduct   A 8 ta6 rates -susid' is P 8 rice o other negati$e ta6. roducts  AP 8 Aastes o roducers / 8 costs o roduction Grifths and Wall: Economics or Business and Management 3rd edition © Pearson Education Limited 2011

Slide 1.44

?eri$ation o the sul' cur$e -1. •

 Ahe mar(et sul' cur$e is deri$ed rom summing the indi$idual %rm sul' cur$es hori&ontall'*

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Slide 1.45

?eri$ation o the sul' cur$e -2.

Pence

!

I 0 3 0 2 0 1 0

0

I 0 3 0 2 0 1 0

0

20 uantit '

'irm A

!B

17 30

I 0 3 0 2 0 1 0

0 uantit '

'irm B

Grifths and Wall: Economics or Business and Management 3rd edition

! A

17

70 uantit '

Market su((l) *A!B+

© Pearson Education Limited 2011

Slide 1.46

Mar(et e5uilirium •

Equilibrium rice relates to the rice at #hich the 5uantit' demanded e5uals the 5uantit' sulied*

•

Disequilibrium reers to a situation in #hich demand does not e5ual sul'*

•

 Ahis can lead to a situation o either excess demand or excess supply *

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Slide 1.47

Price determination E5uilirium rice and 5uantit'

  e   c    i   r    P

?

!

!

?

P1



1

uantit' sulied and demanded er time eriod Grifths and Wall: Economics or Business and Management 3rd edition © Pearson Education Limited 2011

Slide 1.48

,ole o rice signals Price acts as signal to u'ersFsellers   e   c    i   r    P

?

E6cess sul'

!

P2 P1 P3 !



E6cess deman d

1

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uantit' sulied and demanded er time eriod ,estoring e5uilirium rice andand 5uantit' in a3rd ree Grifths and Wall: Economics or Business Management edition © Pearson Education Limited 2011

Slide 1.49

ncrease in demand ,ise in e5uilirium rice and 5uantit' ?) ! ? P2   e   c    i   r    P

P1 E6cess deman d

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uantit' sulied and demanded er time eriod Grifths and Wall: Economics or Business and Management 3rd edition © Pearson Education Limited 2011

1

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Slide 1.50

?ecrease in demand 4all in e5uilirium rice and 5uantit' ? ! ? P1   e   c    i   r    P

E6cess sul'

P2 ? !

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uantit' sulied and demanded er eriod

Grifths and Wall: Economics or Business and Management 3rd edition

© Pearson Education Limited 2011

Slide 1.51

ncrease in sul' 4all in e5uilirium rice" rise in 5uantit' !

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E6cess sul'

P1 P2 !

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uantit' sulied and demanded er eriod

Grifths and Wall: Economics or Business and Management 3rd edition

© Pearson Education Limited 2011

Slide 1.52

?ecrease in sul' ,ise in e5uilirium rice" all in 5uantit' !))

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!

P2   e   c    i   r    P

P1 !))

E6cess deman d

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uantit' sulied and demanded er eriod

Grifths and Wall: Economics or Business and Management 3rd edition

© Pearson Education Limited 2011

Slide 1.53

Ma6imum rice

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!

P1   e   c    i   r    P

Ma6imum rice

PQ !

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E6cess demand

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uantit' sulied and demanded er eriod

 ma6imum rice PQ set elo# the e5uilirium rice Grifths and Wall: Economics or Business and Management 3rd edition © Pearson Education Limited 2011 P

Slide 1.54

Minimum rice

E6cess sul'

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PQ

Minimum rice

P1   e   c    i   r    P

!

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uantit' sulied and demanded er eriod

 minimum rice PQ set ao$e the e5uilirium rice Grifths P1 and Wall: Economics or Business and Management 3rd edition © Pearson Education Limited 2011

Slide 1.55

Economic s'stems •

Market economy: resources allocated through the rice mechanism" #ith mar(et rices eing determined ' the orces o demand and sul'*

•

Planned economy: the go$ernment ma(es the decisions aout #hat is roduced" ho# resources are allocated and ho# the %nished roducts are distriuted*

•

Mixed economy: contains eatures o oth the mar(et and lanned economic s'stems" #ith the go$ernment inter$ening in $arious #a's to inCuence mar(et rices and resource allocation*

Grifths and Wall: Economics or Business and Management 3rd edition

© Pearson Education Limited 2011