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1. INTRO: ECONOMICS:Comes from the Greek Word oikonomos that means one who manage a household. In fact, is the study of the society resources as they are scarce in order to allocate them among its members taking into account each member abilities, effort and desires. PRINCIPLES:1. People face trade-offs: To get one thing we have to give up another one. TV or study. 2. The cost of something is what we give up to get it: we have to compare costs. 3. Rational people think at the margin: a decision maker takes an action only if the marginal benefit > marginal cost. 4. People respond to incentives: when good X price rise, people might consume good Y 5. Trade can make everyone better off: Trade allows countries to specialise in what they do best. 6. Markets good way to organise Economic Activity: Invisible Hand 7. Governments can improve Market Outcomes: can intervene to make sure the economy is going into the desired direction 8. An Economy’s standard of living depends on its Ability to produce goods and services 9. Price rises when the Governments print too much €: Inflation increase the overall price level in the company 10. Society faces a short-run trade-off between inflation and unemployment.
2. MICROECONOMIC THINKING: CIRCULAR FLOW DIAGRAM:Simplified in Households and Firms which interact in two types of markets. The one for goods and services (households buyers) and the ones for factors of production (firms buyers). PPF: shows various combinations of output which an economy can produce given the available factors of production. Shows the trade-off that society faces. To get more pizza, we have to give up some sugar. OPPORTUNITY COST AND COMP.ADVANTAGE: The producer who gives up less of other goods to produce good X has the smaller opportunity cost of producing good X, so it has the comparative adv. producing the good. Differences in opp.cost and comp.adv. create gains! 3. SUPPLY AND DEMAND: MARKET: Group of buyers and sellers of a particular good and services. Buyers determine demand and sellers supply. COMPETITIVE MARKET:market where buyers and sellers have an impact on the market price. RELATIONSHIPS: P and Q demanded: Q. demanded is negatively related to the price. P and Q supplied: Q supplied is positively related to the price. SHIFTS IN DEMAND CURVE: Income: Demand ↓Income↓ and Demand ↑Income↓. Prices of related goods: Substitutes or Complements. Tastes and Fashions. Expectations. Size of Population. SHIFTS IN DEMAND CURVE: Input prices: ↑Input prices ↓ Produced goods. Number of sellers. Technology. Expectations. Natural/Social factors. 4. ELASTICITY: PRICE ELASTICITY OF DEMAND: how much the q. demanded respond to changes in price. Elastic? Q demanded responds substantially in a change in price – Luxuries. Inelastic? Q demanded responds only slightly – Necessities. PRICE ELASTICITY OF SUPPLY:how much the q. supplied respond to changes in price. Elastic? Q supplied responds substantially to changes in price. Inelastic? Q supplied responds only slightly. TOTAL REVENUE:If demand is inelastic then an increase in price causes an increase in total revenue. Increase in price 1 to 3€ causes the q demanded to fall only from 100 to 80 and the total revenue rises from 100 to 240€. An increase in price raises PxQ because the fall in Q is proportionately smaller than rise in P.
If demand is elastic an increase in the price causes a decrease in the total revenue. When a price rises from 4 to 5€, the Q demanded falls from 50 to 20€. The total revenue falls from 200 to 100€. Increase of the price reduces PxQ because the fall in Q is proportionately greater than the rise in P.
OPEC EXAMPLE: in the short run both supply and demand for oil are relatively inelastic. Supply is inelastic because the Q of known oil reserves and the capacity for oil extraction cannot be changed quickly. Demand is inelastic because buying habits don’t respond immediately to changes in price. In the long run, producers of oil outside the OPEC respond to high prices by increasing oil exploration and by building new extraction capacity. Consumers respond with greater conservation. The long run supply and demand curves are more elastic. In the long run, the shift in the supply curve from S1 to S2 causes a much smaller increase in price. OPEC’s coordinated reduction in supply proved less profitable in the long run.
5. SUPPLY, DEMAND, GOV. POLICIES: PRICE CEILING:A legal maximum on the price at which a good can be sold. *Not Binding: gov. imposes a price ceiling on 4€ per cornet. In this case the market price is 3 so the ceiling has no effect on price and Q sold. *Binding: gov. imposes a price ceiling on 2€ per cornet. Equilibrium price is above the price ceiling. Binding constraint on the market. Prices moves towards the equilibrium price but once it hits the ceiling, it cannot rise further.
RENT CONTROL: *Short run: inelastic, nº of people searching for housing in a city may not be highly responsive to rents in the short run. *Long run: Supply side – landlords respond to low rents by not building new housing and by failing to maintain existing housing. Demand side – low rents encourage people to find their own housing and induce more people to move into the city. Is more elastic. Result? Large shortage of housing.
PRICE FLOOR:A legal minimum on the price at which a good can be sold. *Not Binding: gov. imposes a price floor of 2€ per cornet when the equilibrium price is 3€. It has no effect. *Binding: Gov. imposes a price floor of 4€ per cornet. The equilibrium price is only 3€. The price floor is a binding constraint on the market. S and D move the price towards the equilibrium price but when it hits the floor, it cannot fall further.
LABOUR MARKETS: If the gov. doesn’t intervene, the wage adjust to balance labor supply and labor demand. The minimum wage is above the equilibrium level, the Q of labor supplied exceeds the Q demanded. The result is unemployment. Min. wage raises the incomes to the ones that have a job, but it lowers the incomes of those who cannot find jobs. Rent and wage subsidies cost the gov. money, and hence requires higher taxes.
7. COSTS OF TAXATION: LOSSES FROM TAX – LARGE/SMALL: The price elasticities of supply and demand determines whether they are large or small. Deadweight loss is larger when the supply curve is more elastic. A tax has a deadweight loss because it introduces buyers and sellers to change their behaviour, so they consume less. At the same time, the tax lowers the price received by sellers, so they can produce less. Size of the market shrinks below its optimum. The greater the elasticities of supply and demand, the greater the deadweight loss of a tax. LAFFER CURVE: Its intuition consists on reducing tax rates to actually raise tax revenue again. Incorrect, because of the size of the relevant elasticities. The more elastic, the more taxes.
9. EXTERNALITIES: arises when a person engages in an activity that influences the well-being of a bystander (a third party) who neither pays nor receives any compensation for that effect. If the impact of the third party is adverse, it is called a negative externality. If it is beneficial, positive.