Understanding Key Economic Concepts and Principles

Posted on Feb 9, 2025 in Economy

Displacement Curve Situations of Supply: Graph

Several factors can shift the supply curve:

  • Price of Production Factors: If the price of production factors, such as fertilizer, decreases, farmers are willing to produce more grain at the same price.
  • Existing Technology: Technological improvements reduce production costs, increasing supply.
  • Number of Suppliers: An increase in the number of firms increases the overall supply.
  • Prices of Related Goods:
    • Substitute Goods
    • Complementary Goods
  • Expectations: Market expectations can influence current supply.

Fiscal Policy: Instruments and Effect on National Income

Fiscal policy involves the use of public spending or taxes to adjust aggregate demand and influence national output.

Variations:

  • Public Investment in Expenditure – Effect on Income:

    ΔR (Income) = 1 / (1 – MPC (Marginal Propensity to Consume)) * ΔInvestment

  • Transfers – Effect:

    ΔR = 1 / (1 – MPC) * (ΔTransfers * PMC)

  • Tax Level – Effect:

    ΔR = -1 / (1 – MPC) * (ΔTaxes * PMC)

Note: These do not have the same effect, as shown in the formulas.

Effects of Inflation

Effects on Income Distribution

  • Loss of purchasing power for some groups, especially those with fixed incomes and creditors.
  • Benefits for others, such as debtors and the state.
  • Reduction in the real value of savings.

Effects on Economic Activity

  • Prices of some goods and services may not adjust to demand pressures, but rather to competitive situations. Inflation can be used as an excuse by employers to maximize their inefficiency.
  • Change in the structure of relative prices.
  • The effects on economic activity (and production/occupation) are evident in an international context. Inflation can negatively impact exports.

Uncertainty

  • Difficulty in controlling and calculating investment leads to a decline in investment, especially in the long term.
  • Impacts savers and consumers.

Production Possibilities Frontier (PPF) Curve Displacement

Economic combinations previously considered impossible can be achieved through organic growth. This may be due to:

  1. Technological Improvements
  2. Increase in the Volume of Capital
  3. Increase in the Workforce
  4. Discovery of New Natural Resources

An improvement in the production of a good implies a shift in the direction of the frontier, marked by the axis representing that good.

Factors Shifting the Demand Curve

  • Consumer Income:
    • Normal Goods: Increased income increases consumption at any price (e.g., fruit).
    • Inferior Goods: Increased income decreases consumption at any price (e.g., frozen food).
  • Price of Related Goods:
    • Substitute Goods: An increase in the price of good A increases the quantity demanded of good B (e.g., oil and coal).
    • Complementary Goods: An increase in the price of good A decreases the quantity demanded of good B (e.g., oil and cars).
  • Consumer Preferences: Advertising can significantly influence preferences.
  • Number of Consumers: A larger consumer base increases demand.

Price Elasticity Concept and its Relationship to Income

Price elasticity of demand measures the degree to which the quantity demanded responds to changes in market price.

Relationship between Income and Elasticity:

  • Elastic: When the price rises, total revenue drops, and vice versa.
  • Inelastic: When the price rises, total income also rises, and vice versa.

Concept of Comparative Advantage in International Trade

Production Conditions per Country:

  • Country A (1 hour): 1 Unit of Food / 2 hours: 1 Unit of Manufactured Goods
  • Country B (3 hours): 1 Unit of Food / 3 hours: 1 Unit of Manufactured Goods

It might seem that Country B would never be interested in trading with Country A. However, this is not the case when considering relative costs:

  • The cost of food compared to manufactured goods in Country A is 1/2.
  • The cost of manufactured goods compared to food in Country B is 1.

Manufactured goods are cheaper in Country A than in Country B because of the real exchange rate.

Opportunity Cost: Scarcity and the PPF

Opportunity cost is the value of the next best alternative forgone. To produce additional quantities of one good, the production of another must be reduced.

Scarcity

  • Needs are unlimited.
  • Productive resources are limited.
  • This forces choices to be made.

Production Possibilities Frontier (PPF)

With available resources, only a certain number of goods and services can be obtained.

  • The graphical representation of this set of goods and services is called the PPF. The PPF shows that there are many alternatives to choose from.