In this chapter: See how economists apply the methods of science, consider how assumptions and models can shed light on the world, learn two simple models - the circular flow and the production possibilities frontier, distinguish between microeconomics and macroeconomics,...
Lecture Part I: Introduction to Business economics Part II: Market forces of supply and demand Instructor: Prof.Dr.Qaisar Abbas Course code: ECO 400 Lecture Part I: Introduction to Business economics Instructor: Prof.Dr.Qaisar Abbas Course code: ECO 400 Thinking Like an Economist Economics trains you to • • Think in terms of alternatives Evaluate the cost of individual and social choices • Examine and understand how certain events and issues are related The economic way of thinking • • Involves thinking analytically and objectively Makes use of the scientific method The Scientific Method: Observation, Theory, and More Observation •Uses abstract models to help explain how a complex, real world operates •Develops theories, collects, and analyzes data to evaluate the theories The Role of Assumptions •Economists make assumptions in order to make the world easier to understand •The art in scientific thinking is deciding which assumptions to make • Economists use different assumptions to answer different questions Thinking Like an Economist Economic Models •Economists use models to simplify reality in order to improve our understanding of the world • Two of the most basic economic models include: • The Circular Flow Diagram • The Production Possibilities Frontier Our First Model: The Circular-Flow Diagram The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms Thinking Like an Economist Thinking Like an Economist Firms • • Produce and sell goods and services Hire and use factors of production Households • • Buy and consume goods and services Own and sell factors of production Markets for Goods and Services • • Firms sell Households buy Markets for Factors of Production • • Households sell Firms buy Factors of Production • • Inputs used to produce goods and services Land, labor, and capital Thinking Like an Economist Our Second Model: The Production Possibilities Frontier •The production possibilities frontier is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology Thinking Like an Economist The Economist As Policy Advisor •When economists are trying to explain the world, they are scientists •When economists are trying to change the world, they are policy advisor Positive Versus Normative Analysis •Positive statements are statements that attempt to describe the world as it is • Called descriptive analysis •Normative statements are statements about how the world should be •Called prescriptive analysis •Positive or Normative Statements? • An increase in the minimum wage will cause a decrease in employment among the least-skilled POSITIVE • Higher federal budget deficits will cause interest rates to increase POSITIVE Thinking Like an Economist Positive or Normative Statements? • The income gains from a higher minimum wage are worth more than any slight reductions in employment NORMATIVE • State governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor NORMATIVE Why Economists Disagree? •They may disagree about the validity of alternative positive theories about how the world works •They may have different values and, therefore, different normative views about what policy should try to accomplish Lecture Part II- Market forces of supply and demand Instructor: Prof.Dr.Qaisar Abbas Course code: ECO 400 Lecture Outline Markets and competition Demand curve Market demand vs individual demand Shifts in demand curve Introduction •Supply and demand are the two words that economists use most often •Supply and demand are the forces that make market economies work •Modern microeconomics is about supply, demand, and market equilibrium Markets and competition • A market is a group of buyers and sellers of a particular good or service •The terms supply and demand refer to the behavior of people as they interact with one another in markets •Buyers determine demand •Sellers determine supply Competitive Markets •A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price Introduction Competition: Perfect and Otherwise Perfect Competition • • • Products are the same Numerous buyers and sellers so that each has no influence over price Buyers and Sellers are price takers Monopoly • One seller, and seller controls price Oligopoly • • Few sellers Not always aggressive competition Monopolistic Competition • • • Many sellers Slightly differentiated products Each seller may set price for its own product Demand •Quantity demanded is the amount of a good that buyers are willing and able to purchase Law of Demand • The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises The Demand Curve: The Relationship between Price and Quantity Demanded •Demand Schedule The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded E.g Ahmad’s demand schedule is following Demand Demand Curve • The demand curve is a graph of the relationship between the price of a good and the quantity demanded E.g Ahmad’s demand curve is following Demand Market Demand versus Individual Demand •Market demand refers to the sum of all individual demands for a particular good or service •Graphically, individual demand curves are summed horizontally to obtain the market demand curve Shifts in the Demand Curve •Change in Quantity Demanded • Movement along the demand curve • Caused by a change in the price of the product Changes in Quantity Demanded Shifts in the Demand Curve Variables That Influence Buyers • • • • • Consumer income Prices of related goods Tastes Expectations Number of buyers Change in Demand • • A shift in the demand curve, either to the left or right Caused by any change that alters the quantity demanded at every price Shifts in the Demand Curve Consumer Income • • As income increases the demand for a normal good will increase As income increases the demand for an inferior good will decrease Consumer Income (Normal Good) Consumer Income (Inferior Good) Shifts in the Demand Curve Prices of Related Goods • • When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes When a fall in the price of one good increases the demand for another good, the two goods are called complements Variables That Influence Buyers .. .Lecture Part I: Introduction to Business economics Instructor: Prof.Dr.Qaisar Abbas Course code: ECO 400 Thinking Like an Economist Economics trains you to • • Think in... views about what policy should try to accomplish Lecture Part II- Market forces of supply and demand Instructor: Prof.Dr.Qaisar Abbas Course code: ECO 400 Lecture Outline Markets and competition... in order to make the world easier to understand •The art in scientific thinking is deciding which assumptions to make • Economists use different assumptions to answer different questions Thinking