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1、Chapter 1Economics and the Economy,David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000Power Point presentation by Peter Smith,1.1,What is Economics?,ECONOMICS .is the study of how society decides:WhatFor whomHowto produce.,1.2,The price of oil,Tripled in 1973
2、-74, and doubled again in 1979-80 and affected people all over the world.,1.3,An increase in the price of oil affects,What to produceless oil-intensive productsHow to produceless oil-intensive techniquesFor whom to produceoil producers have more buying power, importers have less,1.4,The distribution
3、 of world population and GNP, 1998,1.5,Scarcity forces choices to be made,Opportunity cost a crucial concept in economic analysisthe quantity of other goods that must be sacrificed to obtain another unit of a good,1.6,The production possibility frontier,For each level of the output of one good,the p
4、roduction possibility frontier showsthe maximum amount of the other good that can be produced.,Film output,Food output,Production possibility frontier,1.7,The operation of markets,Marketa shorthand expression for the process by which households decisions about consumption of alternative goodsfirms d
5、ecisions about what and how to produceand workers decisions about how much and for whom to workare all reconciled by adjustment of prices,1.8,Resource allocation,Resource allocation is crucial for a societyand is handled in different ways in different societies, e.g.:Command economyMixed economyFree
6、 market,1.9,Market orientation,Cuba,China,Hungary,Sweden,UK,USA,Hong Kong,Commandeconomy,Freemarketeconomy,1.10,Normative and Positive Economics,Positive economics deals with objective explanatione.g. if a tax is imposed on a good its price will tend to riseNormative economics offers prescriptions b
7、ased on value judgementse.g. a tax SHOULD be imposed on tobacco to discourage smoking,1.11,Micro and Macro,Microeconomicsoffers a detailed treatment of individual economic decisions about particular commoditiesMacroeconomicsemphasizes the interactions in the economy as a whole,Chapter 2The tools of
8、economic analysis,David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000Power Point presentation by Peter Smith,1.13,Models and data,Modela framework based on simplifying assumptionshelps to organize our economic thinkingDatathe economists link with the real wor
9、ldtime seriescross section,1.14,Real and nominal,Many economic variables are measured in money termsNominal valuesmeasured in current pricesReal valuesadjusted for price changes compared with a base yearmeasured in constant prices,1.15,Diagrams, help to analyze patterns and trends in data,1.16,Econo
10、mic models: an example,To organize our thinking we need a simplified picture of realityfocusing on key elementsQuantity of tube journeys demanded = f(Prices, income, preferences),1.17,Relationships,Diagrams help economists to explore relationshipsbetween economic variables,1.18,Evidence in economics
11、,Scatter diagrams help us to confront economic theory with empirical realityEconometrics takes this further using statistical techniquesEvidence may allow us to reject a theoryor accumulate support for it,Chapter 3Demand, supply, and the market,David Begg, Stanley Fischer and Rudiger Dornbusch, Econ
12、omics, 6th Edition, McGraw-Hill, 2000Power Point presentation by Peter Smith,1.20,Some key terms,Marketa set of arrangements by which buyers and sellers are in contact to exchange goods or servicesDemandthe quantity of a good buyers wish to purchase at each conceivable priceSupplythe quantity of a g
13、ood sellers wish to sell at each conceivable priceEquilibrium priceprice at which quantity supplied = quantity demanded,3.21,The Demand curve shows the relation between price and quantity demanded holding other things constant,“Other things” include:the price of related goodsconsumer incomesconsumer
14、 preferencesChanges in these other things affect the position of the demand curve,D,Quantity,Price,3.22,The Supply curve shows the relation between price and quantity supplied holding other things constant,“Other things” include:technologyinput costsgovernment regulationsChanges in these other thing
15、s affect the position of the demand curve,Quantity,Price,S,3.23,Market equilibrium,Market equilibrium is at E0 where quantity demanded equals quantity suppliedwith price P0 and quantity Q0,D0,D0,S,S,Q0,P0,E0,Price,Quantity,3.24,Market equilibrium,If price were above P0 there would be excess supplypr
16、oducers wish to supply more than consumers wish to demand,D0,D0,S,S,Q0,P0,E0,Price,Quantity,1.25,A shift in demand,D0,D0,S,S,Q0,P0,E0,Price,Quantity,If the price of a substitute good increases .,more will be demanded ateach price,1.26,A shift in supply,D,D,Q0,P0,E0,Price,Quantity,Suppose safety regu
17、lations are tightened, increasing producers costs,S0,S0,If price stayed at P0 there would be excess demand,3.27,Two ways in which demand may increase,(1) A movement along the demand curve from A to Brepresents consumer reaction to a price changethis could follow a supply shift,A,B,P0,P1,Q0,Q1,Quanti
18、ty,Price,D,3.28,Two ways in which demand may increase,(2) A movement of the demand curve from D0 to D1leads to an increase in demand at each pricee.g. at P0 quantity demanded increases from Q0 to Q1,A,B,P0,Q0,Q1,C,D0,D1,Quantity,Price,3.29,A market in disequilibrium,Suppose a disastrous harvest move
19、s the supply curve to SSgovernment may try to protect the poor, setting a price ceiling at P1which is below P0, the equilibrium price levelRATIONING is needed to cope with the resulting excess demand,Quantity,Price,P0,Q0,Q1,D,S,S,P1,E,A,B,P2,1.30,What, How and For Whom,The market:decides how much of
20、 a good should be producedby finding the price at which the quantity demanded equals the quantity suppliedtells us for whom the goods are producedthose consumers willing to pay the equilibrium pricedetermines what goods are being producedthere may be goods for which no consumer is prepared to pay a
21、price at which firms would be willing to supply,Chapter 4Government in the mixed economy,David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000Power Point presentation by Peter Smith,1.32,What do governments do?,create laws, rules and regulationsbuy and sell goo
22、ds and servicesmake transfer paymentsimpose taxestry to stabilize the economyaffect the allocation of resources,1.33,Government spending,1.34,What should governments do?,Governments may be justified in intervening in the economy in the presence of market failureSix ways in which intervention may imp
23、rove the allocation of resources:,1.35,What should governments do?,(1) The business cycledecisions on taxation and spending may affect the business cyclenot always favourably(2)Public goodsgoods that, even if consumed by one person, are still available for consumption by others e.g. clean airthe fre
24、e-rider problem prevents the market from achieving production of the “right” amount of such goods.,1.36,What should governments do?,(3)Externalitiescosts and benefits of production are not always reflected in market pricese.g. pollution, congestion.(4)Information-related problemsprivate markets may
25、not produce the “right” kinds and amounts of informatione.g. food labelling, health and safety regulations.,1.37,What should governments do?,(5)Monopoly and market powerresource allocation may be improved by limiting or regulating the market power of monopoly firms(6)Income redistribution and merit
26、goodsconcern with equity issuese.g. protecting vulnerable groupsmerit goods are goods that society thinks people should consume regardless of incomee.g. health, education,1.38,Who pays a commodity tax?,D,S,S,Q0,P0,Quantity,Price,With no tax, market equilibrium is at P0, Q0,but who pays the tax?,3.39
27、,Who pays a commodity tax?,D,S,S,S,Q1,Q0,P0,P1,S,The incidence of thetax depends upon theelasticities of demandand supply.,Chapter 5The effect of price and incomeon demand quantities,David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000Power Point presentation
28、by Peter Smith,1.41,The price elasticity of demand,measures the sensitivity of the quantitydemanded of a good to a change in its price,1.42,Elastic demand,ELASTIC demandwhen the price elasticity is more negative than -1i.e. when the % change in quantity demanded exceeds the change in pricee.g. if qu
29、antity demanded falls by 7% in response to a 5% increase in priceelasticity is -7 5 = -1.4,1.43,Inelastic demand,INELASTIC demandwhen the price elasticity lies between -1 and 0i.e. when the % change in quantity demanded is smaller than the change in pricee.g. if quantity demanded falls by 3.5% in re
30、sponse to a 5% increase in priceelasticity is - 3.5 5 = - 0.7,1.44,Unit elastic demand,UNIT ELASTIC demandwhen the price elasticity is exactly -1i.e. when the % change in quantity demanded is equal to the change in pricee.g. if quantity demanded falls by 5% in response to a 5% increase in priceelast
31、icity is - 5 5 = - 1,1.45,Price elasticity for a linear demand curve,The price elasticity varies along the length of a straight-line demand curve.,1.46,What determines the price elasticity?,The ease with which consumers can substitute another good.EXAMPLE:consumers can readily substitute one brand o
32、f detergent for another if the price risesso we expect demand to be elasticbut if all detergent prices rise, the consumer cannot switchso we expect demand to be inelastic,1.47,Elasticity is higher in the long run,In the short run, consumers may not be able (or ready) to adjust their pattern of expen
33、diture.If price changes persist, consumers are more likely to adjust.Demand thus tends to bemore elastic in the long runbut relatively inelastic in the short run.,1.48,Elasticity and revenue,When price is changed, the impact on a firms total revenue (TR) will depend upon the price elasticity of dema
34、nd.,1.49,Elasticity and tube fares,Passengers can use buses, taxis, cars etcso demand may be elastic (e.g. - 1.4)and an increase in fares will reduce the number of journeys demanded and total spendingIf passengers do not have travel optionsdemand may be inelastic (e.g. - 0.7)so raising fares will ha
35、ve less effect on journeys demandedand revenue will improve,How should tube fares be changed to increase revenues?,1.50,The cross price elasticity of demand,This may be positive or negative,The cross price elasticity tends to be negative if two goods are substitutes: e.g. tea and coffee,The cross pr
36、ice elasticity tends to be positiveif two goods are complements e.g. tea and milk.,1.51,Price elasticities in the UK,with respect to a 1%price change in:,Food,Clothing,Transport,Percentage change inthe quantity demanded of,Food,Clothing and footwear,Travel and communications,0,0.1,0.1,0.3,0.1,0.1,1.
37、52,The income elasticity of demand,The income elasticity may be positive or negative.,1.53,Normal and inferior goods,A NORMAL GOOD has a positive income elasticity of demandan increase in income leads to an increase in the quantity demandede.g. dairy produceAn INFERIOR GOOD has a negative income ela
38、sticity of demandan increase in income leads to a fall in quantity demandede.g. coalA LUXURY GOOD has an income elasticity of demand greater than 1e.g. wine,1.54,Income and the demand curve,Chapter 6The theory of consumer choice,David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Editi
39、on, McGraw-Hill, 2000Power Point presentation by Peter Smith,1.56,Four key elements in consumer choice,Consumers incomePrices of goodsConsumer preferencesThe assumption that consumers maximize utility,6.57,The budget line,Income and prices together determine the combinations of the goods that the co
40、nsumer can afford.The budget line separates the affordable from the unaffordable.,Consider a student with abudget of 50 to spend on meals and films.,3.58,Modelling consumer preferences,Assume the consumer prefers more to less.Compared with point “a”:the consumer would prefer to be to the north-east
41、e.g. at “c”but prefers “a” to such points as “b” to the south-west.,3.59,Modelling consumer preferences (2),“a” is preferred to all points in the dominated regionbut the consumer would prefer any point in the preferred region to “a”points like “d” and “e” involve more of one good and less of the oth
42、er compared with “a”.,3.60,An indifference curve like U2U2 shows all the consumption bundles that yield the same utility to the consumerICs slope downwards (given our assumptions)their slope gets steadily flatter to the rightICs cannot intersect,Modelling consumer preferences (3),3.61,The consumers
43、choice,The choice point is at Cwhere the budget line is at a tangent to an ICPoints B and E are also affordablebut give lower utility,being on a lower IC.,The point at which utility is maximized is found by bringing together the ICs and the budget line,1.62,Adjustment to an income change,A change in
44、 the consumers income shifts the budget linewithout changing the slopethe change in the pattern of consumer choice depends on the nature of the two goods,1.63,Normal goods,When both goods areNORMAL, an increasein income induces a newchoice point at C:,The quantity demanded of each good increases,1.6
45、4,An inferior good and a normal good,When “meals” is an inferior goodthe increase in income takes theconsumer from C to C.,The quantity of meals falls,and the quantity of films increases,1.65,Adjustment to a price change,An increase in the price of one good shifts the budget linealtering its slopewh
46、ich reflects relative prices.,1.66,An increase in the price of meals (1),The increase in price of meals shifts the budget line from BL0 to BL1,The increase in price reduces purchasing power.,1.67,An increase in the price of meals (2),The consumer moves from the original choice point C,to a new posit
47、ion at E.,Tracing out more of such points at different pricesenables us to identify the Demand curve.,1.68,Response to a price change,The response to a price change comprises two effects:The SUBSTITUTION EFFECTis the adjustment to the change in relative pricesTHE INCOME EFFECTis the adjustment to th
48、e change in real income.,3.69,The income and substitution effects,The consumer moves from C to EThe hypothetical budget line HH has the slope of the NEW relative prices and is tangent to the OLD indifference curve,3.70,The substitution effect,The SUBSTITUTION EFFECT is from C to D along U2U2.It is a
49、lways negativea price increase leads to a fall in demand,3.71,The income effect,The INCOME EFFECT is from D to Eit reflects the fall in real income at constant relative pricesit may be positive or negativedepending on whether the good is normal or inferior,Chapter 7Business organization and behaviou
50、r,David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000Power Point presentation by Peter Smith,1.73,The theory of supply,Costs ofproduction,Revenues,Firms decisions about how much output to supplydepend upon the costs of production and the revenue they receive
