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What Is Economics?
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AB 106
Instructor:
Microeconomics -- Associate Prof Rosalind Chew
Macroeconomics -- Prof Chew Soon Beng
Two quizzes: one in Week 7 and one in Week 12
Format: 10 multiple choice questions
Duration: 30 minutes
Venue: Your Tutorial Classroom
u or a par c pa on:
Each quiz: 10%
http://wps.aw.com/aw_parkin_economics_8/0,13296,4324270-,00.html
Available FREE to students with the text.
For each chapter, students can access:
(1) Answers to odd-numbered problems in the text(2) Quick multiple-choice quizzes2
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Understanding Our Changing World
You are studying economics at a time of enormous.
Much of the change is for the betterthe information age,lobalization and all the benefits that the brin .
But they also bring challenges: inflation, unemployment,
etc.
Did you know that there was a financial meltdown in theUSA in October 2008? And the labour market felt the
impact throughout 2009. Today it has recovered from theimpact.
our econom cs course w e p you o un ers an e
powerful forces that are shaping and changing our world. 3
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Definition of Economics
All economic questions arise because we want more than.
Our inability to satisfy all our wants is called scarcity.
Because we face scarcity, we must make choices.
Choices mean making a tradeoffThinking about a choice as a tradeoff emphasizes cost asan opportunity forgone.
ence, e c o ces we ma e epen on e ncen ves weface.
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penalty that discourages an action.
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Definition of Economics
Economics is the social science that studies the choicesthat individuals, businesses, overnments, and entire
societies make as they cope with scarcity and theincentives that influence and reconcile those choices.
But scarcity of what? Scarcity of resources and time!
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Definition of Economics
Microeconomics
and businesses make, the way those choices interact inmarkets, and the influence of governments.
Macroeconomics
Macroeconomics is the study of the performance of thenational and global economies.
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Economics: A Social Science
Economics is a social science.
What ispositive statements
a oug o enorma ve s a emen s
A positive statement can be tested by checking it against.
A normative statement cannot be tested.
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Economics: A Social Science
The task of economic science is first to discover positivestatements that are consistent with what we observe in the
world and that enable us to understand how the economicworld works and then seek to improve the outcome.
The first part is Positive Economics and the second partis Normative Economics
os t ve conom cs s arge an rea s nto t ree steps:
Observation and measurement
o e u ng Testing models
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Economics: A Social Science
Obstacles and Pitfalls in Economics
economic behavior has many simultaneous causes.
To isolate the factor of interest economists use thelogical device called Ceteris Paribus or other things
being equal.Economists try to isolate cause-and-effect relationshipby changing only one variable at a time, holding all other
.
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Economics: A Social Science
Obstacles and Pitfalls in Economics
Fallacy of CompositionA false statement that what istrue for the arts is true for the whole or that what is truefor the whole is true for the parts.
Post Hoc Fallacy From the Latin term Post hoc, ergopropter hoc, which means after this, therefore becauseof this. The error of reasoning that a first event causes
second.
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Conclusions of Chapter 1
Society is very competitive for individuals, firms andalso for overnments
Economics will help every economic agent to makeinformed decisions
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The Economic Problem
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Production Possibilit ies and Opportunity
Cost
The production possibilities frontier(PPF) is theboundary between those combinations of goods andservices that can be produced and those that cannot.
To illustrate the PPF, we focus on two goods at a timean o e quan es o a o er goo s an serv cesconstant.
,remains the same (ceteris paribus) except the two goodswere considering.
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Production Possibilit ies and Opportunity
Cost
Production Possibili ties
The figure shows the PPFfor two goods: CDs andpizza.
Any point on the frontierefficiency) and any pointinside the PPF such as Z
.Points outside the PPFare unattainable.
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All the oints alon the PPF are efficient.
To determine which of the alternative efficient quantitiesto produce, we compare costs and benefits.
The PPF and Marginal Cost
The PPF determines opportunity cost.
The marginal cost of a good or service is the opportunitycost of producing one more unit of it.
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Using Resources Efficiently
As we move along thePPF from A to F, theopportunity cost of
.
The opportunity
cost of producingone more pizza is
the marginal cost of
.
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Using Resources Efficiently
Hi her MC
The black dots andthe line labeled MCshow the marginalcost of pizza.
e curvepasses through thecenter of each bar.
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Using Resources Efficiently
Why do we produce pizza?
Preferences and Marginal Benefit
Preferences are a description of a persons likes and.
To describe preferences, economists use the concepts of.
The marginal benefit of a good or service is the benefitreceived from consumin one more unit of it.
We measure marginal benefit by the amount that aperson is willing to pay for an additional unit of a good orservice.
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Using Resources Efficiently
It is a eneral rinci le that the more we have of an
good, the smaller is its marginal benefit and the less weare willing to pay for an additional unit of it.
We call this general principle the principle of decreasingmarginal benefit.
The marginal benefit curve shows the relationshipbetween the marginal benefit of a good and the quantity ofthat ood consumed.
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Using Resources Efficiently
At oint B with izza
production at 1.5million, people are
a pizza.
,production at 4.5million, people are
w ng o pay ora pizza.
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Using Resources Efficiently
Efficient Use of Resources
When we cannot produce more of any one good withoutgiving up some other good, we have achieved productive
.
All points on the PPF are production efficient.
u on y one po n s a oca on e c en : we ac eveallocative efficiency at this point.
.
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Using Resources Efficiently
If we produce exactly2.5 million pizzas,marginal cost equalsmar inal benefit.
We cannot get more
value from our.
On the PPF at pointB we are roducin
the efficient quantitiesof CDs and pizzas.
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Determination of Allocative Efficienc
Marginal Cost and Marginal Benefit (cds per pizza)
MC$
A C
B
MB
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Pizza2.5
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Economic Growth
The ex ansion of roduction ossibilitiesand increase
in the standard of livingis called economic growth.Two key factors influence economic growth:
Technological change
Capital accumulationTechnological change is the development of new goodsand of better ways of producing goods and services.
Capital accumulation is the growth of capital resources,which includes human capital.
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Economic Growth
The Cost of Economic Growth
o use resources n researc an eve opment anto produce new capital, we must decrease our
roduction of consum tion oods and services.
So economic growth is not free.
The o ortunit cost of economic rowth is lesscurrent consumption.
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Economic Growth
The figure illustrates.
We can produceizzas or izza ovens
along PPF0.
By using someresources o pro ucepizza ovens today,the PPF shifts
ou war n e u ure.What happens toPPF1 if A wasc osen
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Conclusions of Chapter 2
Concept of PPF
Productive efficiency and allocative efficiency
Will PPF shift?
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From Chapter 1: Two Big Economic
Questions
Two big questions summarize the scope of economics:
(1) How much to produce? How to produce and forwhom to produce?
Examples: (a) investment goods or consumption goods;
(b) Weapons or food; rice or healthcare (2) When do choices made in the pursuit of self-interest
also promote the social interest?
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How much to produce?
Production Possibilities
Frontier We can choose anypo n on e
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How to produce?
resources that economists call factors of production.Factors of roduction are rou ed into four cate ories:
Land
Labor
Capital
Entrepreneurship
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How to produce?
The gifts of nature that we use to produce goods andservices are land.
The work time and work effort that people devote toproducing goods and services is labor.
The quality of labor depends on human capital,which is the knowledge and skill that people obtain
from education on-the- ob trainin and workexperience.
The tools, instruments, machines, buildings, and other
are capital.
The human resource that or anizes land labor andcapital is entrepreneurship.
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How to produce?
The figure shows ameasure o e grow o
human capital in theUnited States over the lastcenturythe percentageof the population that has
of education.
Economics ex lains thesetrends.
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Employed Residents by Education and Gender,
Singapore: 1996, 2006
Education/Year 1996
Total
2006
Total
1996
Male
2006
Male
Primary and
Below
373.6
24.7
295.7
15.7
243.4
65.1
178.0
60.2
Lower Secondary212.7
(14.1)
236.7
(12.6)
150.5
(70.8)
153.5
(64.9)
Secondary 458.6 456.1 247.2 242.8. . . .
Upper Secondary175.1
(11.6)
236.6
(12.6)
95.6
(54.6)
127.4
(53.8)
Polytechnic 117.5 215.0 77.3 128.1
uca on . . . .
Degree 173.9
(11.4)
440.6
(23.4)
102.7
(59.1)
251.3
(57.0)
1,511.5 1,880.8 916.6 1,081.2
(100%) (100%) (60.6) (57.5)
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For whom we produce?
For Whom?
Who gets the goods and services depends on theincomes that people earn.
an earns rent.
Labor earns wages. (Raw labour earns
high salary.)
Ca ital earns interest.
Entrepreneurship earns profit.
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Self-Interest vs Social Interest
-
that you think are best for you.
be in the social interest.
Is it ossible that when each one of us makes choicesthat are in our self-interest, it also turns out that thesechoices are also in the social interest?
For example, when we choose to drive a car, itcontributes to pollution. Choices that affect the
in economics.35
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Demand and Supply
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Markets and Prices
A market is any arrangement that enables buyers and.
A competitive market is a market that has many buyers
the price.
The mone rice of a ood is the amount of moneneeded to buy it.
The relative price of a goodthe ratio of its money price
to the money price of the next best alternative goodis itsopportunity cost.
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Demand
If you demand something, then you
. ant t,
2. Can afford it, and
. .
Wants are the unlimited desires or wishes people have
for oods and services. Demand reflects a decision aboutwhich wants to satisfy.
The quantity demanded of a good or service is the
amount that consumers plan to buy during a particulartime period, and at a particular price.
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Demand
A rise in the price,o er ngs rema n ng
the same, brings adecrease in thequantity demandedand a movement
curve.
Known as Law of
Demand
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Demand
Demand Curve and Demand Schedule
between the price of the good and quantity demanded ofthe good.
A demand curve shows the relationship between thequantity demanded of a good and its price when all other
n uences on consumers p anne purc ases rema n esame.
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Why Law of Demand
Substitution effect
When the relative price (opportunity cost) of a
good or service rises, people seek substitutes for
service decreases.
Income effect
When the rice of a ood or service rises relative
to income, people cannot afford all the things theypreviously bought, so the quantity demanded of
.
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Demand
Willingness andAbilit to Pa
A demand curve isalso a willingness-- - -
curve.
The smaller thequantity available,the higher is theprice that someone
is will ing to pay foranother unit.
Willin ness to ameasures marginal
benefit.42
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Demand
A Change in Demand
price of the good changes, there is a change in demandfor that good.
The quantity of the good that people plan to buy changesat each and every price, so there is a new demand curve.
When demand increases, the demand curve shiftsrightward.
When demand decreases, the demand curve shiftsleftward.
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Demand
Six main factors that change demand are
The prices of related goods
Expected future prices
Expected future income
Population Preferences
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Demand
Prices of Related Goods
another good. another good.
when the price of a complement of an energy bar falls, thedemand for energy bars increases.
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Demand
Expected Future Prices
If the price of a good is expected to rise in the future,
current demand for the good increases and the demandcurve shifts ri htward.
Income
,goods and the demand curve shifts rightward.
A normal ood is one for which demand increases as
income increases.An inferior good is a good for which demand decreases as
.
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D d
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Demand
Expected Future Income
When income is expected to increase in the future, thedemand might increase now.
Population
The larger the population, the greater is the demand forall goods.
Preferences
People with the same income have different demands ifthey have different preferences.
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D d
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Demand
The fi ure shows anincrease in demand.
Because an energybar is a normal good,an increase in income
for energy bars.
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A M t l th D d C
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A Movement along the Demand Curve
good changes andeverything elserema ns e same, equantity demanded
changes and there isa movement along thedemand curve.
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A Shift of the Demand Curve
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A Shift of the Demand Curve
If the price remainsthe same but one ofthe other influences
on buyers plans,
changes and the
demand curve shifts.Caused byparameters such as
change in incomeprice of related
taste 50
Demand Curve
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Demand Curve
Ceteris Paribus
Inverse relationship
between price anduantit demanded
provided taste (T),income (Y) and prices
s complements (Pc)remain unchanged
(T,Y, Ps ,Pc )
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Supply
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Supply
If a firm supplies a good or service, then the firm
1. Has the resources and the technology to produce
it,
. ,
3. Has made a definite plan to produce and sell it.
to produce.
Supply reflects a decision about which
technologically feasible items to produce.The quantity supplied of a good or service is the amount
a pro ucers p an o se ur ng a g ven me per o a aparticular price. 52
Supply Curve
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Supply Curve
A rise in the price ofan energy ar, o er
things remaining thesame, brin s anincrease in thequantity supplied.
Known as Law ofSupply
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Supply
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Supply
The Law of Supply
e aw o supp y s a es:
Other things remaining the same, the higher the price of a,
the lower the price of a good, the smaller is the quantity
supplied.The law of supply results from the general tendency forthe marginal cost of producing a good or service to
, .
higher because more is at stake (Chapter2, page 37).
Producers are willin to su l a ood onl if the can atleast cover their marginal cost of production.
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Supply
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Supply
Supply Curve and Supply Schedule
the quantity supplied and the price of a good. quantity supplied of a good and its price when all otherinfluences on producers planned sales remain the same.
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S l
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SupplyMinimum Supply Price
A supply curve is also aminimum-supply-price
curve.
As the quantityproduced increases,
mar inal cost increases.The lowest price atwhich someone is willing
to sell an additional unitrises.
This lowest price is themarginal cost. 56
Supply
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Supply
A Chan e in Su l
When some influence on selling plans other than theprice of the good changes, there is a change in supply ofthat good.
The quantity of the good that producers plan to sellc anges a eac an every pr ce, so ere s a new supp ycurve.
, .
When supply decreases, the supply curve shifts leftward.
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Supply
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Supply
The five main factors that change supply of a good are
The prices of related goods produced Expected future prices
The number of suppliers
Technology
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Supply
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Supply
Prices of Productive Resources
,
minimum price that a supplier is willing to accept forproducing each quantity of that good rises.
So a rise in the price of productive resources decreasessupply and shifts the supply curve leftward.
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S l
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Su l
Prices of Related Goods Produced
A substitute in production for a good is another good thatcan be produced using the same resources.
The supply of a good increases if the price of a
substitute in production falls.
produced together.
complement in production rises.
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Supply
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pp y
Expected Future Prices
If the price of a good is expected to rise in the future,supply of the good today decreases and the supply curveshifts leftward.
The Number of Suppliers
The larger the number of suppliers of a good, the greateris the supply of the good. An increase in the number of
.
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Supply
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pp y
Technology
the cost of producing existing products, so advances intechnology increase supply and shift the supply curverightward.
A natural disaster is a negative technology change, whichecreases supp y an s ts t e supp y curve e twar .
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An increase in supply
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pp y
An advance in thetechnology for
producing energy
supply of energybars and shifts the
rightward.
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A Movement Along the Supply Curve
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g pp y
en t e pr ce o t e
good changes andother influences onsellers plans remainthe same, the quantity
there is a movementalong the supplycurve.
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A Shift of the Supply Curve
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If the price remains
other influence onsellers plans changes,
the supply curve shifts.
Caused bparameters such aschange in wages,im rovement in
technology
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Supply Curve
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Ceteris Paribus
, , ,
A positiverelationship betweenprice and quantitysupplied provided
,wage rate (W), Oilprices and govtpo cy o rema n
unchanged
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Market Equilibrium
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Equilibrium is a situation in which opposing forcesbalance each other. E uilibrium in a market occurs whenthe price balances the plans of buyers and sellers.
The equilibrium price is the price at which the quantitydemanded equals the quantity supplied.
The equilibrium quantity is the quantity bought and soldat t e equ r um pr ce.
Price regulates buying and selling plans.
Price adjusts when plans dont match.
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Market Equilibrium
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Price as a Re ulator
.bar, the quantitysupplied exceeds the
quan y eman e .
There is a surplus of.
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Market Equilibrium
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Price Adjustments
At prices above theequ r um pr ce, a surp us
forces the price down. equilibrium price, ashortage forces the priceup.
At the equilibrium price,
plans agree and the pricedoesnt change until someevent changes eitherdemand or supply. 69
Predicting Changes in Price and Quantity
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An Increase in Demand
When demand
increases the demand
B
.
The price rises, and
Aincreases along thesupply curve from A to
.
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An Increase in Supply
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An Increase in Supply
When supply
increases the supply.
The price falls, and
the uantit demandedincreases along thedemand curve from A
B .
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Increase in Both Demand and Su l
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Increase in Both Demand and Su l
An increase indemand and an
increase in supply
increase the
from A to B.
A B
equilibrium price is
uncertain because the
raises the equilibriumprice and the increase
in supply lowers it.72
Summar
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Su a
S(W left;P
D(Y right;
A is the equilibrium point
r g ;
Ps right;
Pc left)
Q
Difference between demand and quantity demanded
73Difference between supply and quantity supplied
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Elasticity
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Elasticity
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When price falls,
rises by different
amounts depending Total Revenue is P.QTR is affected as price fallson pr ce sens v y
Impacts on revenue P0
on price sensitivity P1
D1D2
Q0 Q1 Q2 Q
75
Price Elasticity of Demand
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An increase in supply can bring about a large P and asmall Q or a small P and a large Q
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Price Elasticity of Demand
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The contrast between the two outcomes in the figuresearlier hi hli hts the need for
A measure of the responsiveness of the quantity demandedto a price change.
The price elasticity of demand is a units-free measureof the responsiveness of the quantity demanded of a good
buyers plans remain the same.
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Price Elasticity of Demand
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Measures the sensitivity of quantity demanded to price
chan es.
It measures the percentage change in the quantitydemanded of a good that results from a one percentc ange n pr ce.
QE
DD
P
%
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Price Elasticity of Demand
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The ercenta e chan e in a variable is the absolute
change in the variable divided by the original level of
the variable.ere ore, e as c y can a so e wr en as:
PQPPE
D
P
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Price Elasticity of Demand
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A negative number, because price and quantity move
As price increases, quantity decreasess pr ce ecreases, quan y ncreases
When EP > 1, the good is price elastic
When EP < 1, the good is price inelastic
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Price Elasticity of Demand
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But it is the magnitude, or absolute value, of the
measure that reveals how res onsive the uantit
change has been to a price change.
is the availability of substitutes.
If there are many substitutes, demand is price elastic
Can easily move to another good with price increases
If there are few substitutes, demand is price inelastic
Necessities, such as food or housing, generally haveinelastic demand.
Luxuries, such as exotic vacations, generally have
elastic demand.
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Linear Demand Curve
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If we move down a linear demand curve slo e is the
same but price is lower and quantity is larger
Hence, E is smaller
Elasticity will change along the demand curve
PQPPE
D
P
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Price Elasticity of Demand
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Linear Demand Curve84
Price Elasticity of Demand
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Given a linear demand curve
Elasticity depends on slope and on the values of P and Q
The top portion of the demand curve is elastic
Price is high and quantity small
The bottom portion of the demand curve is inelastic
Price is low and quantity high
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Price Elasticity of Demand
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Price = -4
Elastic
Demand Curve
Q = 8 2P
-p
Inelastic
E = 0
86
Q84
Price Elasticity of Demand
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The steeper the demand curve becomes, the moreinelastic the ood.
The flatter the demand curve becomes, the more elasticthe good
Two extreme cases of demand curves
Com letel inelastic demand verticalInfinitely elastic demand - horizontal
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Price Elasticity of Demand
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e pr ce e as c y o eman equa s an e goohas unit elastic demand. 89
Price Elasticity of Demand
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The price barely changes the price elasticity of demand is infinite and the good has aperfectly elastic demand.
A horizontal demand curve.90
Price Elasticity of Demand
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Total Revenue and Elasticity
equals the price of the good multiplied by the quantity
sold.
When the price changes, total revenue also changes.
If a price cut increases total revenue, demand is elastic.
If a price cut decreases total revenue, demand isinelastic.
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Link between Elasticity and Total Revenue
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Other Demand Elasticities
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Cross-Price Elasticity of Demand
Measures the percentage change in the quantity
demanded of one good that results from a one percent.
m
b
b
m
mm
bb
PQPQPP
Emb
93
Other Demand Elasticities
C l t C d T
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Complements: Cars and Tyres
-
Price of cars increases, quantity demanded of carsfalls leadin to smaller uantit demanded of tires
Substitutes: Butter and Margarine
Cross-price elasticity of demand is positive
Price of butter increases, quantity demanded ofbutter falls leading to higher quantity of margarine
demanded
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How to study for AB 106
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Ste 1: Stud the conce ts used in lectures and
examples in tutorials
Step 2: Study the materials according to the Courseu ne
Step 3: Study the whole book
Remember: Study in this order
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