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Eco (Subject) / CMA (Lesson)
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- Economics is based on the facts that: 1) Human nature has unlimited desires 2) There is a scarcity of economic resources available to use to satisfy those desires
- Economic resources - include all resources that go into the production of goods and services - factors of production
- factors of production - land - labor - capital (capital goods or investment goods) - and entrepreneurial ability
- individuals and the economy face economic problems 1) Individuals must decide how they will spend their limited income to maximize their individual satisfaction 2) The economy deals with the allocation of the fixed (limited) resources in order to achieve the maximum social benefit
- the economic system must answer the following questions: 1) What goods and services should be produced and how much should be produced? 2) How should these goods and services be produced? 3) For whom should these goods and services be produced?
- Demand is the quantity of a good or service that consumers are willing and able to purchase during a certain period of time at different sales prices
- The law of demand as the price of the product is reduced, the quantity demanded for that same product will increase, and vice versa.
- Movement Along the Demand Curve - occurs only when the price of the good changes - Since price is a variable on the vertical axis, its change results in a movement along the demand curve
- Movement Along the Demand Curve - occurs only when the price of the good changes - price is a variable on the vertical axis => its change results in a movement along the demand curve - change in the “quantity demanded” on the horizontal axis
- Movement (or Shift) Of the Demand Curve change in any of the other determinants of demand other than price will cause the entire demand curve to shift
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- increase in demand can be graphically represented by a rightward shift of the entire demand curve
- A change in the following items will cause the entire demand curve to shift • Consumer income, • Prices of other goods, • Consumer tastes and preferences, • Expectations of future price changes, and • The number of consumers
- Set out below are changes that will cause the demand curve to shift to the right • An increase in consumer income, if the product is a normal gooda • A decrease in consumer income, if the product is an inferior gooda. . • An increase in the price of another good, if this product is a substitute gooda. • A decrease in the price of another good, if this product is a complementary gooda. • A positive change in the tastes and preferences of consumers toward a product (e.g., resulting from a successful advertising campaign). • The expectation of price increases in the future. • The conclusion of a group boycott.
- Normal Goods - Normal goods are goods for which demand is directly related to income - This means that as income increases, demand for these goods also increases
- Inferior Goods - are goods for which demand is inversely related to income - When incomes fall, people buy these goods because they cannot afford to buy more expensive products
- Whether a particular good is a normal good or an inferior good is determined by Whether a particular good is a normal good or an inferior good is determined by looking at the income elasticity of demand for the good
- Substitute Goods if two products are substitutes for one another, then a price increase in one will gen-erate an increase in the demand for the other
- Complementary Goods if two products are complements then a price increase in one will result in a decrease in the demand for the other
- Whether a particular good is a substitute good or a complementary good is determined by looking at the cross elasticity of demand
- Consumer Expectations If people think that the price of coffee will increase in the future the demand for coffee may increase now
- Number of Consumers The more consumers there are in the market, the more goods and services will be demanded
- Elasticity of Demand how responsive the quantity demanded of a product is to a change in the price for that product
- Elastic Goods if a 1% change in the price of the good causes more than a 1% change in the quantity demanded
- Inelastic Goods if a 1% change in the price of the good causes less than a 1% change in the quantity demanded
- Price Elasticity of Demand (Ed) – Percentage Method Percentage Change in Quantity Demanded %ΔQ Ed= --------------------------------------------------------------------------- = ----------- Percentage Change in Price %ΔP
- The Price Elasticity of Demand (Ed) – Midpoint Method (Q2 – Q1) / [(Q2 + Q1) / 2] Ed = ---------------------------------------------------- (P2 – P1) / [(P2 + P1) / 2]
- Ed=0 Perfectly Inelastic – This means that no matter what happens to the price, the quantity that is demanded will remain the same.
- Ed Inelastic or relatively inelastic – Any given percentage change in price will result in a smaller percentage change in the quantity demanded.
- Ed=1 Unitary Elasticity – Any given percentage change in price will cause the quantity demanded to change by the same percent
- Ed>1 Elastic or relatively elastic – Any given percentage change in price will result in a larger percentage change in the quantity demanded.
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- Four factors can affect the price elasticity of demand for a particular product: 1) Whether the good is classified as a luxury (demand for luxury goods is more elastic) or a necessity (demand is less elastic for items that are necessities), 2) The percentage of consumer income that is required to purchase the good (the larger the per-centage, the more elastic the demand for the good), 3) The number of substitutes (the more substitutes there are for a good, the more elastic the de-mand for the good, and the less substitutes there are, the more inelastic), 4) The time period considered (the longer the time period analyzed, the more elastic the demand for any good).
- Total revenu when demand is elastic - Total Revenue rises when price falls (output rises), - Total Revenue falls when price increases (output falls)
- Total revenu when demand is inelastic - Total Revenue rises when price rises (output falls) -Total Revenue falls when price falls (output rises).
- Cross-Elasticity of Demand The cross-elasticity of demand measures the percentage change in quantity demanded of a particular good that results from a given percentage change in the price of another good
- The cross-elasticity will be positive or negative if two goods are substitutes? positive
- the cross-elasticity will be positive or negative when two goods are complements negative
- Cross-Elasticity of Demand %ΔQx Percentage Change in Quantity Demanded of Good X Exy = ------------------------------------------------------------------------------------------- %ΔPy Percentage Change in Price of Good Y
- Income Elasticity of Demand %ΔQ = Percentage Change in Quantity Demanded EI =_________________________________________________ %ΔI= Percentage Change in Income
- The measure of the benefit that a consumer gets from an individual good or service is called utility
- point of maximum utility the point at which, given a fixed income, the individual chooses the combination of Good A and Good B that maximizes his or her utility
- marginal utility the utility that is received from the next unit of that good
- Utility Maximization Formula The utility of a consumer will be maximized when the consume to the point where: Marginal Utility of Good A = Marginal Utility of Good B ____________________ ______________________ Price of Good A = Price of Good B
- Consumers will change their utility maximizing point of consumption in response to: 1) A change in income, 2) A change in preferences, which suggests a change in the marginal utilities derived from the various goods (so a change in the marginal utility per dollar spent on goods). 3) A change in prices, which will also affect the marginal utility per dollar received from various goods.
- The Indifference Curve An indifference curve represents all combinations of two commodities that give equal utility to a consumer
- The slope of an indifference curve is called the consumer’s Marginal Rate of Substitution (MRS)
- the MRS reflects - the slope of an indifference curve is ΔY/ΔX - if the consumer receives 1 additional unit of X (ΔX=+1), how much would Y have to change in order to leave the consumer indifferent (ΔY)? Thus, if the slope of the consumer’s indifference curve at some point is 3, it means that the consumer’s preferences are such that he/she is willing to give up 3 units of Y (ΔY=−3) in order to get 1 additional unit of X; the consumer’s Marginal Rate of Substitution is 3
- Indifference curves have a negative slope. If a consumer were to receive an additional unit of good X (so, ΔX =+1), this alone would cause the utility to rise (since “more is better”). Therefore, to remain on the same indifference curve, Y must fall by an amount that lowers utility enough to offset the utility gain related to the additional unit of X received
- Indifference curves will be “strictly convex - as consumption of good X increases, the consumer’s marginal utility from good X will fall - Since, as X rises, additional units of X are valued less highly by a consumer, the consumer will be willing to give up fewer units of Y to get each additional unit of X. - This suggests that the consumer’s Marginal Rate of Substitution, which is the slope of the indifference curve, falls as the consumption of X rises.
- A budget constraint line exhibits all combinations of two goods that can be bought, given fixed prices and a fixed amount of income
- Graphical Determination of Utility Maximization A graph combining an individual’s budget constraint and indifference curves