NS 3040 Summer Term 2021 Basic Microeconomic Tools

Economics Overview • Economics concerned with three related issues: • How scarce resources are exchanged • How consumers and producers interact • The role of government in compensating for the limitations of markets • Economics divided into two main branches • Positive economics -- factual world, what does occur • Normative economics -- value judgements – what should occur • Factors of Production • Land, natural resources • Human capital – human investments • Real capital – physical investments • Enterprise – entrepreneurship, management 2

Economic Problem • Choice and opportunity cost • Resources limited – choices have to be made between competing alternatives • Opportunity costs – true cost of a choice – what we could have done if we did chose that • Three basic questions concerning resources • What to produce • How to produce it • For whom to produce 3

Production Possibility Curve I Normal Production Possibility Curve – Increasing Costs 4

Production Possibility Curve II • Constant Cost Production Possibility Curve 5

Production Possibility Curve III Decreasing Cost Production Possibility Curve 6

Production Possibility Curve IV • Economic Growth Over Time 7

Growth and Contraction • What causes growth – outward shift of curve • Application of new technology increasing productivity • Division of labor greater specialization • New production methods – robotics • Increase in labor force, capital investment • Discovery of new raw materials • What causes contraction – inward shift of curve • Resources run out – non renewables depleted • Failure to invest – human/physical resources • Erosion of infrastructure • Natural disaster 8

Production Possibility Curve V • Resource Constraint Production Possibility Curve 9

Supply and Demand I 10

Supply and Demand II 11

Determinants of Demand 12

Determinants of Supply 13

Operation of Supply/Demand • Factors that affect demand supply • Demand – shift demand curve • Income changes • Prices of other goods – complements and substitutes • Changing preferences • Supply – shift demand curve • Costs of production • Technological change • Increases in productivity 14

Elasticity of Demand I 15

Elasticity of Demand II 16

Economic Systems I • Market economies • Beneficial exchange between producers and consumers • Market forces resolve scarcity • Pursuit of self interest by producers and consumers 17

Economic Systems II • Command Economies • Allocation of resources by governments • Central planning • Mobilization economies • Wartime – Post disaster 18

Economic Systems III • Mixed economies • Combination of market forces and central planning • Distinct private sector where resources allocated by market forces -- consumer goods • Distinct public sector where resources allocated by government – public enterprises • Mixed both allocate education, healthcare 19

Interference with Equilibration • Classic interferences in the market place • Keep the price above the equilibrium • Minimum wage -- unemployment • Farm Prices – food surpluses • Keep the price below the equilibrium • Rent control -- shortage of housing • Overvalued exchange rates - balance of payments deficits 20