Intro to the Basics

Opportunity Cost

• Economic and Accounting Cost
  • Example: The cost of a year of college.
  • Example: The cost of business
  • Example: The cost of staying in business
• Possibility Curves
  • Example: Individual: Cost of MBA degree
  • Example: Alternative routes to MORE
  • Example: National/Individual/firm: Cost of investment
• Trade and Possibility Curves

Economic and Accounting Cost : Cost of a year of school

Economic Cost Accounting Framework

Economic and Accounting Cost : Cost of staying in business

Possibility Curves

• Alternatives to more: Original Situation

• Territorial expansion

• Productivity / efficiency advances

• Trade

• Helio Plastics

Increased budget                                        Increased price

 

 

• Economics Department possibilities

25 students in 300-400 level classes
100 students in 100-200 level class
10 faculty

1. what is the student possibility curve?

2. what happens to the possibility curve if faculty increases to 12?

3. what happens to possibility curve if upper division classes rise to 40 students?

Increased resources                                 Increased efficiency

 

 

Trade and possibility curves: Theory of comparative advantage

Will they trade?

Whow will specialize in what?

Supply & Demand

The Setting

"Tidelands has 834 wells off the coast of Long Beach, Calif., but it has shut 327 of them in the last year as oil prices plunged."  NYT April 3, 1999 p B1

A Cookbook Model of Prices

• Identify the market (what is it)
• Identify the participants (who are they)
• Identify the determinants of behavior (why do they do what they do)
  • Buyers / Demanders
  • • Price of the good (-)
    • Price of other goods
      • Complements (-)
      • Substitutes (+)
    • Income (+)
    • Population (+)
      • Size (+)
      • Composition (?)
    • Tastes / Preferences
      • Fashion & Fad (+)
      • Aptness (+)
      • Habits (+)
    • Confidence (+)
    • Expectation / Bubbles (+)
  • Sellers / Suppliers
  • • Price of the Good (+)
    • Availability of Factors /Inputs (+)
    • Price of Factors /Inputs (-)
    • Productivity of Inputs (+)
    • Motivation of Supplier
      • (maximization of profit, growth, market share...)
    • Market Structure number of buyers and sellers (+)
      • (monopoly, perfect competition, oligopoly...)
• How do we represent the market graphically?
  • Transition from tables to graphs
    • Demand Schedule / Supply Schedule
  • The graphs: Supply and Demand Curves
    • Buyers: Demand Curve

Demand Curve

• Sellers: Supply Curve

• Supply Curve

  

• Characteristics of curves
  • Slope (influence of price)
    • steep slope - unresponsive to price changes
    • flat slope - responsive to price changes
  • Shifts (influence of other factors)
    • outward shift - increase in demand (supply)
• Buyers and Sellers Together
  • Equilibrium (right price)

P* = Equilibrium Price

Q* = Equilibrium Quantity

• Disequilibrium (wrong price)
  • Shortage (price too low)
  • Surplus (price too high)

  

• Comparative Statics
  • The graphs: Single Changes

  

  • The graphs: Double Changes (Increase S and D)

  

  • The results

Single: Shifts in Supply or Demand

Double: Shifts in Supply and Demand

 

• How does government intervene?
  • Rent Controls / Minimum Wage

• Supply and Demand in Action
  • A URI Example
  • Spring Break Theory
  • Investing for the 21st Century