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Boyes & Melvin, 9 th Edition

Boyes & Melvin, 9 th Edition. Chapter 1-3 Review. 1. Economics . Everything is scarce. Economics is the study of how best to allocate scarce resources among competing uses. Chapter 1-3 Review. 2. Economics.

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Boyes & Melvin, 9 th Edition

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  1. Boyes & Melvin, 9th Edition Chapter 1-3 Review 1

  2. Economics • Everything is scarce. • Economics is the study of how best to allocate scarce resources among competing uses. Chapter 1-3 Review 2

  3. Economics • is a study of human behavior. How we spend our money indicates what we think is important. Chapter 1-3 Review 3

  4. Rational Behavior • The theory that people act in their own best interest. Chapter 1-3 Review 4

  5. Marginal • Marginal means “extra” or “additional” Chapter 1-3 Review 5

  6. Marginal Cost • Additional costs involved in producing one additional item, or taking an additional action. Chapter 1-3 Review 6

  7. Marginal Benefit • Additional benefits that result from producing one additional item, or taking an additional action. Chapter 1-3 Review 7

  8. Marginal Analysis • Use Marginal Cost & Marginal Benefit in making decisions. • If the Marginal Benefit > Marginal Cost, you do it. Chapter 1-3 Review 8

  9. What you give up to do something else. The economic value of your next-best alternative What are you not doing? May be non-financial Opportunity Costs Chapter 1-3 Review 9

  10. Chapter 3 Supply and Demand

  11. Maximizing Behavior • Consumers maximize their utility (satisfaction) given limited resources. • Businesses try to maximize profits by using resources efficiently in producing goods. • Government maximizes general welfare of society. Chapter 1-3 Review 11

  12. Economic interactions with others occur because: • We can’t produce all of the goods we need or desire. • We have limited time, energy, and resources to produce things we could make for ourselves. Chapter 1-3 Review 12

  13. Market • Where buyers (demanders) and sellers (suppliers) meet Chapter 1-3 Review 13

  14. Supply • The ability and willingness to produce a good or service at different price levels in a given time period. Chapter 1-3 Review 14

  15. Demand • The ability and willingness to consume a good or service at different price levels in a given time period. Chapter 1-3 Review 15

  16. Individual Demand • A demand exists only if someone is willing and able to pay for a good. • When people purchase a product there is an opportunity cost. Chapter 1-3 Review 16

  17. Law of Demand • The quantity of a good demanded in a given time period increases as its price falls. Chapter 1-3 Review 17

  18. Demand Schedule • A table showing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period. Chapter 1-3 Review 18

  19. Demand Schedule PriceQuantity Purchased $1 8,000 $2 4,000 $3 2,000 $4 500 $5 1 Chapter 1-3 Review 19

  20. Demand Curve • A curve describing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period. Chapter 1-3 Review 20

  21. Demand Curves • Demand curves show us how changes in market prices alter consumer behavior. Chapter 1-3 Review 21

  22. Demand Curve Chapter 1-3 Review 22

  23. Determinants of Demand • Tastes & Preferences • Income • Expectations • Number of buyers • Price of related goods • Substitutes Coke and Pepsi • Compliments Peanut Butter, Jelly, and Bread Chapter 1-3 Review 23

  24. Shifts in Demand • The determinants of demand can and do change. • A shift in demand is a change in the quantity demanded at any (every) given price. Chapter 1-3 Review 24

  25. Shifts in Demand Chapter 1-3 Review 25

  26. Movements vs. Shifts • Changes in quantity demanded • movements along a demand curve, in response to price changes for that good. • Changes in demand • shifts of the demand curve due to changes in tastes, income, other goods, or expectations. Chapter 1-3 Review 26

  27. The Market Demand Curve • Market demand represents the combined demands of all market participants. • The separate demands of individual consumers is added up to determine the total quantity demanded at any given price. Chapter 1-3 Review 27

  28. Law of Diminishing Marginal Utility • As consumption increases, the amount of usefulness/enjoyment goes down. • 2 beers is better than 1 but after 6 or 7 you aren’t getting as much enjoyment out of each one. Chapter 1-3 Review 28

  29. Supply • To understand the complete market, we must also look at market supply. • The market supply depends on the behavior of all the individuals willing and able to supply a good at some price. Chapter 1-3 Review 29

  30. Market Supply • The total quantities of a good that sellers are willing and able to sell at alternative prices in a given time period. Chapter 1-3 Review 30

  31. Law of Supply • Larger quantities will be offered for sale at higher prices. Chapter 1-3 Review 31

  32. Supply Schedule PriceQuantity Produced $1 15 $2 600 $3 2,000 $4 6,000 $5 12,000 Chapter 1-3 Review 32

  33. Market Supply • The market supply curve is just a summary of the supply intentions of all producers. Chapter 1-3 Review 33

  34. Supply Curve Chapter 1-3 Review 34

  35. Determinants of Supply • Price of inputs • Factor costs • land, labor, capital, know how • Technology • Other goods • Taxes and subsidies • Expectations • Number of sellers Chapter 1-3 Review 35

  36. Shifts of Supply • Changes in the quantity supplied • movements along the supply curve. • Changes in supply • shifts in the supply curve. Chapter 1-3 Review 36

  37. Shifting Supply Curve Chapter 1-3 Review 37

  38. Equilibrium • ”Market clearing” balance • The Price level where Quantity Supplied is equal to Quantity Demanded. Chapter 1-3 Review 38

  39. Equilibrium Chapter 1-3 Review 39

  40. Market Surplus • quantity supplied > quantity demanded at a given price. • created when the seller’s asking prices are too high - above the equilibrium price. Chapter 1-3 Review 40

  41. Surplus P Qd Qs Qe Chapter 1-3 Review 41

  42. Market Shortage • quantity demanded > quantity supplied at a given price. • created when the seller’s asking prices are too low - is below the equilibrium price. Chapter 1-3 Review 42

  43. Shortage P Qs Qd Qe Chapter 1-3 Review 43

  44. The “Invisible Hand” • To overcome a surplus or shortage, buyers and sellers will change their behavior. • This happens automatically • No government interference is necessary • Adam Smith! Chapter 1-3 Review 44

  45. Demand Shifts: Increase Dnew Pnew Qnew Chapter 1-3 Review 45

  46. Demand Shifts: Decrease Dnew Pnew Qnew Chapter 1-3 Review 46

  47. Supply Shifts: Increase Snew Pnew Qnew Chapter 1-3 Review 47

  48. Supply Shifts: Decrease Snew Pnew Qnew Chapter 1-3 Review 48

  49. Effect of Shifting Supply or Demand on Equilibrium QuantityPrice Dincreases increases Ddecreases decreases Sincreases decreases Sdecreases increases Chapter 1-3 Review 49

  50. Supply increase, Demand increase Snew Dnew Pnew Qnew Chapter 1-3 Review 50

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