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Understanding Economics: Allocation of Scarce Resources

Explore the study of economics, rational behavior, and maximizing behavior in supply and demand dynamics. Learn about marginal analysis, opportunity costs, demand and supply curves, and determinants of demand and supply.

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Understanding Economics: Allocation of Scarce Resources

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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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