Economics Summer Workshop – 1 s t Class

Principles of Economics 12th Edition Pearson

Monopoly

Inflation unemployment and growth

Oligopoly

Labor market, Long run growth

Economics

Opportunity costs

Marginalism : process of analyzing the additional costs

Efficiency Markets : No free lunch

Microeconomics – Studying the tree

and Macroeconomics – Forest

Production

Price

Income

Employment

Field: Econometrics – Statistics

Positive economics: Widout making adjustments

Normative economics: Subjective aspect – Own opinion

Model

Variable – Eg - GDP

Ockham’s Razor – principle that irrelevant detail shd be cut away

Empirical Economics

Economic policy : Efficiency, Equity, Growth and stability

Chapter 2 – Economic Problem : Scarcity and choices

 Capital
 Factors of production (Resources)
 Production
 Inputs or resources
 Outputs

Primary resources dat must be allocated: land, labor and capital

Specialization, Exchange and Comparative Advantage

Theory of Comparative advantage: Ricardo’sTheory

Weighing Present and expected future costs and benefits

Capital goods and Consumer goods

Investment

 Production Possibility Frontier (PPF)

 Negative Slope and Opportunity Costs
 Marginal Rate of transformation (MRT)
 Law of increasing opportunity cost
 Unemployment
 Inefficiency
 Economics Growth

Economic Systems and the role of Govt.

 Command Economies
 Laissez-Faire Economics : The free market

Market

Consumer Sovereignty

Individual Production Decisions : Free Enterprise

Distribution of Output

Price Theory

Chapter 3 : Firms and Households : The basic Decision making units

Firms

Entrepreneur

Households
Product or output markets

Input or factor markets

Labor Market

Capital Market

Land Market

Factors of production

Demand in Product/Output Markets

 Price of the product

 The income available to the household
 The household’s amount of accumulated wealth
 The prices of other products available to the household
 The household’s tastes and preferences
 The household’s expectations abt future income, wealth and prices

Quantity Demanded

Changes in Quantity Demanded versus changes in demand

Demand Schedule

Demand Curve

Law of Demand

Other properties of demand curve

 Negative slope
 Intersect at x axis
 Intersect at y axis

Income – flow measure

Wealth or Net Worth - stock measure

Normal Goods

Inferior Goods

Prices of other good and services

 Substitutes
 Perfect substitutes
 Complements, Complimentary goods
Other determinants of households demands

 Tastes and preferences

 Expectations

Shifts of a Demand versus movement along a demand curve

From Household Demand to market Demand

 Market Demand
 Horizontal Submission

Supply in product/Output Markets

 Profits : Revenues – Costs

Price and quantity supplied : the law of supply

 Quantity supplied
 Supply schedule
 Law of supply
 Supply Curve

Other Determinants of supply

 The cost of production

o The Cost of producing the product
o The price of the good or service
 The price of related products

Shift of supply curve versus movement along a supply curve

Market Supply

Market Equilibrium

 Equilibrium

Excess Demand

 Excess Demand or shortage

 Excess Supply or Surplus

Chapter 4 – Demand and Supply Applications

The Price System : Rationing and Allocating Resources

 Price Rationing
Constraints on the Market and Alternative Rationing Mechanisms

 Price ceiling
 Queuing
 Favored customers
 Ration Coupons
 Black Market

Price Floor

Minimum wage

Supply and Demand and Market Efficiency

 Consumer Surplus
 Producer Surplus

Competitive Markets

Deadweight Loss

Chapter 5 – Elasticity

Elasticity

Price Elasticity of Demand

Perfectly inelastic demand - vertical

Perfectly elastic demand – horizontal

Elastic demand

Inelastic demand

Unitary elasticity

Calculating Elasticities

Elasticity is a ratio of percentages

The Midpoint formula

Elasticity and Total Revenue = Price *Quantity

Determinants of Demand Elasticity

 Availability of substitutes
 Luxuries versus Necessities
 The importance of being unimportant
 The time dimension
Income Elasticity of demand

Cross Price Elasticity of demand

Economics Summer Workshop – 2 n d Class

Market System

Perfect knowledge

Perfect competition

Homogenous products

Budget Constraint

Choice set or opportunity set

Budget Constraint :

Price

Real Income

Utility

Diminishing Marginal Utility – Law of marginal utility

Utility Maximizing rule

Household choice in input markets

Chapter 7:

 Profits and Economics costs

 Normal Rate of return
 Short run versus long run decisions
 Capital intensive technology also known as Labor saving
 Labor intensive technology also known as Capital saving
 Law of diminishing returns
o Marginal products
 Marginal product versus average product
 Isoquants and Isocosts
 Slope of isoquant
Chapter 8: Short run costs and Output decisions

 Fixed cost
 variable cost
 Total cost
 Total fixed cost or overhead
 Average fixed cost
 Total variable cost
 Average variable cost
 Economic costs – includes both explicit and implicit costs
 Accounting cost
 The short run supply curve

Chapter 9: Long Run costs and output decisions

 Minimizing Losses
 Shutdown point: Minimum point on AVC
 Long run costs : economies and diseconomies of scale
o Long run average cost curve (LRAC)
o Increasing returns to scale or economies of scale
o Constant return to scale
o Decreasing returns to scale or diseconomies of scale
 Increasing Returns to scale
o MEC
 Long run adjustments

Chapter 10: Input Demand: The Labor and Land Markets

Input Markets :

 Derived Demand
 Productivity of an input
 Marginal Revenue product
 Input Demand Curves
o The Demand for outputs
o The quantity of complimentary and substitutable inputs
o The prices of other inputs
o Technological change

Chapter 13 : Monopoly and Antitrust Policy

 Imperfectly competitive industry

 Market power
 Monopoly
 Oligopoly
  Monopolistic competition
 Pure monopoly

Continued 2nd August

Barriers to entry

o Economies of scale
o Natural Monopoly: An industry that realizes such large companies
o Patents
o Government Rules
o Ownership of a scarce factor of production
o Network effects
o Network Externalities

The Social Costs of Monopoly (Fig: 13.8)

o Consumer surplus
o Producer Surplus
o Deadweight loss

Rent Seeking Behavior is link to Govt failure

Price Discrimination

o Perfect price discrimination

o Example: Movie tickets, Airplane tickets, bus tickets

Remedies for Monopoly: Antirust Policy

o Clayton Act
o Federal Trade Commission (FTC)
o The Sherman Act of 1980

Chapter 14: Oligopoly

Market structure in an Oligopoly

o Five Forces Model

o Industry Competitors
o Suppliers
o Buyers
o Potential Entrants
o Substitutes

Concentration Ratio

Contestable Markets
 o The Collusion Model
o Cartel
o Tacit Collusion
o The Price Leadership Model
o Predator Pricing – lowers the price for some time so that small firms can out from the
market and then raise the price again
o The Cournot Model
o Duopoly – A two firm oligopoly

Continued 3rd August

Oligopoly and Economic Performance

Industrial Concentration and Technological Change
The Role of Government
o Regulation of Mergers
o Celler-Kefauver Act
o Herfindahl Hirschman Index (HHI)

Chapter 15: Monopolistic Competition

How do firms differentiate products?

o Horizontal Differentiation
o Vertical Differentiation
o Behavioral economics
o Commitment Device
o Advertising
Guest lecture : Introduction to Macro Economics

Chapter Outline

Macroeconomic Concerns

 Output Growth
 Unemployment
 Inflation and Deflation

The components of the Macroeconomy

 The circular Flow Diagram

 The three Market Arenas
 The role of the govt in the macroeconomy

 Microeconomics
 Macroeconomics
 Aggregate behavior
 Sticky prices: prices dat do not always adjust rapidly to maintain equality between quantity
supplied and quantity demanded.

The Three Markets

 The goods and service market

 The labor market
 The money (financial) market

Typical Business Cycle

 Trough
 Expansion or boom
 Peak
 Recession
 Trough
 Trend growth
 Depression
 Contraction, recession or slump
 European Long Recession : 9 consecutive months also known as Depression
 American Long Recession : 6 consecutive months
The components of Macroeconomy

 Households
 Firms
 The Government – Transfer money and subsidies
 The rest of the world
 Households and firms make up the private sector
 Government is the public sector
 Transfer Payment; Legal citizen (Direct)
 Subsidies: Money received to the bank accounts under condition of supplying G&S(Indirect) –
eg: Agriculture

The role of the govt in the Macroeconomy

 Fiscal Policy –
o Decrease Taxes or increase Govt Expenditures called as Expansionary Fiscal Policy
o Increase Taxes or Decrease Govt Expenditures called as Contractionary Fiscal Policy
 Monetary Policy

A brief History of Macroeconomics

 Great Depression:
 Stagflation
 Inflation
 Hyperinflation: Very rapid(high or fast)increase of inflation rate
 Deflation
 Disinflation: Inflation but on the lower side OR it’s a better condition

Measuring National Output and National Income

Chapter Outline

 Gross Domestic Product

o Final Goods and services
o Exclusions of used goods and paper transactions
o Exclusions of output product abroad by domestically owned factors of production
 Calculating GDP
o The Expenditure Approach
o The Income Approach
 Nominal versus Real GDP

GDP

It is the total market value of a country’s output. It is the market value of all final goods and services
produced within a given period of time by factors of production located within a country
Gross National Product (GNP)

The total market value of all final goods and services

Calculating GDP Approaches

o The Expenditure Approach

GDP = C+I+G+(EX-IM)

Where, C= personal Consumption expenditure

I = Gross Private domestic investment
G = Govt Expenditures
EX = Export
IM = Import

Note : Exception to investment is Real Estates

Durable goods

Non durable goods

Non residential investment

Note: When you increase capital to improve your business

Depreciation

Gross Investment

Net Investment

Capital (end of product) = Capital (Beginning of period)

o The Income Approach – Accounting

o Value Added Approach – Car example
The difference between the value of goods as they leave a stage of production and the cost of
the goods as they entered that stage

Nominal Versus Real GDP

Current Dollars: The current prices that we pay for goods and services.

GDP Deflator Versus CPI

o How the overall price level is changing

CPI = Price 2018 – Price 2017/Price 2017
 o How real output is changing
Deflator = Nominal GDP/Real GDP

The problem of fixed weights =

Limitations of the GDP concept

o The informal economy

o Domestic work or charity/volunteer
o GDP and social welfare

Continues 2nd August 2, 2018

Labor Market

Chapter Outline

Unemployment

o Measuring Unemployment
o Components of the Unemployment Rate
o The costs of Unemployment

BLS: bureau

Labor Market = Labor Force (Concerned for work, Employed – atleast1 paid hr/week or 15 hrs / week
for free and Unemployed – 4 consecutive weeks – looking for a job) + Not Labor Force (Children not
includes, Severe Disable, No willingness to work, Housewives, Full Time Student, Discourage people)

Unemployment rate = unemployed /employed +unemployed

Labor Force participation rate = labor force/population

Types of Unemployment

o Frictional Unemployment: skill matching problems

o Structural: have less chance to be recruited, more demanding
o Cyclical
o Seasonal
o Frictional + Structural = Normal/Natural (Natural rate of unemployment)

Full Employment: Total capacity or full use of resources, For ex: maximum GDP

Potential GDP is a synonym of Full employment

GDP GAP: Difference between potential and real GDP

Multiplier:

The Classical View of the labor market

Price is fixed or sticky in labor market because of the following reasons:

o Social contracts
o Relative wage explanation of unemployment
o Explicit Contracts
o Cost of living adjustments (COLAs)
o Efficiency wage Theory
o Imperfect Information
o Minimum wage laws

Surviving wage: because of social cause to reduce the numbers of making criminal

The short relationship between the unemployment rate and inflation (Philips Curve)

o Negative relationship between unemployment and inflation

o No govt can’t fight two goals – it is always either unemployment or inflation

Friedman Theory:

o Aggregate supply = employed

o Money illusion n or monetary illusion

NAIRU (Non-Accelerating Inflation rate of unemployment)

o Accelerating Inflation
o Deaccelerating Inflation

Long Run Growth

Per Capital output growths

Labor productivity growth

The Growth process: From Agriculture to Industry

Sources of Economic growth

o Aggregate Production Function

Continued 3rd August

The Money Supply and the Federal Reserve System

Money?

o A Means of payment
o Medium of exchange
o Store of value
 o Liquidity property of money
o A unit of account
o Legal tender
o Commodity Monies
o Fiat or token money

Problem of Money:

o Currency Debasement

Measuring the supply of money in the united states

o M1: Transaction Money – Coins, debit card, cheques

o M2: Broad Money
o Near Monies – Close substitutes for transactions money such as saving accounts and
money market account

M2 = M1 + SAVING ACCOUNTS+ MONEY MARKET ACCOUNTS+ OTHER NEAR MONIES

Interest Rates and Bond Prices

Interest –

The Demand of Money

o The Transaction Motive

o The Speculative Motive

Note: Negative relation with interest rate

The Private Banking System

o Financial Intermediaries
o Reserve is the monetary policy
o Consequence of reserve – reduces the chances of lending
o Required reserve ratio
o Excess reserves

The Creation of Money: Loans create money

o The money multiplier

Money multiplier = 1/required reserve ratio

Engaging in open market operations

o Issuing Treasury bills, securities , money supply decreases

 o Central bank - Sell securities – give promissory notes

Imp Note: Ninja Loans:

The money supply does not depend on interest rate but it does affects interest rates

Zero interest rate bound

Binding

Demand Push Inflation and Cost push inflation

Cost shock or supply shock

Investment saving curve