LECTURE 1

INTRODUCTION TO ECONOMICS

AKA Free Launch Principle

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-

SCARCITY PRINCIPLE

Economics : How people make choices under scarcity & the results of these choices for

f. society .

scarcity principle : people have unlimited wants & limited resources .

$ Of one good ,
☆ Of another .

$ Of an action % & action Benefits of an action action ( incentive principle )

BENEFIT PRINCIPLE
-

COST
.
,
.

MB ≥ MC
(
Take action benefits great
•
if &
Only if extra are at least as as extra costs .

•
cost & Benefits not just money .

APPLICATION
•
Assume people are rational .

A rational person has well defined goals & tries to fulfill them .

EXAMPLES Benefits are clear .

•
Takes taxi to work but not to school . Costs are hard to define . ( E. g. Money ,
Time , Effort , Inconvenience )

•
skipping regular dental check up -
.

BUYERS & SELLERS

•
Buyers : MB ≥ MC

• sellers : MB ( MR ) ≥ MC

ECONOMIC SURPLUS

Total Benefits -

Total costs

OPPORTUNITY COST

•
value of what must be foregone in order to undertake an activity .

Consider explicit &

implicit costs .

☆ Note : that you need to give up

NOT the combined value of all pcfssible activities .

EXAMPLES
opportunity lost considers only your best alternative .

•
Give up an hour of babysitting to go to the movies .

•
Giving up watching TV to walk to town -

SUNK COST -

ignore & move on

•
costs that are beyond recovery when decision is made .

irrelevant to future decision making Copyright © Wee Qian Hui

•
.
 One additional unit
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(MARGINAL ANALYSIS

Marginal lost : Increase in total cost from one additional unit of an activity .
LOOK at marginal lost & benefit
before carrying out additional
TO -191 Cost
Average cost =
units .

n units

Increase in total benefit from one additional unit of an activity

Marginal Benefit : .

Total Benefit
Average Benefit =

n units

EXAMPLE :
NASA space shuttle

# Of launches Total lost ( $ B) AVG lost ($13 / Launch ) Marginal lost

0 $0 $0

I $3 $3 $3

2 $7 $3.5 $4

3 $12 $4 $5

4 $20 $5 $8

5 $32 $6.4 $12

MB ≥ MC

NASA 's
marginal Benefit is $6B / launch .

If NASA is rational 3 launches

'

- -
.

2 TYPES OF ECONOMICS

1
Normative ECONOMIC Principle -
E. g. price to high in consumer POV
,
but not for supplier .

says how people should behave

E. 9 .
Gas prices too high

Building a space base on the moon will lost TOO much .

Prices measurable 9 Accuracy

(☆ ,

2
Positive Economic Principle

Predicts how people will behave

F-
-9 .

Average price of gasoline in 2010 was higher than 2009 .

Building a
space base on the moon will cost more than shuttle program .

MICRO V. MACRO
country a whole
Individual party products firms markets as every firm
( (
, ,
, ,

Microeconomics -
Choice & its implications for Macroeconomics _

performance of national economies &

price & quantity in individual markets .

the policies that governments use to improve performance .

E- g. Sugar Carpet , Housecleaning services

,
E. 9 . Inflation , Unemployment ,
Growth

considers topics like :

considers topics like :

cost of production Monetary Policy

Demand for a product Deficits

Exchange Rates Tax

Policy
 SIMULTANEOUS EQUATIONS
* where it intercepts the graph
* ( ↑ , more steep ]
slope

EXAMPLE

Plan 1 : 13=10+0--0417 Plan 1 has higher per min price while

A

plan 2 :
13=20--10-02 D Plan 2 has higher monthly fee .

Q :
Find B&D @ Point A.

Find D Find B

10+0.0413=201-0.0213 13=10+0.041500 )

D= 500 B. = $30 } can use on Plan 2

Function 9150

TYPES OF ECONOMIES -

Most countries have mixed economies .

I Central Planning E. 9. North Korea Government owns every resource They decide what / how / for whom to
-

. .

produce .

•
Decisions made by individuals or small groups

Agrarian societies

•
Government programs

•
sets prices & goals for the group
•
Individual influence is limited .

2 The Market -
More Efficient ( US leans move to the market but still not 100% )
,

Buyers
•
& sellers signal wants & COSTS .

•
Resources & goods are allocated accordingly -

•
Interaction of supply & demand answer the 3 Basic QNS : what HOW , ,
For whom .

Movement :O in price

☐ EM AND _

shift : o in Demand / Willingness to buy a causes of shift :$ Of complementary goods ,

$ Of substitute goods ,
Income
,

preference ,
NO . Of buyers in market, F- ( future )
AKA Marginal Benefit curve
~
.

•
Demand curve illustrates the Interior normal
quantity buyers would purchase at each possible price .

income ↑ income ↑ ,
,
• Downward sloping buy less buy more

•
A price
, buy less .
to price , buy more .

•
price ☆ ,
Demand ↑

•
Demand reflects entire market ,
not one consumer

LAW OF DEMAND

•
consumers buy less of a product as the price of product rises .

• P & Q are inversely related .

•
cost-Benefit principle -
Does something if MB ≥ MC

•
increase in market price approaches our reservation price Highest price one is willing to pay
-

Market Price ( lost ] [ benefit ]

•
> Reservation price . NO BUY .

WHEN PRICE B

1. substitution Effect -

Buyers switch to substitutes

2 .
Income Effect -
to Buyers
'
Overall purchasing power

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 Movement : ☐ in Price of good
SUPPLY shift :D in supply / willingness to offer • causes of shift $ of input 0 in technology weather
:
, ,
,

NO -
Of sellers in market, F- ( future price D)
AKA Marginal cost curve
(
.

at
supply curve quantity good willing price
•
illustrates the of that sellers are to offer each .

• Producers incur lost to obtain resources to produce output & sell at market price to maximise profits .

•
Upward sloping curve -
LOW -

Hanging Fruit Principle

•
seller 's Reservation Price -

Lowest price willing to sell ( Reservation Price =

Marginal cost of production ]

LAW OF SUPPLY

producers supply price P

•
more as

• P & Q supplied are positively related .

* Efficiency principle
/
Best outcome when
MARKET EQUILIBRIUM
:

•
NO external costs / benefits are
P shaved to The public .

• ( Sellers )
s =
Marginal Private cost ( MPC ) • MPB =
MPC
=
Marginal social lost ( MSc )

PE
- - - -

,
- -
-

I
*
Equilibrium principle
1 ( Buyers ) Market outcome is socially optimal when :

i D= Marginal Private Benefit ( MPB ) • seller incurs full lost

! *= ☒anginal
social Benentit ( MSB ) •
Buyers capture full benefit MSC =
MSB
QE

•
when all buyers & sellers are satisfied with their respective quantities at the market price .

•
QS = QD

•
Demand & Supply curve intersects .

EXCESS SUPPLY & DEMAND

1 Excess supply 2 Excess Demand

Price higher than PE Price lower than PE

p
£ ☆

p - - -

T
-
- - -

,
-
surplus

/ ! -
shortage
1 I P - -

y
- - -

y
! I '
☆
☆ Q Q

PRICE CEILINGS I Rent controls )

•
Maximum price set by law

•
It controlled price < PE :

•
QD ↑

•
① s tf

shortage
•

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 4 RULES : SUPPLY & DEMAND SHIFTS

1
$ Demand 3 ↑ supply

$ PE ☆ QE to PE ↑ QE ☆ If both curves shifts .

, ,

Outcome will depend on degree of shift .

2 to Demand 4 to supply

to PE ,
to QE ☆ PE ,
to QE

CASH ON THE TABLE

•
Buyer 's surplus =
Buyer 's Reservation Price -

Market price

seller 's surplus

• =
Market price -

seller 's Reservation Price

•
Total surplus =
Buyer 's surplus + seller 's surplus
OI

=
Buyer 's Reservation Price -

seller 's Reservation Price

• NO cash on the table

•
surplus is maximised ( Efficiency -
Me = MB )

•
NO opportunity to gain from additional sales / Purchases .

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