NS4960 Spring Term 2017 Basic Microeconomic Tools IMF, Seven Questions About the Recent Oil Price Slump, December 22, 2014

Economics Overview Economics concerned with three related issues: How scarce resources are exchanged How consumers and producers interact The role of government in compensating for the limitations of markets Economics divided into two main branches Positive economics -- factual world, what does occur Normative economics -- value judgements – what should occur Factors of Production Land, natural resources Human capital – human investments Real capital – physical investments Enterprise – entrepreneurship, management

Economic Problem Choice and opportunity cost Resources limited – choices have to be made between competing alternatives Opportunity costs – true cost of a choice – what we could have done if we did chose that Three basic questions concerning resources What to produce How to produce it For whom to produce

Supply and Demand I

Supply and Demand II

Determinants of Demand

Determinants of Supply

Operation of Supply/Demand Factors that affect demand and supply Demand – shift demand curve Income changes Prices of other goods – complements and substitutes Changing preferences Supply – shift demand curve Costs of production Technological change Increases in productivity

Elasticity of Demand I

Elasticity of Demand II

Interference with Equilibration Classic interferences in the market place Keep the price above the equilibrium Minimum wage -- unemployment Farm Prices – food surpluses Keep the price below the equilibrium Rent control -- shortage of housing Overvalued exchange rates - balance of payments deficits