NS4540 Winter 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 three main branches Positive economics -- factual world, what does occur Normative economics -- value judgements – what should occur Technocratic economics – efficient solutions to economic problems Factors of Production Land, natural resources Human capital – human investments Real capital – physical investments Enterprise – entrepreneurship, management Technology, productivity

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

Production Possibility Curve I Normal Production Possibility Curve – Increasing Costs

Production Possibility Curve II Constant Cost Production Possibility Curve

Production Possibility Curve III Decreasing Cost Production Possibility Curve

Production Possibility Curve IV Economic Growth Over Time

Growth and Contraction What causes growth – outward shift of curve Application of new technology increasing productivity Division of labor greater specialization New production methods – robotics Increase in labor force, capital investment Discovery of new raw materials What causes contraction – inward shift of curve Resources run out – non renewables depleted Failure to invest – human/physical resources Erosion of infrastructure Natural disaster

Production Possibility Curve V Resource Constraint Production Possibility Curve

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

Economic Systems I Market economies Beneficial exchange between producers and consumers Market forces resolve scarcity Pursuit of self interest by producers and consumers

Economic Systems II Command Economies Allocation of resources by governments Central planning Mobilization economies Wartime – Post disaster

Economic Systems III Mixed economies Combination of market forces and central planning Distinct private sector where resources allocated by market forces -- consumer goods Distinct public sector where resources allocated by government – public enterprises Mixed both allocate education, healthcare

Interference with Equilibration Classic MENA interferences in the market place Keep the price above the equilibrium Minimum wage -- expensive labor, unemployment Keep the price below the equilibrium Rent control -- shortage of housing Overvalued exchange rates - balance of payments deficits – cheapen imports Interest rates – cheapen capital Food -- discourage agricultural production, increase imports