Economics Winter 14 January 15 th, 2014 Lecture 4 Ch. 2 and Ch. 3

Allocative efficiency implies producing goods & services most wanted by society Decide on allocative efficiency by comparing Marginal (extra) Cost (MC) to Marginal Benefit (MB) Marginal Benefit is the extra benefit associated with consuming one more unit Marginal Cost is the extra opportunity cost of that extra unit

The line through the points shows the marginal benefit from a pizza. Using Resources Efficiently Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

A Growing Economy : Shifts in the Production Possibility Curve 1.Capital accumulation, including all new investment in land, physical equipment, and human resources through improvements in health, education, and job skills 2.Growth in population 3.Increases in the natural resource base. 4.Technological progress

Biased Technological Change Shifts in the Production Possibility Curve 0 B A DVDs Burgers C

If more inputs are available for the production of X and Y equally, the PPC shifts out along both X and Y axes. If fewer inputs are available for the production of X and Y equally, the PPC shifts in along both X and Y axes. If more inputs are available for good X only, the PPC shifts out on the X axis only. If more inputs are available for good Y only, the PPC shifts out on the Y axis only. Examples of Shifts in the Production Possibility Curve

Ch. 3 Supply and Demand

Characteristics of Competitive Market: Many buyers and sellers Buyers and sellers are price takers Goods being offered for sale are all the same quality

Demand, Demand Schedule, Demand Curve: a schedule or a curve that shows the various amounts consumers are willing and able to purchase at each of a series of possible prices, during some specified period of time. Graphically, it refers to the entire demand curve.

Quantity Demanded: refers to a specific amount that will be demanded per unit of time at a specific price, other things constant. Graphically, it refers to a specific point on the demand curve.

Law Of Demand: The claim that, all else equal, the quantity demanded for a good falls when the price of the good rises and vice-versa Rationale: –diminishing marginal utility –income effect –substitution effect

*Real income – consumer’s income measured in terms of the goods it can buy Income Effect: the change in consumption resulting from an increase in the consumer’s real income*. In other words, when the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demanded of the good or service decreases Substitution Effect: the change in consumption resulting from a change in the price of one good relative to the price of the other good. In other words, when the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded of the good or service in question decreases.

Shifts in Demand Versus Movements Along a Demand Curve When price of the product changes, there is a movement along the demand curve When any other determinant of demand changes, there is a shift in the demand curve

Change in Quantity Demanded Versus a Change in Demand Quantity Price D1D1 D2D2 Decrease in quantity demanded Increase in quantity demanded D0D0 Increase in demand demand Decrease in demand demand

Increase means shift to the RIGHT Decrease means shift to the LEFT

Study question From the following list of variables, circle those that change as we move along the market demand curve for pencils, and cross out those that are assumed to be fixed: A.Quantity of pencils; B.Number of potential consumers; C.Price of pencils; D.Price of pens; E.Consumer Income.

Study question From the following list of variables, circle those that change as we move along the market demand curve for pencils, and cross out those that are assumed to be fixed: A.Quantity of pencils; B.Number of potential consumers; C.Price of pencils; D.Price of pens; E.Consumer Income.

Demand Shifters are changes in: tastes (preferences) number of buyers money (nominal) income prices of related goods expectations Change in Demand

3. Changes in money incomes: when income increases demand for NORMAL goods increases demand for INFERIOR goods decreases Normal good – a good, for which, all else equal, an increase in income leads to an increase in quantity demanded Inferior good – a good, for which, all else equal, an increase in income leads to a decrease in quantity demanded Change in Demand, cont’d