Lesson One Peter Rumble Bangor Transfer Abroad Programme BUS 111 – Micro Economics

BUS Micro Economics It’s the economy - stupid n "It's the economy, stupid" is a slight variation of the phrase "The economy, stupid" which James Carville had coined as a campaign strategist of Bill Clinton's successful 1992 presidential campaign against sitting president George H. W. Bush.James CarvilleBill Clinton1992 presidential campaignGeorge H. W. Bush n Carville's original phrase was meant for the internal audience of Clinton's campaign workers as one of the three messages to focus on, the other two messages being "Change vs. more of the same" and "Don't forget health care.”

BUS Micro Economics It’s the economy – stupid continues n Clinton's campaign had advantageously used the then- prevailing recession situation in the US as one of the campaign means to successfully unseat George H. W. Bush. In March 1991, days after the ground invasion of Iraq, 90% of polled Americans approved of President Bush's job performance. [1] Later the next year, Americans' opinions had turned sharply; 64% of polled Americans disapproved of Bush's job performance in August [1]recessionground invasion of Iraq [1]

BUS Micro Economics Economics Introductory Thoughts n What is Economics? n Micro – Economics n Macro – Economics n Ten Principles

BUS Micro Economics Economics Introductory Thoughts n Micro Economics n This is concerned with the individual parts – the demand and supply of goods and services n Focuses on households (consumer expenditure) and firms (organisations) n How markets work.

BUS Micro Economics Economics Introductory Thoughts n Macro Economics n This is concerned with the economic aggregate demand and supply – the grand totals of households /individuals and firms activities. n The impact nationally of prices- inflation, employment and savings/ investments n International aspects.

BUS Micro Economics Economics? n Handling scarce resources äFactors of production.. äLabour äLand äCapital äEnterpreneurial skill n Maximising Wealth – Well being

BUS Micro Economics Maximising Wealth n Economic Choices – Production Possibilities Frontiers n Rice or Wheat? n Computers or Cars? Page 26 n Computers or Rice?

BUS Micro Economics The Circular Flow The simple circular flow model of the economy is designed to understand the basic operations of the economy

BUS Micro Economics Households Businesses Markets for factors of production Markets for good and services

BUS Micro Economics The simple circular flow In the simple circular flow model two players of the economic game: Households and Businesses. Households are: sellers of all inputs, or factors of production, and buyers of all output of good and services. Businesses are: buyers of all inputs and sellers of all output.

BUS Micro Economics Flow 1 – Households sell their land, labor and capital in the market as factors of production. Flow 2 – Businesses buy these factors of production and use them to make goods and services. Flow 3 – Businesses sell the goods and services made. Flow 4 - Households buy the goods and services. So, when we start at the households and go counterclockwise from 1 to 4 we will follow the flows of what are called “real” things – the resources and the goods and services made. These are what are really important in the economy because these are the items used to create our standard of living.

BUS Micro Economics So, when we start at the households and go counterclockwise from 1 to 4 we will follow the flows of what are called “real” things – the resources and the goods and services made. These are what are really important in the economy because these are the items used to create our standard of living Consumption

BUS Micro Economics Next we look at flows 5 through 8 and these are financial flows and we see a connection between spending, revenues, and income. Flow 5 – The households payment after selling resources in the factor markets is called income. Flow 6 – When the households buy stuff they pay for it and the term used in the national economy sense to represent this buying is spending or consumption expenditure. The households buy from businesses in the markets for output of good and services. Flow 7 – When the businesses sell goods and services to household the businesses bring home revenue. (So, if we ignore government for now, expenditure = revenue).

BUS Micro Economics Flow 8 – When businesses take in revenue from sales then they use the money to pay for the resources they have purchased in the markets for factors of production. Here we talk about costs of business So the flows 5 through 8 are the financial flows that correspond to our “real” flows. The simple circular flow model is a simple model of the day to day operations of the economy.

BUS Micro Economics Flows 1 through 4 are flows of inputs (resources) and output (goods and services). Flows 5 through 8 are flows of money. The flow of money is one way we account for the flow of resources and goods and services.

BUS Micro Economics Analogy – A grocery store Denis We look at the revenue of a grocery store to get a feel for the output amount – but we know the output is made up of items like milk, noodles, drinks etc… We look at expenses to get a feel for amount of inputs used – but we know the inputs are hours of labor (wages), electricity used, rents paid and so on.

BUS Micro Economics Final thought The economy is large and complex. Each individual business has a pretty decent grip on what resources are being used and can probably make a list of what those resources are on a sheet of paper – you know, labor, cash registers, etc Each individual household knows what goods and services are being bought and can probably make a list of those items on a sheet of paper – you know, cookies, milk, etc. In large complex economies it would be difficult to get these lists from businesses and households. But we have come up with ways to get at the money flows. Often our focus will be on money flows when we really want to talk about the lists.

BUS Micro Economics The Circular Flow n Basic model but in reality it is more complex – Government Trade Advertising, The Invisible Hand, n Not complicated…. Just complex

BUS Micro Economics The “10” principles 1 and 2 – n People face trade offs n The cost of something is what you give up to get it - OPPORTUNITY COST.

BUS Micro Economics The “10” principles 3 n Rational people (firms) think at the MARGIN. n The marginal benefit depends on how many units already “owned” and rarity of item - Peter’s mugs!!!

BUS Micro Economics The “10” principles 4 n People respond / need incentives. n Costs and benefits. n Tangible versus intangible.

BUS Micro Economics The “10” principles 5 n Trading can make everyone better off. n Specialisation

BUS Micro Economics The “10” principles 6 & 7 n Markets are usually a good way to organize economic activity n Governments can sometimes improve market outcomes. PROPERTY RIGHTS.

BUS Micro Economics The “10” principles 8 n A countries standard of living depends on its ability to produce goods and services n PRODUCTIVITY

BUS Micro Economics The “10” principles 9 n Prices will rise when Governments PRINT too much money n INFLATION – QUANTITATIVE EASING

BUS Micro Economics The “10” principles 10 n Economies face a short/medium run trade off between Inflation and Employment n The Business Cycle.

BUS Micro Economics Markets u A market is a group of buyers and sellers of a particular good or service. u The terms supply and demand refer to the behavior of people... as they interact with one another in markets. u And Economics, especially Microeconomics is about how supply and demand interact in markets.

BUS Micro Economics Market Types or Structures n Competitive Markets äProducts are the same,price takers n Monopoly n Monopolistic Competition n Oligopoly

BUS Micro Economics Demand Curve $ Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0

BUS Micro Economics Why does the Demand Curve Slope Downward? n Law of Demand äInverse relationship between price and quantity. n Law of Diminishing Marginal Utility. äUtility is the extra satisfaction that one receives from consuming a product. äMarginal means extra. äDiminishing means decreasing.

BUS Micro Economics Market Demand u Market demand refers to the sum of all individual demands for a particular good or service. u Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

BUS Micro Economics Ceteris Paribus Ceteris paribus is a Latin phrase that means all variables other than the ones being studied are assumed to be constant. Literally, ceteris paribus means “other things being equal.” The demand curve slopes downward because, ceteris paribus, lower prices imply a greater quantity demanded!

BUS Micro Economics Two Basic Rules for Movements vs. Shifts n Rule One äWhen an independent variable changes and that variable does not appear on the graph, the curve on the graph will shift. n Rule Two äWhen an independent variable does appear on the graph, the curve on the graph will not shift, instead a movement along the existing curve will occur. n Let’s apply these rules to the following cases of supply and demand!

BUS Micro Economics Change in Quantity Demanded versus Change in Demand Change in Quantity Demanded u Movement along the demand curve. u Caused by a change in the price of the product.

BUS Micro Economics Changes in Quantity Demanded 0 D1D1 Price of Cigarettes per Pack Number of Cigarettes Smoked per Day A tax that raises the price of cigarettes results in a movement along the demand curve. A C $

BUS Micro Economics Change in Quantity Demanded versus Change in Demand Change in Demand u A shift in the demand curve, either to the left or right. u Caused by a change in a determinant other than the price.

BUS Micro Economics Determinants of Demand u Market price u Consumer income u Prices of related goods u Tastes u Expectations u What are some examples?

BUS Micro Economics Consumer Income Normal Good $ Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in demand An increase in income... D1D1 D2D2

BUS Micro Economics Consumer Income Inferior Good $ Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Decrease in demand An increase in income... D1D1 D2D2

BUS Micro Economics Prices of Related Goods Substitutes & Complements u When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. u When a fall in the price of one good increases the demand for another good, the two goods are called complements.

BUS Micro Economics Change in Quantity Demanded versus Change in Demand

BUS Micro Economics Supply Curve $ Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0

BUS Micro Economics Law of Supply The law of supply states that there is a direct (positive) relationship between price and quantity supplied.

BUS Micro Economics Supply Quantity supplied is the amount of a good that sellers are willing and able to sell.

BUS Micro Economics Change in Quantity Supplied 1 5 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve.

BUS Micro Economics Market Supply u Market supply refers to the sum of all individual supplies for all sellers of a particular good or service. u Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

BUS Micro Economics Determinants of Supply u Market price u Input prices u Technology u Expectations u Number of producers u What are some examples?

BUS Micro Economics Change in Supply Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S1S1 S2S2 S3S3 Increase in Supply Decrease in Supply

BUS Micro Economics Change in Quantity Supplied versus Change in Supply

BUS Micro Economics Supply Demand Price of Ice-Cream Cone Quantity of Ice-Cream Cones Equilibrium of Supply and Demand $ Equilibrium

BUS Micro Economics Price of Ice-Cream Cone Quantity of Ice-Cream Cones $ Supply Demand Surplus Excess Supply

BUS Micro Economics Excess Demand Quantity of Ice-Cream Cones Price of Ice-Cream Cone $ Supply Demand $1.50 Shortage

BUS Micro Economics Three Steps To Analyzing Changes in Equilibrium u Decide whether the event shifts the supply or demand curve (or both). u Decide whether the curve(s) shift(s) to the left or to the right. u Examine how the shift affects equilibrium price and quantity.

How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones Supply Initial equilibrium D1D1 1. Hot weather increases the demand for ice cream... D2D resulting in a higher price... $ and a higher quantity sold. New equilibrium Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

BUS Micro Economics S2S2 How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1S An earthquake reduces the supply of ice cream... New equilibrium 2....resulting in a higher price... $ and a lower quantity sold.