1. Lesson One Introduction, Markets and Demand
BUS 111 – Micro Economics
Lesson One Introduction, Markets and Demand
Peter Rumble
Bangor Transfer Abroad Programme

2. What I want you to be able to do by 20th October
Understand Economic news In Context
Example –India and China = same population but different in what ways?
What is economics? – Thinking like an economist..

3. What you need to do.. Be able to understand economic terms
Discuss economic matters
One handed economist….so there is no right answer as long as well argued..

4. Economics Introductory Thoughts
What is Economics?
Micro – Economics
Macro – Economics

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

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

7. It’s the economy - stupid
"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.
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.”

8. Economics? Handling scarce resources Maximising Wealth – Well being
Factors of production..
Labour
Land
Capital
Enterpreneurial skill
Maximising Wealth – Well being

9. Maximising Wealth
Economic Choices – Production Possibilities Frontiers
Rice or Wheat?
Computers or Cars? Page 26
Computers or Rice?

10. The Circular Flow
The simple circular flow model of the economy is designed to understand the basic operations of the economy

11. 8 5 1 2 Households Businesses 4 3 7 6 Markets for good and services
Markets for factors of production 5 1 2
Households
Businesses 4 3
Markets for good and services 7 6

12. 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.

13. Flow 3 – Businesses sell the goods and services made.
Flow 1 – Households sell their land , labour 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.

14. 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

15. 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).

16. 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.

17. Flows 5 through 8 are flows of money.
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.

18. 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 ?.

19. 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, noodles, milk, electricity.
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.

20. The Circular Flow
Basic model but in reality it is more complex – Government Trade Advertising, The Invisible Hand,
Not complicated…. Just complex
Quick break….

21. Ten Principles of Economics1
Ten Principles of Economics

22. Economy. . .
. . . The word economy comes from a Greek word for “one who manages a household.”

23. TEN PRINCIPLES OF ECONOMICS
A household and an economy face many decisions:
Who will work?
What goods and how many of them should be produced?
What resources should be used in production?
At what price should the goods be sold?

24. TEN PRINCIPLES OF ECONOMICS
Society and Scarce Resources:
The management of society’s resources is important because resources are scarce.
Scarcity. . . means that society has limited resources and therefore cannot produce all the goods and services people wish to have.

25. TEN PRINCIPLES OF ECONOMICS
Economics is the study of how society manages its scarce resources.

26. TEN PRINCIPLES OF ECONOMICS
How people make decisions.
People face tradeoffs.
The cost of something is what you give up to get it.
Rational people think at the margin.
People respond to incentives.

27. TEN PRINCIPLES OF ECONOMICS
How people interact with each other.
Trade can make everyone better off.
Markets are usually a good way to organize economic activity.
Governments can sometimes improve economic outcomes.

28. TEN PRINCIPLES OF ECONOMICS
The forces and trends that affect how the economy as a whole works.
The standard of living depends on a country’s production.
Prices rise when the government prints too much money.
Society faces a short-run tradeoff between inflation and unemployment.

29. Principle #1: People Face Tradeoffs.
“There is no such thing as a free lunch!”

30. Principle #1: People Face Tradeoffs.
To get one thing, we usually have to give up another thing.
Guns v. butter
Food v. clothing
Leisure time v. work
Efficiency v. equity
Making decisions requires trading off one goal against another.

31. Principle #1: People Face Tradeoffs
Efficiency v. Equity
Efficiency means society gets the most that it can from its scarce resources.
Equity means the benefits of those resources are distributed fairly among the members of society. 9

32. Principle #2: The Cost of Something Is What You Give Up to Get It.
Decisions require comparing costs and benefits of alternatives.
Whether to go to college or to work?
Whether to study or go out on a date?
Whether to go to class or sleep in?
The opportunity cost of an item is what you give up to obtain that item. 10

33. Principle #2: The Cost of Something Is What You Give Up to Get It.
LA Laker basketball star Kobe Bryant chose to skip college and go straight from high school to the pros where he has earned millions of dollars. 10

34. Principle #3: Rational People Think at the Margin.
Marginal changes are small, incremental adjustments to an existing plan of action.
People make decisions by comparing costs and benefits at the margin. 11

35. Principle #4: People Respond to Incentives.
Marginal changes in costs or benefits motivate people to respond.
The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs! 12

36. Principle #5: Trade Can Make Everyone Better Off.
People gain from their ability to trade with one another.
Competition results in gains from trading.
Trade allows people to specialize in what they do best. 15

37. Principle #6: Markets Are Usually a Good Way to Organize Economic Activity.
A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
Households decide what to buy and who to work for.
Firms decide who to hire and what to produce. 16

38. Principle #6: Markets Are Usually a Good Way to Organize Economic Activity.
Adam Smith made the observation that households and firms interacting in markets act as if guided by an “invisible hand.”
Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social costs of their actions.
As a result, prices guide decision makers to reach outcomes that tend to maximize the welfare of society as a whole. 16

39. Principle #7: Governments Can Sometimes Improve Market Outcomes.
Market failure occurs when the market fails to allocate resources efficiently.
When the market fails (breaks down) government can intervene to promote efficiency and equity. 17

40. Principle #7: Governments Can Sometimes Improve Market Outcomes.
Market failure may be caused by
an externality, which is the impact of one person or firm’s actions on the well-being of a bystander.
market power, which is the ability of a single person or firm to unduly influence market prices. 18

41. Standard of living may be measured in different ways:
Principle #8: The Standard of Living Depends on a Country’s Production.
Standard of living may be measured in different ways:
By comparing personal incomes.
By comparing the total market value of a nation’s production. 21

42. Principle #8: The Standard of Living Depends on a Country’s Production.
Almost all variations in living standards are explained by differences in countries’ productivities.
Productivity is the amount of goods and services produced from each hour of a worker’s time. 21

43. Standard of living may be measured in different ways:
Principle #8: The Standard of Living Depends on a Country’s Production.
Standard of living may be measured in different ways:
By comparing personal incomes.
By comparing the total market value of a nation’s production. 21

44. Principle #9: Prices Rise When the Government Prints Too Much Money.
Inflation is an increase in the overall level of prices in the economy.
One cause of inflation is the growth in the quantity of money.
When the government creates large quantities of money, the value of the money falls. 23

45. òInflation ð ñUnemployment
Principle #10: Society Faces a Short-run Tradeoff Between Inflation and Unemployment.
The Phillips Curve illustrates the tradeoff between inflation and unemployment:
òInflation ð ñUnemployment
It’s a short-run tradeoff! 24

46. Summary
When individuals make decisions, they face tradeoffs among alternative goals.
The cost of any action is measured in terms of foregone opportunities.
Rational people make decisions by comparing marginal costs and marginal benefits.
People change their behavior in response to the incentives they face.

47. Summary Trade can be mutually beneficial.
Markets are usually a good way of coordinating trade among people.
Government can potentially improve market outcomes if there is some market failure or if the market outcome is inequitable.

48. Summary Productivity is the ultimate source of living standards.
Money growth is the ultimate source of inflation.
Society faces a short-run tradeoff between inflation and unemployment.

49. Markets
A market is a group of buyers and sellers of a particular good or service.
The terms supply and demand refer to the behaviors of people as they interact with one another in markets.
And Economics, especially Microeconomics is about how supply and demand interact in markets. 4

50. Market Types or Structures
Competitive Markets
Products are the same,price takers
Monopoly
Monopolistic Competition
Oligopoly