1. NS3040 Summer Term 2018 Basic Microeconomic Tools

2. 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

3. 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

4. Production Possibility Curve I
Normal Production Possibility Curve – Increasing Costs

5. Production Possibility Curve II
Constant Cost Production Possibility Curve

6. Production Possibility Curve III
Decreasing Cost Production Possibility Curve

7. Production Possibility Curve IV
Economic Growth Over Time

8. 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

9. Production Possibility Curve V
Resource Constraint Production Possibility Curve

10. Supply and Demand I

11. Supply and Demand II

12. Determinants of Demand

13. Determinants of Supply

14. 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

15. Elasticity of Demand I

16. Elasticity of Demand II

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

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

19. 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

20. 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