Advanced Economics Week #1
Spring 2012
Advanced Economics 3/19/12
http://mrmilewski.com
• OBJECTIVE: Examine course syllabus & beginning
of class administration stuff.
• I. Administrative Stuff
-Welcome Back 
-Syllabus
• II. Structure of the Class
• III. Textbook
• Notice: 62 Days until the Senior’s Last Day!
Advanced Economics 3/20/12
http://mrmilewski.com
• OBJECTIVE: Examine the fundamental economic
concepts from Chapters#1&2.
• I. Journal#1 pt.A
-Watch the following:
-Colorado Students Begin to Learn Financial
Discipline
• II. Journal#1 pt.B
-notes on microeconomics (Chapters#1&2)
• Notice: 61 Days until the Senior’s Last Day!
The Fundamental Economic problem is:
• Scarcity - the condition that results from society not
having enough resources to produce all the things
people would like to have.
• Since people have unlimited wants & limited
resources, scarcity leads to choices.
1.) What to produce?
2.) How to produce?
3.) For whom to produce?
The Factors of Production
• LAND – the gifts of nature
• LABOR – people with all their efforts & abilities
• CAPITAL – the tools, equipment, machinery, and
factories used in the production of goods &
services
• ENTREPRENEURS – a risk taker in search of
profits who does something new with existing
resources
The Circular Flow of Economic Activity
http://upload.wikimedia.org/wikipedia/commons/thumb/b/b8/Circular_flow_of_goods_income.png/350
px-Circular_flow_of_goods_income.png
Division of Labor
Adam Smith – Wealth of Nations 1776
http://cdn.fuuzio.com/assets/Fuuzio-Main-Site-Template/images/adam-smith.jpg
• Division of Labor – work
is arranged so individuals
do fewer tasks than before.
• Specialization – factors of
production perform tasks
more efficiently than
others.
• Human Capital – the sum
of the skills, abilities,
health, and motivation of
the people.
Production Possibilities Frontier
• PPF is a diagram that
represents various
combinations of
goods and/or services
an economy can
produce when all
productive resources
are fully employed.
• See Figure 1.6
page23
http://upload.wikimedia.org/wikipedia/commons/thumb/4/4c/PPF_opportunity_cost.svg/220pxPPF_opportunity_cost.svg.png
Trade-offs & Opportunity Costs
• Trade-offs – alternate
choices
• Opportunity costs –
the cost of the next
best alternative use of
money, time, or
resources when one
choice is made rather
than another.
http://reason.com/assets/mc/psuderman/2012_02/simpdoc.gif
Types of Economic Systems
Roles in Market Economy
• Entrepreneur –
-organizes land, labor, and capital in order to make a profit
• Consumer –
-determines what is made “the customer is always right”
• Government –
-protector of private property, enforcer of contracts, and definer
of fairness
-provider of services like defense, education, and public welfare
-consumer of goods
-regulator charged with preserving competition
-promoter of national goals
Advanced Economics 3/21/12
http://mrmilewski.com
• OBJECTIVE: Examine the fundamental economic
concepts from Chapters#3&4.
• I. Journal#2 pt.A
-Watch the following:
-Video: Wants vs. Needs
• II. Journal#2 pt.B
-notes on microeconomics (Chapters#3&4)
• III. Notice: 60 Days until the Senior’s Last Day!
Price stability
• Price stability adds a degree of certainty to the
future.
• If inflation–a rise in the general level of prices–
occurs, workers need more money to pay for food,
clothing, and shelter.
• How inflation works:
-Wendy’s Jr. Cheese Deluxe
-Cost $.99
CPI
http://www.danielstrading.com/resources/newsletter/2011/03/15/comparitiveconsumer-price-index.png
• Consumer Price Index – an index
used to measure price changes for a
basket of frequently used common
items.
• The CPI reports on price changes for
90,000 items in 364 categories from
85 geographic areas of the country
and are compared to their 1982-84
base year prices.
• Produce Price Index – measure
price changes paid by domestic
consumers for their inputs and is
based on a sample of about 100,000
commodities and uses 1982 as the
base year.
Types of Firms
• Sole proprietorship – a business owned and run by one
person.
• Partnerships – business jointly owned by two or more
persons.
• There are two types of partnerships:
*general partnerships – all partners actively run the business
*limited partnership – at least one partner is not active in
running the business
• Corporation – a form of business organization that is
recognized by the law as having all the legal rights of an
individual.
• They have the right to buy & sell property, enter into legal
contracts, and to sue & be sued.
What is demand?
• Demand – the desire, ability, and willingness to
buy a product.
• In a market economy, you compete with other
consumers who demand the same products as you.
• If a lot of people demand the same product, the
price will rise.
• If there are a lot of the same product, and very few
people who demand it, the price will fall.
Simplistic view of demand
•
•
•
•
As price increases, demand decreases
As price decreases, demand increases
This is an inverse relationship
When an inverse relationship is graphed, the
slope is negative
Demand Changes
• Change in quantity
demanded –
movement along the
demand curve
Demand Changes
• Change in demand –
shift in the demand
curve
Elasticity
• Elasticity – a measure of responsiveness that tells
how a dependent variable such as quantity responds to
an independent variable such as price.
• 3 Types of Demand Elasticity
 Elastic Demand - A small change in price causes a
big change in quantity demanded
 Inelastic Demand - A big change in price causes a
small change in quantity demanded
 Unit Elastic Demand - Any change in price causes a
proportional change in quantity demanded
Advanced Economics 3/22/12
http://mrmilewski.com
• OBJECTIVE: Examine the fundamental economic
concepts from Chapter#4.
• I. Journal#3 pt.A
-Watch the following:
-How Uncertainty, Speculation Factor Into Gas
Prices
• II. Journal#3 pt.B
-notes on microeconomics (Chapter#4)
• Notice: 59 Days until the Senior’s Last Day!
Change in Demand v. Change in Quantity
Demanded
Elastic Demand
• A small change in price causes a big change
in quantity demanded.
• Slope is less than -1
• Example
-fresh foods (green beans, tomatoes, apples)
Inelastic Demand
• A big change in price causes a small change
in quantity demanded.
• Slope is greater than -1
• Examples:
-table salt
-gasoline
Unit Elastic Demand
• Any change in price causes a proportional
change in quantity demanded.
• Slope equals -1
Elasticity Formulas
• Formula to determine elasticity
% change in Q = elasticity
% change in P
• Formula to determine % change in P or Q
(NEW P or Q) – 1 = decimal equivalent
(OLD P or Q)
• Answer x 100 = % Change in P or Q.
Example #1
• The manufacturer of a pain medication
reduces the price for medication by 30%
and the percent change in quantity
demanded is 30%. What is the elasticity for
the pain medication?
• % change in Q = 30%
• % change in P = -30%
• Elasticity = -1
Example #2
• A Chinese Buffet increased prices from
$4.95 all you can eat to $5.95 all you can
eat. The number of big eaters went from 58
to 36. What is the elasticity for All You Can
Eat Chinese?
• First we need to figure out the % change in
P & the % change in Q.
Chinese Buffet
• % change in P
• NEW P = 5.95
• OLD P = 4.95
(5.95) – 1 =
(4.95)
• .20
• 20%
• % change in Q
• NEW Q = 36
• OLD Q = 58
(36) – 1 =
(58)
• -.37
• -37%
Chinese Buffet
• % change in Q =-37%
• % change in P =20%
• The elasticity for the
-37% =
Chinese Buffet is
20%
elastic
• Elasticity = -1.85
If you owned the Chinese Buffet, would you
keep the price of the Buffet at 5.95?
• 5.95 x 36 = $214.20
• 4.95 x 58 = $287.10
Law of Supply
•
•
The principle that suppliers will normally
offer more for sale at higher prices and
less at lower prices.
As price goes up, quantity produced also
goes up
Supply Curve
• At high prices more
will be supplied. At
lower prices, less will
be supplied.
• Price and quantity
supplied are directly
related.
• The drawing to the
right is a typical
supply curve.
Change in supply
• A change in supply
occurs when
something happens to
cause suppliers to
offer different amounts
of products for each
price in the market.
Advanced Economics 3/23/12
http://mrmilewski.com
• OBJECTIVE: Examine the fundamental economic
concepts from Chapters#5&6.
• I. Journal#4 pt.A
-Watch the following:
-NBR
• II. Journal#4 pt.B
-notes on microeconomics (Chapters#5&6)
• Notice: 58 Days until the Senior’s Last Day!
What can cause a change in supply to the right?
• Lower cost of inputs such
as cheaper labor or cheaper
packaging
• More productive/better
trained labor.
• New technology like more
fuel efficient delivery
vehicles, better/faster
machines
• Lower taxes/government
subsidies (subsidy is a
government payment to an
individual or business to
encourage or protect a
certain economic activity.)
What can cause a change in supply to the left?
•
•
•
•
•
More expensive labor
Higher taxes
Less efficient workers
Broken technology
Withdrawal of
subsidies
Supply Elasticity
Type of Elasticity
Change in Quantity
Supplied Due to a
Change in Price
Elastic
More than proportional
Unit Elastic
Proportional
Inelastic
Less than proportional
Supply Elasticity
• Supply elasticity is caused by the ability of
a producer to change output.
• If producers can increase output quickly,
supply is elastic.
• If producers can not increase output quickly,
supply is inelastic.
Theory of Production
• The relationship between the factors of
production (land, labor, capital,
entrepreneurs) and output of goods and
services.
• Short run – change in the variable of labor
• Long run – change in land & capital
Law of Variable Proportions
• Stage I – Increasing returns
*output rises at an increasingly faster rate (each new
worker makes more than the previous worker did)
• Stage II – Diminishing returns
*output rises at a diminishing rate (each new worker
increases output, but not as much as the previous worker
did)
• Stage III – Negative returns
*output decreases as each new worker is added
Where will profits be maximized?
• When marginal
cost &
marginal
revenue are
equal.
How is price determined?
• Price is determined
by the intersection
of supply &
demand.
Prices as Signals
• Price – the monetary value of a product as
established by supply & demand.
• Price is a signal that helps us make
economic decisions.
• High prices are a signal for producers to
produce more and consumers to buy less.
• Low prices are a signal for producers to
produce less and consumers to buy more.
Inelastic Demand v. Elastic Demand
Figure 6.3a
Figure 6.3b