Most students find the introductory course in economics interesting but difficult. This section is designed to enhance comprehension of introductory economics by presenting the core material in an easily understood format. Students can use this section as a supplement to an introductory textbook or as an independent text for self-study. Also, when combined with a series of readings, this section can serve as the required course text.
Chapter 1: Introduction to Economics.
Chapter Summary: 1. Economics is a discipline which studies how scarce economic resources are used to maximize production for a society. Microeconomics studies the economic behavior of individual units; Macroeconomics studies the behavior of aggregates.
2. Economic theories and models are developed to facilitate the understanding of complex economic phenomena. Models of economic behavior relate a dependent variable to a limited number of independent variables.
3. Economists use tables, graphs, and equations to present modeled behavior. Graphs are useful in that they provide visualization of the relationship between two variables. An equation is a more concise presentation of a relationship and is essential for the forecasting of economic behavior.
For an expert-understanding of chapter 1, we recommend our students to revise the following link:
http://info.psu.edu.sa/psu/fnm/hsalem/econstudy%20guide/econ_sg_chap01.pdf
http://socyberty.com/economics/adam-smith-and-the-invisible-hand/
In addition to the summary above (the link), and to those people who get confused
with too much reading and papers, we collected a selection of videos that we
hope will enhance your understanding of the subject; however this video section
does not cover all the chapter, there are still some ideas on which we are still
working.
<<A video is worth a thousand words>>
Economics and scarcity:
Macroeconomics Vs Microeconomics:
Positive and Normative Economics: What should be and what is?
A word about Mixed Economy:
A student's PPF:
Again the PPF???? yes, but this time, it's with Mr Phill and we will be talking also about shifts of the PPF.
The opportunity Cost.
One More thing:
Please have a look at Appendix 1 page 22, and try to understand the difference between shifts of curves and movement along curves.
Practice makes perfect
In addition to the exercices given with the summary above, here are some intresting links:
Mcgraw Hill official Website a very intresting tool that we hope you will use frequently.
For a more deep understanding of The PPF's curve "shifts of and movement along...", we found out for you the following link.
http://tutor2u.net/economics/revision-notes/as-markets-production-possibility-frontier.html
Chapter 2: Markets and Government in a Modern
Economy
This chapter introduces a series of fundamental ideas and concepts that define the essence of the economic problem and the source of economic opportunity for an advanced economy. They are important because they form the foundation for the analysis of a market economy. The tools and methods that you learn here will be carried throughout the text and developed in greater detail as you make your way through the course. It is essential, therefore, that you grasp each of them before you proceed.
invisible hand. Prices rise and fall naturally as people change their behavior; there is no need for a higher a. Market allocations are only efficient when conditions of perfect competition hold; this means that no
What Is a Market Economy?
1. A market economy has at its heart the actions of buyers and sellers who exchange goods and services with one another. There is no higher authority that directs the behavior of these economic agents; rather, it is the invisible hand of the marketplace that allocates final goods and services, as well as factors of production.
2. A market is a mechanism through which buyers and sellers interact to determine prices and exchange goods and services.
3. Buyers and sellers receive signals from one another in the form of prices. If buyers want to buy more of a good, prices rise and sellers respond by supplying more to the marketplace. If buyers want to buy less of a good, prices fall and sellers respond by supplying less to the marketplace. This is what is meant by the term authority. Price signals tell sellers what to do with their production levels.
4. Market equilibrium occurs when the price is such that the quantity that buyers are interested in purchasing is equal to the quantity that sellers are interested in supplying to the market.
4. The market mechanism allows an economy to simultaneously solve the three economic problems of what, how, and for whom. Consumers indicate their preferences over what is
produced through their willingness to pay for a good or service "The dollar votes" . Firms
respond to this by considering the mix of final products that will
maximize their own profits, that is, the difference between their
revenues from sales and their production costs. This must involve the
question how, since firm production costs
are determined by the prices of inputs and technology used in the
production process. Once these questions have been addressed, for whom is found to be those consumers who have the money to pay for the goods and services produced and it is mainly determined by the supply and demand in the markets for factors of production. The Invisible Hand In his book the wealth of Nations, Adam Smith argued that even though every individual intends only his own security, only his own gain, ... he is led by an invisible to promote an end which was no part of his inttention. B y pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. The property of the invisible hand doesn't work if there is market failures.
B. Trade, Money, and Capital 1.
Advanced economies use complex systems of trade in order to accumulate
the bundle of goods and services that the people in that economy want
to consume. People produce the goods and services that they can produce
most efficiently << This is what we call specialization >>, and then they trade their excess for other items that
they need. As compared to medieval economies, today's economy depends heavily on: Specialization and division of labor.
***** Specialization occurs when people and countries concentrate their efforts on a particular set of tasks- it permits each person and country to use to best advantage the specific skills and ressources that are available
***** Division of labor consiste of dividing production into a number of small specialized steps or tasks.
3. In this course, the term capital does not refer
to money. Instead, the term refers to productive inputs that have,
themselves, been manufactured. The notion of capital includes durable
items like blast furnaces, factory buildings, machine tools, electric
drills, jack hammers, and so on. It also includes stocks of
semifinished goods. These are goods which are on the way to becoming
consumer goods but which are still manufactured inputs to be used in
later stages of the production process. 4.
Capital accumulation is an important determinant of economic growth. An
economic system that builds a strong capital base is investing in a
factor of production that will make all other factors more productive
or useful. Capital is typically privately owned in a market economy, so
that private individuals can make decisions about its use. Because
these individuals will directly benefit from the use of their capital,
they have some incentive to make sure that it is employed efficiently.
A modern economy depends upon special features to become highly
productive. Division of labor and specialized capital goods allow
individuals to become highly skilled in particular areas. But
specialized entities can survive only because monetized trade allows
different people and countries easily to sell their products and buy
things for everyday life. Specialization creates enormous efficiencies;
increased production and makes trade possible, money allows trade to
take place quickly and efficiently; and a sophisticated financial
system is crucial for transforming some people's saving into other
people's capital. C. The Economic Role of Government 1.
In the real world, markets do not always operate as smoothly as we
might like. Market imperfections lead to a wide range of problems, and
governments step in to address them. 2. Governments intervene in a market economy in order to promote efficiency.
firm or consumer is large enough to affect input or output market
prices. When there are many small firms in a market, competition forces
all firms to operate with lowest possible costs and prices.
On the other hand, imperfect competition occurs when a buyer or seller can affect a good's price. b. Market allocations become inefficient when externalities occur.
Externalities are the positive or negative effects on outside parties
that production or consumption in an industry yields. For example, when
people receive education, schools and students benefit, but so do
others in the community who now have neighbors who are better educated.
Positive and Negative Externalities; some examples.
Public Goods.
c. Market allocations often do not work well, if at all, in the case of public goods. A public good is
something that is nonrival (my consumption of the good does not exclude
your consumption of it) and that can be collectively consumed (we can
both enjoy it at the same time). Because it is difficult, or at least
expensive, to exclude consumers once the good is available, these types
of goods are often provided by the government. One example is snow
removal. Once the street has been plowed, everyone on the block can use
it; however, it is very impractical to charge residents every time they
use the plowed street.
3. Governments intervene in a market economy in order to promote equity, or
fairness, in the distribution of resources and income. This is a
difficult concept because there is no universal definition of fairness.
Markets distribute goods and services to those who have the money to
purchase them, not necessarily to those who need or deserve them the
most. 4. Governments intervene in a market economy in order to promote macroeconomic growth and stability.
Fiscal policies of government (the power to tax and spend) and monetary
policies (the power to adjust the money supply and interest rates) help
to move an economy along a straight path, avoiding periods of excessive
inflation and unemployment.
Practice makes perfect
To evaluate your degree of understanding of the chapter, please have a look at the following links:
Chapter 3: Basic elements of Supply and Demand
This chapter introduces the notions of supply and demande and shows how they operate in competitive markets for individual commodities. We begin with demande curves and then discuss supply curves. using these basic tools we will see how thw the market price is determined where these two curves intersect- where the forces of supply and demande are just in balance- the price mechanisme- which brings supply and demand into balance or equilibrium.
The Demand Schedule
There exists a definite relation ship between the market price of a good and the quantity demanded of that good, other things held constant. This relation between the price and the quantity bought is called the demand schedule or the demand curve.
The demand curve always slopes downward and this important property is called the Law of Downward Sloping Demand. This law states that: when the price of a commodity is raised (and other things are held constant) buyers tend to buy less of the commodity. Similarly when the price is lowered, other things being constant, quantity demanded increases.
The market demand curve is found by adding together the quantities demanded by all individuals at each price.
Forces behind the demand Curve:
Changes in the market size: More population means more consumers. and more consumers means more consumption, then more demand
The prices and availability of Related Goods: Lets take the example of Moroccan tea. You know that sugar and tea are related goods "we can not consume one without consuming the other". Imagine for example the price of sugar rised up and reached 2000DH/Kg. For sure the consumption of sugar will decrease "higher is the price lower is the consumption" and with it the consumption of tea.
Taste or preferences: Each consumer has a specific preference and taste. For example, moroccan citizen, in general, do not like spicy food. then selling spicy food in morocco is not a good idea, maybe in tunisia, but not in morocco, because as I said the demand will be low and not intresting in terms of quantity.
Special influences: The demand for big cars will be important in KSA,because the fuel is cheap and ...., but low in Zimbabwe, because people are poor and the fuel is expensive.....
Factors affecting the demand curve.
Equilibrium of Supply and Demand
The equilibrium price and quantity comes where the amount willingly supplied equals the amount willingly demanded. In a competitive market, this equilibrium is found at the intersection point of the supply and demand curves. There are no shortage or surplus at the equilibrium.
For a more deeper understanding of the Equilibrium, the shortage and the surplus; please have a look at the following link:
http://student.ccbcmd.edu/courses/econ152e/mywebctfiles/module07/market05.htm
Practice makes Perfect
http://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter3/origin_of_the_idea.html
Chapter 4: Applications of Supply and Demand
, In order to turn supply and demand into a trully useful tool, we need to know how much supply and demand respond to changes in price. Some purchases like those for vacation travel, are very sensitive to price changes "luxuries" . Others like food or electricity, are necessities for which consumer purchases respond very little to price changes. The quantitative relationship between price and quantity purchased is analyzed using the crucial concept of Elasticity.
Price Elasticity of Deamnd:
The price Elasticity of demand (or simply called price elasticity) measures how much the quantity demanded of a good changes when it's price changes. The precise definition of price elasticity is the percentage change in quantity demanded divided by the percentage change in price.
To well assimilate the concepte of elasticity please have a look at the following video.
Calculating Price Elasticity of Demand:
The formula that we are going to use for calculating elasticity is:
Price elasticity of demand = PED = ( % change in quantity demanded / %change in Price )
Now, enjoy your video section:
A shortcut for calculating elasticity:
The elasticity of a straight line at a point is given by the ratio of the lenght of the line segment below the point to the lenght of the line segment above the point.
The Paradox of the Bumper Harvest.
We can use elastic ties to illustrate one of the most famous paradoxes
of all economics: the paradox of the bumper harvest. Imagine that in a
particular year nature smiles on farming. A cold winter kills off the
pests, spring comes early for planting, and there are no killing
frosts, rains nurture the growing shoots, and a sunny October allows a
record crop to come to market. At the end of the year, family Jones
happily settles down to calculate its income for the year. The Joneses
are in for a major surprise: The good weather and bumper crop have
lowered their and other farmers' incomes.
How this can be? The answer lies in the elasticity of demand for
foodstuffs. The demands for basic food products such as wheat and corn
tend to be inelastic, for these necessities, consumption changes very
little in response to price. But this means farmers as a whole receive
less total revenue when the harvest is good than when it is bad. The
increase in supply arising from an abundant harvest tends to lower the
price. But the lower price does not increase quantity demanded very
much. The implication is that a low price elasticity of food means that
large harvests tend to be associated with low revenue.
Price Elasticity of Supply:
The PES is the percentage change in quantity supplied divided by the percentage change in price.
Almost all what you need to know bout Price Elasticity of Supply is on the following video.
A Rup up of part B
Taxes and Tax Incidence.
Minimum Floors and Maximum Ceilings
Both of these (Minimum Floors and Maximum Ceilings) are government interventions, meaning they could not be altered by the market forces of demand.
Price ceiling is set below the equilibrium price (maximum price),
basically lowering the price of certain goods in order to make these
goods affordable for consumers.
Price floor is set above the equilibrium price (minimum price),
increasing the price of certain goods in order to protect the interest
of certain unproductive sectors(producers).
In short, price ceiling is the maximum price set by the government to
protect the consumers while price floor is the minimum price also set
by the government but to protect the producers.
Chapter 5: Demand and consumer Behavior
Choice and Utility Theory:
To explain consumer behavior, economics relies on the fundamental premise that people chose those goods and services they value most highly. to describe how people chose among different consumption possibilities, economists developed the notion of utility. In a word, utility denotes satisfaction. More precisely, it refers to how consumers rank different goods ans services.
Marginal Utility and the Law of diminishing Marginal Utility:
Marginal Utility denotes the additional utility you get from the consumption of an additional unit of a commodity.
The Law of Diminishing Marginal Utility states that, as the amount consumed of a good increases, the marginal utility of that good tend to diminish.
Ordinal Vs Cardinal Utility
Cardinal utility is an economic approach that consists on measuring the consumer's satisfaction. The problem with this approach is that there is no way to represent the consumer's satisfaction using numbers.
Ordinal Utility. Under this approach, consumers need to determine only their preference ranking of bundles of commodities. Ordinal Utility asks " is bundle A preferred to bundle B " while cardinal utility asks "how much satisfaction did you get from consuming bundle A and B"
Equimarginal Principle:
A consumer having a fixed income and facing a given market prices of goods will achieve maximum satisfaction or utility when the marginal of the last dollar spent on each good is exactly the same as the marginal utility of the last dollar spent on any other good.
<<We will use the utility theory to explain consumer demand and to
understand the nature of demand curves. For this purpose, we need to
know the condition under which I, as a consumer, am most satisfied with
my market basket of consumption goods. We say that a consumer attempts
to maximize his or her utility, which means that the consumer chooses
the most preferred of goods from what is available.
Can we see what a rule for such an optimal decision would be? Certainly
I would not expect that the last egg I am buying bring exactly the same
marginal utility as the last pair of shoes I am buying, for shoes cost
much more per unit than eggs. A more sensible rule would be: If good A
costs twice as much as good B, then buy good A only when its marginal
utility is at least twice as great as good B's marginal utility.
This leads to the equimarginal principle that I should arrange my
consumption so that every single good is bringing me the same marginal
utility per dollar of expenditure. In such a situation, I am attaining
maximum satisfaction or utility from my purchases. This is clear
concept of equimarginal principle.>>
The substitution and the Income effect
Please have a look at the following summary: http://www.econ.iastate.edu/classes/econ101/hallam/Income_Substitution.pdf
Complements and Substitutes
A substitute is something that can be used INSTEAD of a particular good or service. For example, for dinner, you can substitute beef for chicken and still have a protein component. Theoretically, if the price of chicken increases relative to the price of beef, people will buy more beef.
Complements are items which are used in conjunction with one another. Peanut butter and jelly are complementary items. Theoretically, if the price of peanut butter goes up, people will buy less peanut butter and less jelly because peanut butter and jelly are typically purchased together.
Independent goods are goods for which no price-and-demand
relationship exists relative to each other. As one good's price
changes, the other good's demand is unaffected.
Consumer Surplus:
Because consumers pay the price of the last unit for all units consumed, they enjoy a surplus of utility over cost. Consumer surplus measures the extra value that consumers receive above what they pay for a commodity.
Chapter 6: Production and Business Organization
Our Discussion assumes that the farm, factory, ..., always strive to produce efficiently, that it is at lowest cost. Later on, in deciding what goods or services to produce and sell, firms are assumed to maximize economic profits as well.
The Production Function:
The production function specifies the maximum output that can be produced with a given quantity of inputs. It is defined for a given state of ingeneering and technical knowledge.
For a deeper understanding of the production function please have a look at the following link: "you are not asked to understand all what exist on the link"
http://www.answers.com/topic/production-function
The Marginal Product of an input is the extra output produced by 1 additional unit of that input while other inputs are held constant.
Total Product: is the total amount of output produced in physical units such as bushels or sneakers.
Average Product: equals total output devided by total units of inputs. http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=average%20product
Average Product and Marginal Product: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=average%20product%20and%20marginal%20product
Average Product Curve: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=average%20product%20curve
The Law of Diminishing Returns:
The law of diminishing returns holds that we will get less and less extra output when we add additional doses of an input while holding other inputs fixed. In othe words the marginal product of each unit of input will decline as the amount of that input increases, holding all other inputs constant.
Returns to Scale:
Diminishing returns and marginal product refer to the response of output to an increase of a single input when all other inputs are held constant.
But sometimes we are intrested in the effect of increasing all inputs. For example what would happen to wheat production if land, labor, water, and other inputs were increased by the same proportion?
This kind of question refer to Returns to Scale, or the effects of scale increases of inputs on the quantity produced. Three important cases should be distinguished:
Constant Returns to Scale: denotes a case where a change in all inputs leads to a proportional change in output.
Increasing Returns to Scale "also called economies of scale": denotes a case where a change in all imputs leads to a more than proportional change in outputs.
Decreasing Returns to scale "also called diseconomies of scales": denotes a case where a change in all inputs leads to a less than proportional change in outputs.
To complete your understanding of the concept of "Returns to and economies of Scale" please revise carefully the following link, and have a look at the following video.Short Run Vs Long Run
The short run is the time period in which only the variable inputs can be changed. A firm may make decision ‘in the short
run’ because its building lease runs for another year or two, or
because its workers have a three-year labor contract. Workers may make
decision in the short run because they have a fixed commitment, such as
wanting to stay put until their children finish high school. Thus, most
of the firm’s workers may accept a pay cut in the short run, but once
their fixed commitments are gone, the long-run response may be very
different. For some firms or individual the short run may be only a
week or a month, while for others the short run may be years. The exact
length of the short run depends on the length of the fixed commitments
people face in a given situation.”
The long run is the time period in which anything can be changed, or in which individual and firms are fully able to respond to economic incentives and take advantage of economic opportunities. The long run has no specific time frame; it is simply the time period that is long enough to allow full response to changing incentives.
Productivity: is a concept measuring the ratio of total output to a weighted average of inputs. Two important variants are:
labor productivity; which calculates the amount the amount of output per unit of labor.
Total factor production; which measures output per unit of total inputs (typically of capital and labor)
Rup up your Ideas, by watching the video bellow: do not pay great attention to the theory of the firm, it's not on your syllabus.
The Nature of the Firm:
Business firms are specialized organizations devoted to managing the process of production. Production is organized in firms because efficiency generally requieres large scale production, the rising of significant financial resources, and careful management and monitoring of ongoing activities.
There are three kinds of businesses in the US: Individual or sole propriotorship, the partnership, the corporation. TO learn about these forms of businesses, please have a look at the video bellow; use the HQ.
Chapter 7: Analysis of Costs
Fixed and Variable Costs
Total cost:
Total Cost = Fixed Costs + Variable Costs
Average Cost is the total cost devided by the number of units produced.
Average variable cost equals variable cost devided by the number of units produced
Average Fixed cost equals fixed cost devided by the number of units produced.
Marginal Cost:
Marginal Cost is the extra cost of production incurred in producing 1 extra unit of output.
Cost Curves:
