ЭКОНОМИКА
Subject matter and methodology of economics.
Economics studies how individuals and society choose to use scarce resources provided by nature and previous generations to produce goods and services that would satisfy their wants.
Resources/Factors of production: land, labour, capital, entrepreneurial ability
Microeconomics studies individual units: households, firms and industries.
Macroeconomics studies economic aggregates. It concerns national economy in general.
Classical political economy: the 18 century was the age of the classical economic thought represented by two major schools. The physiocratic school criticized the system of restraint and detailed government regulation of production and trade, the system of high taxes on domestic producers. English classical political economy: English economists emphasized the role of production as the major source of wealth and supported the principle of laissez-faire.
Mercantilism - is the first great school of economic thought. Mercantile thought is concerned with enrichment of nation and increasing national wealth. Wealth=money and money is identified with gold. The major source of enrichment is seen in commerce or merchandising. Sell more, buy less.
Rational choice - maximum benefit using scarce resources
Opportunity cost - cost of any activity measured in terms of best alternative forgone
Marginal cost – the additional cost of doing a little bit more of an activity.
Marginal benefit – the additional benefit of doing a little bit more of an activity.
Methodology:
Positive economics describes what exists and how works.
Normative economics looks at the outcomes of economic behaviour and asks if they are good or not. Involves judgments and prescriptions. It says what should be.
Descriptive economics is the compilation of data that describe phenomena and facts.
Historical vs. Logical methods (pays attention not to details, but to major trends of development).
Economic theory attempts to generalize about data and interpret them.
Economic model – a formal presentation of an economic theory.
Analysis – is the process of mental splitting a phenomenon into elements to see what it is made of.
Synthesis –a process of combining separate things, or ideas into the complete whole.
Concept of elasticity: notion, types, methods of calculation
Elasticity measures the degree of response of a variable to a change in one of its determinants.
Price
elasticity of demand
E=%∆Q / %∆P, or
E>1 Demand is elastic
E<1 Demand is inelastic
E=1 Demand is unit elastic
E=0 Demand is perfectly inelastic
E=infinity Demand is perfectly elastic
Arc method
Using differentiation E=Q’(P/Q) or E=Qd* P/Q
Cross-price elasticity of demand
E=0 neither substitutes, nor complements, E>0 substitutes, E<0 complements.
Income elasticity of demand
E>0 normal goods, E<0 inferior, E>+1 luxury.
Market mechanism: demand, supply, prices
Market is:
System of economic and social relations;
Mechanism that brings the buyers and sellers of a good into contact with one another;
System of communication through which innumerable individual free choices are recorded, summarized, and balanced against one another;
Basic organizing force of production and consumption;
Mechanism of allocating resources and distributing final goods and services;
Place where buyers and sellers meet.
Assumptions of free market model:
Many producers and consumers, all being price takers
Free entry to market and free exit from the market
Free access to absolutely mobile resources
Free access to complete market information
Goods are produced not for self-consumption, but for sale; and there is exchange of goods and services. Product is homogeneous.
Demand shows the various amounts of product which consumers are willing and able to purchase at each specific price in a series of possible prices during some period of time. (It shows relationship between price and quantity demanded. Price-per unit. Quantity demanded-per time.)
Demand curve is a diagrammatic representation of demand schedule.
Quantity demanded = the amount of a product that a consumer would buy in a given period if it could buy all it wanted at the current market price.
Law of demand: at higher price levels people tend to buy less, and vice versa (negative relationship).
If price changes, Qd changes → there is movement along.
If non-price determinants (income, wealth, tastes, expectations, prices for other products, number of consumers) change, the whole curve shifts.
If the price of a product changes, there is change in the QS → movement along the supply curve
If the non-price factors (cost of production, prices of related products, expectations, time) change, the supply curve shifts.
Supply shows the various amounts of a product which a producer is willing and able to produce and make available for sale in the market at each specific price in a series of possible prices during some time period.
Law of supply: increase in market prices leads to increase in quantity supplied (positive relationship).
Supply curve shows how much a firm would produce if it could sell it all it wanted at the given price.
Equilibrium: QS = QD at the current price.
Prices:
1) Provide market information to producers and consumers, which is essential to make rational decisions. 2) Allocate scarce resources between competing users. 3) Determine proportions of the economy. 4) Encourage technical progress. 5) Distribute goods and services. 6) Distribute incomes. 7) Provide market self-regulation.
Price ceiling is a maximum price allowed by the government. It is always below the equilibrium price.
Price floor is a minimum price allowed by the government. It is always above the equilibrium level.