TEN PRINCIPLES

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TEN PRINCIPLES
7. Governments Can Sometimes Improve
Market Outcomes
8. A Countrys Standard of Living Depends
on Its Ability to Produce Goods and Services
A. Productivity
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INCREASES IN PRODUCTIVITY
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TEN PRINCIPLES
7. Governments Can Sometimes Improve
Market Outcomes
8. A Countrys Standard of Living Depends
on Its Ability to Produce Goods and Services
9. Prices Rise When the Government Prints
Too Much Money
A. Inflation
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TEN PRINCIPLES
7. Governments Can Sometimes Improve
Market Outcomes
8. A Countrys Standard of Living Depends
on Its Ability to Produce Goods and Services
9. Prices Rise When the Government Prints
Too Much Money
10. Society Faces a Short-Run Tradeoff
Between Inflation and Unemployment
A. Phillips curve
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PHILLIPS CURVE
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POSITIVE vs. NORMATIVEECONOMICS

• Positive economics describes how the world is.

It attempts to predict the actual state of the
world.

• Normative economics makes judgements about

whether the actual or predicted state of the
world is good or bad. Normative statements
usually make a claim about how the world
ought to be.
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DEFINITION
A market is a group of buyers and sellers of a
particular good or service.
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DEFINITION
A perfectly competitive market satisfies
the following four conditions (1) sellers sell
a homogeneous commodity or service, and buyers
are identical from the sellers point of view, in
that there are no advantages or
disadvantages associated with selling to a
particular buyer
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DEFINITION
A perfectly competitive market satisfies
the following four conditions (2) both sellers
and buyers are numerous, and the sales or
purchases of each individual unit are small in
relation to the aggregate volume of
transactions
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DEFINITION
A perfectly competitive market satisfies
the following four conditions (3) both buyers
and sellers possess perfect information about the
prevailing price and current bids, and they take
advantage of every opportunity to increase
profits and utility
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DEFINITION
A perfectly competitive market satisfies
the following four conditions (4) entry into
and exit from the market is free for both buyers
and seller.
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TYPES OF MARKETS

• PERFECT COMPETITION
• MONOPOLY-- SINGLE SELLER
• OLIGOPOLY -- FEW SELLERS
• MONOPOLISITIC COMPETITION -- MANY
• SELLERS OFFERING SLIGHTLY
• DIFFERENT PRODUCTS

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DEFINITION
Ceteris paribus means other things equal.
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DEFINITION
The quantity demanded of any good is the amount
of the good that buyers are willing to purchase.
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DEFINITION
The law of demand states that, ceteris paribus,
the quantity demanded of a good falls when the
price of the good rises.
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DEMAND CURVE
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THINGS STAYING UNCHANGED

• INCOME
• PRICES OF RELATED GOODS
• TASTES
• EXPECTATIONS
• NUMBER OF BUYERS

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THINGS STAYING UNCHANGED

• INCOME

• Demand for a normal good increases as
• income rises.

Cars, theater tickets.

• Demand for an inferior good decreases as
• income rises.

Bus rides, hamburger.
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EFFECT OF AN INCOME CHANGE
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THINGS STAYING UNCHANGED

• INCOME
• PRICES OF RELATED GOODS

• When the price of a substitute good rises, the
• quantity demanded of a good rises.

Bus rides
and taxi rides.

• When the price of a complementary good rises,
• the quantity demanded of the good falls.

Hamburger and hamburger buns.
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EFFECTS OF CHANGE IN OTHER GOODS PRICE
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SHIFTS IN DEMAND vs MOVEMENTS ALONG
When the price of a good changes, ceteris
paribus, this causes a movement along the demand
curve.
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MOVEMENT ALONG THE DEMAND CURVE
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SHIFTS IN DEMAND vs MOVEMENTS ALONG
When the price of a good changes, ceteris
paribus, this causes a movement along the demand
curve.
When income, the prices of related goods,
tastes, expectations, or the number of buyers
changes, this causes a shift in the demand curve.
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SHIFTS IN DEMAND