Prices and Markets notes week 1 - 12

12.1.1: What is economics?

Economics is the scientific study of how society can best allocate its scarce resources,
whether by the market or central planning.

Logical method of thinking in Economics:

 We observe real life economic phenomena (e.g. market trade and failures)

 We build economic models (e.g. the market, the firm, game theory) using assumptions
(“perfect world”) and variables (p, q)

 We analyse these models for equilibrium (e.g. Qd=Qs, MC=MR, Nash) and efficiency (e.g.
welfare, deadweight loss)

 Based on the analysis, we make theories to explain and predict economic phenomena and
to formulate economic policy (e.g. taxing/subsidising externalities, poverty reduction,
competition policies)

 We compare the theories with thereal world facts and improve modelling, analysis and theory
building if they do not fit

Revision questions

Lecture 1: Introduction - Economics and the economy

1. Economics is the study of how society manages its scarce resources.
 2. The graph represents the various combinations of ham and cheese (in pounds) that the
nation of Bonovia could produce in a given month. If the production possibilities frontier shown
is for 240 hours of production, then how long does it take Bonovia tomake one pound of
cheese?
Answer: 3/4 hours
How to work out - 240 hours/320 pounds of cheese

Lecture 2: The market – Demand, supply and elasticities

1. A movement along the demand curve might be caused by a change in the price of the good
or service that is being demanded.

2. When the price of bubble gum is $0.50, the quantity demanded is 400 packs per day. When
the price falls to $0.40, the quantity demanded increases to 600. Given this information and
using the midpoint method, we know that the demand for bubble gum is elastic.

REMEMBER:
- If answer is less than 1 it is inelastic
- If answer is more than 1 it is elastic
- If answer is exactly 1 it is unit elastic
- If answer is 0 it is perfectly elastic

(on phone)1.37pm
Lecture 3: The market – Equilibrium and efficiency
1. Suppose that demand for a good increases and, at the same time, supply of the good
decreases. What would happen in the market for the good?

Answer: Equilibrium price would increase, but the impact on equilibrium quantity would be
ambiguous.