General Economics and Quantitative Techniques

Economics
- Study how societies use scarce resources to produce valuable goods and services, and
distribute them among different individuals.
- Concept of efficiency
- Study economics to make informed decisions
- Concept of opportunity cost (foregoing something for something else)
- Concept of marginalism/incrementalism (decisions are based on costs and
benefits of a certain choice)
- Concept of efficient markets (all markets have zero profit)
- Study economics to understand society
- Historically, economic decisions have influences on the state f a society
- Ex. Industrial Revolution in the West allowed for new technology for better
productivity.
- Study economics to be an informed citizen
- Understand what happens in each economic situation as: (i) part of the labor
force; and consumers of goods and services including transactions with financial
institutions
- “This is where the developmental approach of economics comes into play”
Branches of economics
Macroeconomics
- John Maynard Keynes
- Behavior/performance of the economy
- Business cycles, investments
Microeconomics
- Adam Smith
- Individual behavior
- Setting of individual prices, market mechanism

Three Fundamental questions in economics

1. What gets produced?
2. How is it produced?
3. Who gets what is produced?

Resources - Allocation of resources - Producers - Distribution of output - Households

Production in an economy
● Land
○ Natural resources for production
● Labor
 ○ Human input into the production process
● Enterprise
○ Entrepreneurs organize factors of production & take risk
● Capital
○ “Durable” goods used to produce other goods
Market Systems
- Venues where there is interaction between buyers and sellers.
- Prices are determined during the exchange of good.

How Markets Solve the Three Economic Questions

- Consumers: dictate what goods need to be produced] What to produce
- Producers: which markets can be profitable?]What to produce
- Producers: Technology to used, with minimal costs]How to produce
- Consumers: distribution of produced goods]For whom to produce
- Producers: Payment for use of factors of production] For whom to produce

Circular Flow of a Market Economy

Is having more better or worse?

- Law of Diminishing Marginal Utility
- Increases in consumption will have less “additional” unit of happiness of a
consumer.
- More is less preferred
- Basis of the consumers’ “demand” for goods.
Most Important Assumption
- Ceteris Paribus: All other things held constant

Theory of Demand
- How consumer’s preferences determine demanded for commodities.
- Quantity demanded: amount of a good/s that has brought by household given its income
and market prices.
 - Based on the concept of Utility
- Utility: Economic concept for consumers happiness
- Demand schedule: shows relationship between price and quantity demanded.
- Downward sloping
- As price increases (decreases), quantity demanded decreases (increases).
- Negative/inverse relationship between price and quantity demanded.
Theory of Supply
- Firms uses inputs to produce
- Inputs = costs
- Set prices to recover costs
- Firms are driven by profit
- Supply schedule: shows relationship between price and quantity supplied.
- Upward sloping
- As price increases (decreases) quantity supplied increases (decreases)
- Positive relationship between price and quantity demanded.
- Upward sloping due to relationship among cost, quantity supplied, and prices.
Factors affecting supply
- Production cost
- Technoloy/production process
- Number of sellers
- Price of related goods
- Other factors (government policies and special influences (e.g., weather))

Market Equilibrium
- Both consumers and suppliers are concerned with prices
- Consumers: dictate how much to buy.
- Suppliers: dictate how much to supply and potential profits.
Markets reach an equilibrium
- Quantity supplied = Quantity demanded.
- Equilibrium price/market-clearing price, Pe.
- Equilibrium quantity, Qe.
- Note: Always draw the demand and supply curves in the same graph.

Economic Output
Goods we can see in the economy
1. Consumer goods: direct consumption
2. Capital goods: goods used to produce other goods and services
3. Investment goods: goods that increase capital goods

Production in an Economy
- Economics have limited resources
- Limited resources
- Limited technologies
- Economic vs Technical efficiency
- Technical efficiency: no possibility to increase output without increasing input
- Economic efficiency: production cost of an output is as low as possible
- Production Possibility Frontier (PPF)
- Opportunity costs given limited available inputs and technology
- How to allocate resources efficiently?
- Why things can never be “free”

Production Possibility Frontier

- Characteristics of PPF
1. Shows the max quantity of goods that can be produced given limited resources
and technology
2. Shows points of “productive efficiency” & “productive inefficiency”,
a. Points along the PPF: Efficient production
b. Points inside the PPF: Inefficient production
c. Points outside the PPF: No capacity
3. Shows trade-offs and opportunity costs
4. Can show effects of economic growth.
Marginal Rate of Transformation (MRT)
- Shows the “opportunity cost” of producing more of a good, ceteris paribus at a point.
- How many units of good “X” do we sacrifice to produce one more unit of good “Y”
- Notice: MRT is increasing from A to E. Why? - It increases because you are diversifying
as a business.

PPF and the gains from trading

- Specialization:
- Endowment of resources are different.
- One economy can have lower cost and opportunity cost in producing a good.
- One way to address scarcity.
- Trading:
- Producing goods where one economy specializes in and trades it for scarcer goods
 - Better to be best at something rather than produce low-quality goods

Absolute advantage vs Comparative advantage

Theory of Demand and Supply

- Theory of demand: how consumer’s preferences determine the demand for commodities
- Quantity demanded: amount of a good or service bought by household given its income
and market prices
- Based on the concept of utility (or consumers’ happiness)

Factors affecting consumer demand

- Price of goods and services
- Consumer’s income
- Prices of related goods and services
- Consumers’ tastes and preferences
- Expectations
- Other factors: Sales

Market Equilibrium with Mathematical Equations

Demand Curve, D(p)=5000-6Q
Supply Curve, S(p)=400+70Q

Changes in Market Equilibrium

-Shifts are caused by change in any of the factors that can affect demand and supply.
-Ex. 1: Price of a substitute increases
-Ex. 2: New Technology available
-Ex. 3: Sudden Change

Elasticity

Price Elasticity of Demand

Elastic Demand
 Different Types of Market Structures
What are Markets?
A market is where buyers and sellers:
- Meet to exchange goods and services
- Are affected by some level of competition.

The market may be in one specific place or it does not exist physically at all (ex. Bitcoin)

Markets are classified by 4 structures

1. Pure (perfect) competition
2. Monopolistic competition
3. Oligopoly
4. Monopoly

1. Perfect competition
This is a theoretical situation. NO TRUE Perfectly competitive market exists. It is only a theory.

The 5 condition of perfect competition

1. Large number of small firms.
a. No single buyer or seller can influence the price
2. Buyers and sellers deal in identical products. No product differentiation.
3. Unlimited competition: so many firms that suppliers lose the ability to set their own
price.
4. No Barriers to Entry. Sellers are free to enter the market, conduct business and free to
leave the market. (Low cost to enter)
5. Each firm is a price-taker

● Consumers have the largest selection of buyers to buy goods from because no single good
is more appealing than another.
● Perfect competition is the opposite of monopoly. Here, any firm can get into the market at
very little cost.
● Example of Perfect competition
- Agriculture Market
● Each individual firm is too small to influence the prices.
● Price becomes fixed to everyone in the industry.
● Examples: The price of goods in perfect competition depends only on supply and
demand.
● Firms in a perfectly competitive market are price-takers (they take the price they are
given, they can’t change the price).
 ● Since they have no control over their own prices, they have no market power (market
power = ability to set one’s own prices)
● In other words, no one will buy overpriced goods in perfect competition.

2. Monopolistic Competition

The 5 conditions of Monopolistic Competition

1. Monopolistic competition takes its name and its structure from elements of monopoly and
perfect competition.
2. Large number of smaller companies (but fewer than perfect competition).
- Sellers can influence the price through creating a product identity
3. Products are not exactly identical, but very similar, so companies use product differentiation.
4. Heavy competition: firms must remain aware of their competitor’s actions, but they each have
some ability to control their own prices.
5. Barriers to entry: harder to get started because of the amount of competition.

● Study tip: The key idea to understanding monopolistic competition is that firms sell
products that are similar, but not exactly alike.
● Ex. Hand soap
● Essentially, all hand soaps are the same. Yet firms can create a brand identity that
separates their hand soap from their competitor’s.
● This brand identity can be formed through packaging, product support, and advertising.
● If effective, consumers will positively identify a certain brand and purchase it even if
hand soap costs more.

● The point is that firms in monopolistic competition must use product differentiation &
non-price competition to sell their products.
● Product differentiation:
○ differences may be real or imagined.
○ Differentiation may be color, packaging, delivery, service, anything to make it
stand out.
● Non-Price competition:
○ Involves the advertising of a product’s appearance, quality, or design, rather than
its price.
○ Advertising to help the consumer believe that this product is different and worth
more money.
● Ex. of Monopolistic competition: Automobile, Steel, Gas, Fast Food, Airlines, etc.
3. Oligopoly
A market in which two-three large sellers control most of the production of a good or service and
they work together on setting prices.

The 5 conditions of an oligopoly

1. Very few sellers control the entire market.
2. Products may be differentiated or identical (but they are usually standardized)
3. Medium barriers to entry: difficult to enter the market because the competitors work together
to control all the resources & prices.
4. The actions of one affects all the producers.
5. Collusion = an agreement to act together or behave in a cooperative manner.
- Collusion agreements: usually illegal, among producers to fix prices, limit output, or
divide markets. (hard to prove that a group of companies is doing this)
- It is also called price fixing: setting the same prices across the industry.
- Basically, the companies are acting as one large monopoly.

Price Behavior in Oligopoly

Now, sometimes businesses do not agree with each other about the price. And if that happens, a
war will result.
Price wars: series of price cuts that competitors must follow or lose business.
- It is a fierce price competition between sellers, sometimes the price is lower than the cost
of production.
- Oligopolists would like to be independent price setters:
- A firm sets prices based on demand, cost of input and other factors (not based on
other companies prices).
2 types of price behavior in an oligopoly
Price leader: independent pricing decisions made by a dominant firm on a regular basis that
results in generally uniform industry-wide prices.
Advantage: you are the company leading the price.

Independent pricing: policy by competitor that ignores other producer’s prices.

Disadvantage: other firms shut you down by agreeing to set lower prices than yours.

4. Monopoly
Exact opposite of pure competition.

Conditions of Monopoly
A price-maker (set their own price, without regard to supply and demand)
There is a single seller
No close substitute goods are available
High barriers to entry: other sellers cannot enter the market.

4 distinct types of monopolies:

1. Natural monopoly: where costs are minimized by having a single producer of the product.
- Gas, water, electricity: government creates natural monopolies by franchising some
utilities.
- Franchise: the right to produce or do business in a certain area with competition.
- Government franchises come with government regulations.
Economies of scale: as natural monopolies grow larger, this reduces its production costs.
- Because normally companies become more efficient as the firm becomes larger.
2. Geographic monopoly: the only business in a location due to size of market.
- Decreasing because of mobility.
3. Technological monopoly: firm has discovered a new process or product.
- The Constitution gave the government the right to grant technological monopolies.
- Patent: 16 years exclusive rights to a developed technology.
- Copyright: (Artists and writers) Life plus 60 years.
4. Government monopoly: retained by the government
- uranium production, water utilities, etc.