Reminders to Students:

I have placed the "Handbook for Economics Lectures" for you to read. This could be of help to you in the way Economics, as a subject,could be taught. http://www.economicsnetwork.ac.uk/handbook/printable/lectures_v5.pdf

The Firm Under Perfect Competition

Our experiences tell us that for every product we buy there is at least one product that can always substitute for it, although in some cases these products may not be the best substitutes available. At any rate, firms supplying these competing commodities are said to be in what we call competition. And so if there are many products of similar features and are perceived to be equally satisfactory by the buyers, then each is a good substitute for the other. These firms competing are in perfect competition.

How does a firm behave given that the industry he is participating in operates under perfect competition? You can figure it out if you open the following links:
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=perfect+competition
Be sure to understand the structure characterizing the perfect market. What motivates the firm to produce?How does the idea of marginal cost link with supply?
http://www.econmodel.com/classic/ucost1.htm
What is the theory behind production when the market is perfect? What are the assumptions behind the model for the theory to work?
http://www.tutor2u.net/economics/content/topics/monopoly/perfect_competition.htm
http://www.clas.ufl.edu/users/rjohnson/Graduate_Policy_Analysis/perfectcompetition.html
http://answers.yahoo.com/question/index?qid=20061116144354AAvWrS3
http://cepa.newschool.edu/het/essays/product/profit.htm

Why Demand Curves Slope downward!

I have mentioned in my earlier discussion that demand expresses one distinct human nature - and that is "preference". A list showing different combinations of commodities preferred where satisfaction everywhere is maintained is depicted graphically in an indifference curve.

However, although indifference curve frontiers describe certain utility levels, each has not described as to whether each combination in the preference curve is affordable. A different function describing different combinations of goods that can be bought given a definite level of income is called a budget line. Combining the two scenarios of maximum benefit given income will arrive at identifying the optimum. The optimum level or is called the consumer equilibrium is defined as the maximum satisfaction reachable within the indifference curve that is purchasable with the given budget.

Now with changes in either in income and prices, the budget line will either shift or rotate. Such will move the indifference curve either positive or negative. Substitution effect or income effect can take place. The optimum condition finally attained after the changes will again define the change in optimum satisfaction enjoyed.

The change in quantity demanded of certain commodities as a result of a change in prices or in income will lead to the derivation of demand function.

Concepts to look at:

1. normal good
2. inferior good
3. giffen good
4. substitution effect
5. income effect
6. diminishing marginal utility

Deciding on Output and Price

Firms, when they decide how much to produce and at what price each will sell, use an approach called marginal analysis. This term has been borrowed from the derivative concept in calculus. 'Marginal' means the additional. So if they want to identify the level of output and prices that maximize profit, they would calculate the marginal revenue (MR) or the additional revenue earned per unit sold and equate it with marginal cost (MC) or the additional cost incurred for every unit produced. The argument is that if MR > MC firms believe that producing more would bring in more profits and if MC>MR losses are underway even at its per unit calculations. Thus when MR=MC firms already got the idea that the additional revenue is just enough to cover the additional cost incurred and thus per unit wise, marginal profit is zero. The computed profits in its entirety defines the maximum profits.

Marginal as in MR and in MC do not have the same meanings with averages as in average revenue (AR) and average cost (AC). What makes the differences. See http://csob.berry.edu/faculty/economics/CostCurves/CostCurves.htm for a clearer explanation.
Also look at this link for practice http://wps.prenhall.com/bp_ayers_micro_1/0,7011,487128-,00.html and
http://www.investopedia.com/articles/03/012703.asp

Terms to understand:
1. profit maximization
2. total profit, total cost and total revenue
3. economic profit and zero economic profit
4. marginal revenue and marginal cost
5. economies of scale
6. average cost and average revenue

Supply and Demand: An Initial Look

Understanding demand is initially understanding "preferences". What makes people buy the things they buy, is the fundamental psychological inquiry. The answer generally is "price". Some argued that buyers get attracted to commodities that are affordable and shun away from expensive ones.

The idea of price however, is hyperlinked to the concept of income. To one whose income is P50,000 a month may find a P10.00 sandwich cheap. But to a beggar whose earning could hardly reach P50.00 a day may find the same commodity expensive. The beggar, in his rational mind, would rather buy one kilo of rice as this would take him long for the entire day. But siince income is determined by other factor prices and demand is determined by goods prices, income and price are two different factors that affect demand.

Of course there are other reasons valid enough to explain the movement of current demand like population, war, net migration, tastes and preferences etc., but the factor that is naturally stable across time and place is price. And so making other factors constant, demand function, which is the summary of all the different price listings and the corresponding quantity demanded, slopes downward. And in the event that the total amount of demand changes irrespective of price but of other factors, the entire demand function shifts either upwards or downwards.

On the other hand, economists use another graph to summarize the factors influencing producer's decision and this is the supply curve. Notice that producers are more willing to sell as prices go up. Thus the line slopes upwards. Also, supply is influenced by factors not necessarily the same with those that affect demand but again the "price" factor is one of those parameters. Assuming an increase in supply not caused by prices, the entire supply function shifts positively. The opposite shift will likewise occur as supply diminishes not caused by price.

Since both curves have a common factor - "price" in them, it is possible for the curves to settle for an equilibrium condition.

In many cases though the government intervenes in an attempt to control prices. Price ceiling and price floors are situations altering market driven equilibrium. What do you think are the effects on these? Try considering a few.

Read the following sources for fun and hints: http://academic.udayton.edu/johnrapp/PartOneNotes.htm
http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm
http://www.tutor2u.net/quiz/economics/jbc_econ_elasticity_1.htm
http://www.netmba.com/econ/

Terms to understand:

1. quantity demanded
2. demand curve
3. supply curve
4. quantity supplied
5. equilibrium price and quantity
6. surplus
7. law of demand and supply
8. Shortage
9. price ceiling and price floors
10. shifts in demand
11. shifts in supply
12. movements along demand and supply curves

Scarcity and Choice: The Economic Problem

"You cant't always get what you want" Mike Joeger

Had there been enough for everyone, there would have been no reason to allocate resources. Scarcity is absent. But since resources are scarce, economizing is imperative. It is because of the presence of scarcity that a profit maximizing individual needs to make rational choices. The entire science talking about allocation of scarce resources defines what is being covered in Economics.

Terms to understand

1. scarcity

2.choice

3.rational decision

4.opportunity cost

5.inputs

6.outputs

7.production possibility frontier

8.principle of increasing costs

9.economic growth

10.three coordination tasks

11.capital goods

If you have browsed every hyperlink and read, you will have by this time some vague ideas about scarcity and the need for making choices. Put your questions on the comment link so that I can incorporate them on our class lectures. Have a good reading.

Also read the link http://www.ingrimayne.com/econ/Introduction/ScarcityNChoice.html

Also the link http://www.ingrimayne.com/econ/Introduction/Utopias.html

What is Economics?

Read the discussion about Economics at http://www.mcwdn.org/ECONOMICS/Econ.html.

Also open the link http://www.vanderbilt.edu/AEA/students/WhatIsEconomics.htm

The concepts important for review and understanding are the following:

1. voluntary exchange
2. comparative advantage
3. Productivity
4. externalities
5. marginal analysis
6.marginal costs
7. Theory
8. correlation vs.causation
9. economic model
10.opportunity costs

Then if you have comments or questions you can post them in the comment link. Have a good time and happy reading.