The PPC may shift from time to time, gaining or losing resources, increase in quality of technology can increase the resources to fully efficiently used, if both good X and Z increase there could be an economic growth happening in the country .
Minggu, 04 Desember 2011
Production Possibility Curve
Basic Economic Problem
Fundamental economic problem is scarcity, or the limited number of resources is outnumbered by unlimited number of wants from the people, The problem then becomes how to determine what is to be produced and how the factors of production (such as capital and labor) are to be allocated. To help slow down the scarce resources from being depleted, we use opportunity cost by making a sacrificing something to obtain another thing, like when we want to buy a product such drink we may sacrifice coke to obtain fanta, with this solution we can slow down the depletion of resources.
Then the allocation of resources is affected by these question, what to produce, how to produce and for whom it’s produced, these question help to allocated the resources efficiently to make sure all resources used to obtain it’s maximum potential, what to produce is about deciding what to produce that based on consumer demand or what they need, for example when there’s a new kind of clothing’s trends the producer will respond to their demand and decide to produce clothes rather than cars, how to produce is about a method of production that the producer thinks that can produce with the lowest cost the can attain or least cost method, by using a labor intensive or capital intensive method of production, and for whom, is the product suitable for all people, or only those who can really afford it, it’s to decide the price level of the product they made.
Economic System
Economic System
· Market
Market system is where the consumer determine the allocation of resources, they make preference through price mechanism, the higher the demand of a product the more they willing to pay for it, higher the price will encourage firms to produce it, here government intervention is very minimum, almost all land and capital are private owned enterprise, some firms like hotel may hire a large amount of labor or labor intensive but some firms like car factory are using more advanced machine to replace labor, it’s called capital intensive, they trying to achieve least cost method of production, in a market economy the consumer decide what to produce, so the producer produce what is demanded, and the firms will think how to produce it, capitally or labor intensive, and for whom, everyone or someone that can afford it, free market system have advantages, because of the responsiveness of the producer, consumer have sovereignty, and there are lots of choice to buy from a particular firms and who to work for, the profit and competition here will promote the efficiency, because each firms trying to achieve to lowest cost so they will gain the highest profit, the one that don’t response quickly may loss in profit but there is a limitation here, firms and consumer maybe only seek for their own benefits so the private benefit is higher than the social benefit and make social marginal cost is higher, firms may throw away their waste in the river to cut their production cost, and consumer may smoke anywhere and cause health problem to anyone near them, competition within firms can lead to monopoly, when a firms win the competition they may take control of the market, and firms will charge anything for what they produce and some goods or service is sometimes are very needed such as defense, these firms will impose price for the people who need it, but because some people can already afford it, and all people feel the effect of the goods or service it will cause a free rider problem, where they who don’t pay for something but feel the benefits also, the minimum government intervention also can lead to market failure because the allocation of resources is decided by the consumer, if the consumer demand many of demerit goods such as alcoholic liquor, it may cause market failure because of the minimum intervention, and make a negatives externalities for the society.
· Planned economy
Is the opposite of market economy where the government decides the allocation for resources, the allocation is to improve the welfare of its citizen, they decide what to produce, how to produce it and for whom, these question can be answered by maintaining the welfare of the citizen, the government will see what the citizen need, is they necessary to be involved in the production process and of course it will for the citizen itself, the state almost own all the land and capital and also employs the worker, or called State owned enterprise, usually the government provide the people with housing, transportation at free or low cost, the government isn’t seek for profit but the welfare of its citizen, the advantage of this economy system is that the market is hard to caught in market failure situation, because the government directly interfere with the system so they able to control the market situation preventing problems that may exist due to the allocation of resources, they can prevent the domination of one firms that might cause other firms to be less demanded, because they can help these firms by giving subsidies or imposing bigger tax on the dominating firms, the disadvantage is the consumer doesn’t have their sovereignty anymore because the market aren’t responsive like in the free market system, and efficiency is not very big compared to free economic because the firms cannot change their price without the government permit.
· Mixed Economy
A system that combined from planned and market, some are state owned and some are private own, some prices are determined by market forces and supply are set by the government, the consumer and government influencing what to produce, it’s trying to take the advantage of the two market system, and trying to avoid its disadvantage, their advantages are the government will hold all the cost and benefits that comes from their decision, such as train if its benefit to the society is bigger than the cost it would be maintained by the gov. even it didn’t make profit, they also can encourage production of a product that has a great benefit than the consumer realize by granting subsidies, making economy equality where everyone wages are the same and providing training for them and providing maximum use of resources to allocating it efficiently, but still there is no guarantee that this will be better than the others, there are risk still exist in this system Market failure still can occur and sometimes government intervention can make situation worse
MARKET FAILURE
Definition : Market failure exits whenever a free market, left to its own devices and totally free from any form of government intervention, fails to make the optimum use of scarce resources. In other words, it occurs when there is misallocation of resources.
Resources not allocated efficiently is when resources are used to produce goods that nobody wants, or when insufficient amounts of resources are used to produce what society is able and willing to pay
There are two classification of efficiency:
1. Productive efficiency : The producers have to make decision on how to produce goods in a low cost example like using less resources or using more efficient machinery
2. Allocative efficiency : Then producers only focused on consumer’s wants.
The allocation of resources said to be socially efficient when the marginal benefit to society equals to the marginal cost to society of producing or consuming the good
Social Marginal Benefit (SMB) = Social Marginal Cost (SMC)
Social Marginal Benefit (SMB) = Social Marginal Cost (SMC)
Social Benefits and Costs
1) Social Marginal Benefit is the sum of Private marginal benefit (PMB) and External Marginal Benefit (EMB) . It can be said the benefits that we and the society received
2) Social Marginal Costs is the sum of Private Marginal Cost (PMC) and External Marginal Costs (EMC). It can be said the costs that we and the society received
2) Social Marginal Costs is the sum of Private Marginal Cost (PMC) and External Marginal Costs (EMC). It can be said the costs that we and the society received
External Benefits and Costs
1) External Benefits are benefits from production/consumption experienced by people other than the producer/consumer themselves
2) External Costs are costs from production/consumption experienced by people other than the producer/consumer themselves
2) External Costs are costs from production/consumption experienced by people other than the producer/consumer themselves
Private Benefits and Costs
1) Private Marginal Benefit (PMB) of a good measures the value that the consumer places on the last unit of the good bought
2) Private Marginal Costs (PMC)of production measures the cost to the producer from the last unit sold. Under the perfectly competitive market, PMC is represented by the supply curve and at any given quantity, PMC is represented by the height of the supply curve.
There are some reasons why market fails:
· When there are externalities in the market
· Failure to provide public goods
· Imperfect competition
· Imperfect information
· Immobility of factors of production
· Underproduction of merit goods and overproduction of demerit goods
· Adverse selection or moral hazard
· Where there are concerns about distribution of income and wealth
Externalities
Externalities are costs or benefits from production or consumption experienced by the one who does not directly involve in production or consumption itself
It occurs if a third party (someone not directly involved) is affected by the decisions and actions of others. There are two types of externalities; Positive and Negative externalities.
Example is when a factory produces a goods and the waste is thrown to the river near the residence, then the people near that residence who use the river will affected by the polluted water (negative externality)
v Negative Externalities
v Positive Externalities
There is a divergence between Social Marginal Benefit (SMB) and Private Marginal Benefit (PMB), with SMB being greater than PMB, as illustrated in graph above
Failure to provide public goods
Certain goods are necessary for society but are not provided if supply would be left over to market forces. This is not because of externalities but due to the characteristics they posses. In this case we talk about Public Goods. Examples of Public Goods are national defence and the legal system (judges, courts, attorneys etc.)
v Public goods are:
Non excludable: this means that once the good has been provided for one consumer ,if it is impossible to stop all other consumers from benefiting from the good.
Non rivalry: As more people consume the product ,the benefit to those already consuming the product is not diminished.
Example of public goods, street lights and the police service
This public good case may leads to free rider problem which means some consumers attempt to gain ‘free ride’ on the back of other consumers’ purchases of the public goods
Example of questions
1. Explain the link between ‘free rider’ problem and government provision of streetlights (5)
The free rider is the people who consume the goods or services without paying for it or not pay fully the cost. In this case, the streetlights itself can be classified as public goods. Everyone can enjoy the streetlights without paying for it. It is non-excludable and non-rivalry.
With providing public goods such as these streetlights, it can help to reduce or avoid free riders problem. When the government provides such goods, people don’t have to fight for this goods (there will be no rivalry). Everyone without exception can enjoy streetlights freely so that it will be fair also to the people who have lower income that cannot afford to spend some money that usually makes them become free riders.
v Private Goods are:
Excludable: Consumers can be excluded from consumption by charging them a price. If they lack the ability to pay they will not enjoy the consumption of this good
Rivalry in consumption: Consumption of the good decreases the availability and quantity of the good. Take for example a bottle of Coca Cola. Once someone has started to drink from it there will be less Cola in the bottle and the quality of it has also gone down
Examples are movie ticket and luxurious hotel
v Quasi public goods are:
The combination of public goods and private goods, does not fully possessing the two required characteristics of public or private goods
Example are sandy seaside beach and fireworks as public attraction
Imperfect competition
It occurs when there is one producer who dominate the markets (monopolist) or a few producers (oligopolists).This act of reducing output to raise the price of a good contributes to market failure since there is no allocative efficiency in production as in perfect competition.
Imperfect information
Imperfect information arises when one side of the market – either buyers or sellers - having better information than the other.
Example is Uninformed Sellers and Knowledgeable Buyers. For example, in the market for life insurance, buyers know more about the risks they face than sellers do.
Immobility of factors of production
Immobility of factors of production also contributes to market failure as resources cannot respond to incentives to produce goods and services demanded by consumers.The greater the immobility of factors, the more difficult it is for markets to achieve socially efficient allocation of resources.
v Labour immobility
v Occupational immobility
v Geographical immobility
v Capital immobility
Underproduction of merit goods and overproduction of demerit goods
v Merit goods can be defined as products that generate positive externalities or greater benefits that the consumer may realize.
Examples are health care and education
v Demerit goods can be defined as products that generate negative externalities or not beneficial to the consumer. The market, however, will produce these goods if there is a demand for them. Hence, there is a need for government control of such goods. Demerit Goods are goods whose social costs are greater than its private costs.
Examples are cigarettes and alcohol
Government intervention to correct market failure
Government can help to correct market failure by giving some policies/regulations and also the use of taxation and subsidies
Examples :
#1 Parliament can pass laws that for example prohibit the sale of cigarettes to children/only to those above the age of 18 or ban smoking in the workplace/shopping malls. This policy may help to reduce the consumption of demerit goods
#2 Government impose more tax on demerit goods so that It can help the reduce in consumption and also the production of demerit goods
#3 By giving subsidies on merit goods ,the people may attract more to the merit goods and that can help the underproduction of merit goods
some example of how to answer questions about price elastic!
Question : 1. The price of good T falls by 20 % as a result the demand for subtitute good rise by 40 %. What is XED for good X?
How to answer =
1. calculation : quantity X = 40% = -2%
price T -20%
2. give an explaination of the answer = if price of good T rises for 1 %, Quantity demanded of good X falls 2 %
3. State the type of the product given by the answer = the product is a complementary good.
well done!
PRICE SYSTEM
1. Demand is the willingness and ability to buy a product at various prices per period of time.
· Law : when the price increase demand will decrease
So as price decrease demand will increase
· Factors that effect demand :
- Change in price
- Change in price
when the price increase the demand will deacrease so as the price decrease the demand will increase.
- Advertising
advertising effect people attractiveness to buy the product.
- Change in population
as the rate of population is high demand might higher also
as the rate of population is high demand might higher also
- Change in taste and fashion
as the taste and fashion change, demand on a product will also change. For example : clothes.
· *Demand diagram*
· Factors that causes shift in demand curve :
- Financial ability to pay for the product
- The attitude towards the product itself
- The price of the product
2. Supply is the willingness and ability to sell or supply a product at various prices per period of time.
· Law : when the price Ý supply will Ý
And so when th price Þ supply will Þ
· Factors effecting supply :
- The cost of supplying the product
- The type of industries
$ joint supply = a product can produced more products. Such as a cow, it can produce milk, cheese, leather, meat, etc.
· *Supply diagram*
Elasticity (Responsiveness)
· A numerical measure of responsiveness of one variable following a change in another variable or ceterus paribus.
· Elastic : a small change in price produces a bigger change in the quantity demanded
· Inelastic : a large change in price produces a bigger change in the quantity demanded
· Elasticity are differentiate into 3 types ;
- Price elasticity of demand (PED)
- Income elasticity of demand (YED)
- Cross elasticity of demand (XED)
# PED : when the price falls = demand will expand
When the price rise = demand will contract
- PED VALUES ; 0 = demand in perfectly inelastic means demand does not change when the price changes
- 0-1 = demand is inelastic means change in demand is smaller than the change of it’s price
- 1 = unit elastic means demand change the same as the change in price
- More than 1 = demand is elastic, means demand change more than change in price
‘ the concept of PED is almost the same with PES, while PED measure the responsiveness of demand to a changes in price so PES measure the responsiveness of supply to a changes In price’
- PED can be determines by :
- Number of substitute goods
- Cost of switching between products
- Peak and off-peak demand
- The time period allowed following a price change
- Whether the good is subject to habitual consumption
- The strength of the brand loyalty to a product
# YED : change in quantity demand
Change in income
- the result will be superior if it’s positive and inferior if it’s negative
#XED : change in quantity demand A
Change in price B
- If the result is positive it means the product is substitute good and if it is negative it means the product is complementary good
Sabtu, 03 Desember 2011
The National Income Accounting
National Income measures the total value of an economy's final output of goods and services in a year
National income also refers to net national product at factor cost (NNP) is the money value of all final goods and services produced by residents regardless of whether the production takes place and less depreciation in a given period of time, usually year.
GDP and GNP are two common measures of national income and output for a given country’s economy
.
GDP of a nation is total market value of all final goods and services newly produced within the geographical boundaries of a country during a specified period usually one year
GNP is market value of all final goods and services newly produced during a specified period usually one year, by productive factors owned by residents of th country, irrespective of whether these factors are located within the geographical boundary of the country or abroad.
3 methods for counting GDP are:
• Output method: totals the value of goods and services produced by all the various productive units, including the government in the country.
• Expenditure method: sums up the expenditures of both the private and government sectors on consumption and investment.
• Income method: aggregates all incomes receives by individuals and organizations for their contributions towards the national output.
Uses of national income are:
• To indicate the overall standard of living of the people in the country
• To measure the rate of economic growth
• To calculate the rate and direction in which a nations income is growing
• To indicate the distribution of factor incomes among wage-earners and property owners
• To assist the government in formulating policies
• To assist firm in their marketing and research
• To assist international economic planning
The limitations of this NI is that it difficult to ascertain accurately the value of capital consumption. Estimates of capital consumption are extremely imprecise and tend to be influenced by income tax laws than by other considerations.
The difficulties in measuring National income are:
• Arbitary definitions-
• Imputation of values
• Omissions in measurement of NI
• Difficulty in obtaining reliable and complete information
• Difficulty in calculating depreciation
• Danger of double-counting
Interpretation of changes in the value of national income must be made with careful qualifications. For meaningful comparisons to be made, the user must be aware of possible problems when using these statistics.
By counting the standard of living of a country, GDP and GNP measures the welfare of its people. It has weaknesses indicated earlier, briefly, NI figures do not reflect the distributions of income, externalities and disamenities. They do not include goods and services that are not for sale.
What is Aggregate Demand
- Aggregate means total - demand means the willingness and ability to buy a product. So aggregate demand means the total of willingness and ability to buy a product.
- AGGREGATE DEMAND is total demand for final goods and services in the economy (Y) at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels.
- There are 3 factors that effect the aggregate demand (slope move downward):
1. Wealth Effect : lower price level means people have more money or become 'wealthier'. when people become wealthier they will spend more. Spending is increasing, Therefore aggregate demand is also increasing.
(lower price level - wealthier - more spending)
2. Interest Rate Effect : when the price level is lower, people can save more money. They put their money on the bank to save it. Due to more people put the money, the bank has more money supply. In order to circulate it, Bank will loan more and they will decrease the interest rate to attract the investors. More investors loan from bank and do investments. So investment increase and investment is one of GDP indicators, Therefore Aggregate demand is increasing.
(lower price level - save money on the bank - bank have more money supply - lowering the interest rate - more investors - investment increase - GDP increase - AG increase)
3. Exchange Rate Effect : lower interest rate resulted to an increasing of investment. Investors are more attact to invest in another country which have higher interest rate in return because they want to get higher profit on their investment. Our currency is flowing to that country because in order to invest they have to exchange their currency (usually US Dollars $). So our country have lower currency. which make our domestic products are cheaper compared to the other country. Foreigners will import our products. so exports is increasing. Export is one of GDP components, so our GDP is increasing and so our Aggregate Demand
(low interest rate - more invesment- investors invest on other countries - our currency is lower - cheaper domestic products- more export - increase in GDP and AD)
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