PRINCIPLES OF ECONOMICS lecture

PRINCIPLES OF ECONOMICS

16th October 2006
Additional reading materials:
Basic textbooks:
1. Krugman and Wells – improved version 2005-2006
2. More info about microeconomics Estrin & Caidlen (UK version) or US version by Varian
3. (UK) Gravelle & Rees; Freps
More advanced books:
1. Dowles “Microeconomics”
2. Stiaclit “Whether socialism?”
3. Henry Hazlits
Ben Fines “Social capital versus social theory”

Assessment
Multiple-choice assessment
There will be exercises in the afternoon for practical experience.

Mankiw Chapter 4
Modern economics is basically refers to some theories developed a century ago and it does not necessary refer to contemporary economic relations.
There are 2 groups: buyers and sellers
Competitive market – 3 criteria:
1. Many buyers and sellers
2. Not controlled by anyone
3. Narrow rage of prices
This definition arose in 1950 and it is very simplified version. In perfect competion:
1. Products are the same
2. Numerous buyers and sellers
3. Buyer and sellers are price takers
Monopoly:
One seller and seller controls price
Oligopoly:
Few sellers – potential presence of new sellers is limited
Monopolistic competition:
Many sellers
Slightly differentiated products
Each seller may set prices for his own product
Demand
Quantity demanded – is the amount of goods that buyers are willing and able to purchase. This refers to an aggregate demand not individual demand.
Another hint about singular case is:
M= paA+pbB so, M means total amount of possible goods that can be purchased

Budget constraint

A buyer cannot go beyond the triangle because it is not possible because of his/her income.
Consumer tries to maximize her utility against constraints.

Demand schedule:
Ice-cream example
There is an inverse relations between quantity demanded and the price.
Determinants of demand
· Market price
· Consumer income
· Prices of related goods
· Tastes
· Expectations

Ceteris Paribus – all variables except the ones being studied remain constant.
Market demand – sum of individual demands
Consumer income
In income increases, demand increases for superior goods but decreases for inferior goods.
Prices of related goods
When a fall in the prices of 1 goods reduces the demand for another goods