© economic problem : Is scarcity . It is when there are unlimited WankSBEe limited resources to satisfy the wants SF Opportunity cost : next best alternative forgone. Eg : with apples and oranges) IF oranges are bought then apples will be the opportunity cost. th scarcity. As best option would be the as it has the least sacrifice Production possibility curve ( PPC ) duct Capital goods maximum ountry can produc of a combination of 2 - with its existing resou Tonsumer %Resources / factors of production Land- Anything available above, on or below the surface of the earth/ naturally. available resources, Eg : trees, coal, water. Payment - Rent Mental and physical efforts of workers in a business. Eg : Skilled worker like doctors and unskilled workers like cleaners Payment Salaries(monthly) Wages(daily/ weekly) pe Piece rate ayment Payment based on working hrs goods made ital - Man made resources. Eg : machines, cars, bridges, road. t= Interest rate ( cost of borrowing and return on saving ) oa x = The risk taking and decision making of merging all other factors of production for a business purpose . Eg: school, hospital Payme Enterprise Payment - ProfitCapital Goods go Concepts through pec? Consumer goods Explain economi 1. Resource Efficiency A and B are efficient levels as maximum resources are used Cis inefficient as under utilisation of resources occur 2. Scarcity: At D scarcity is experienced as resources are not available to produce at that level 3. Opportunity cost Opportunity cost of moving from A to B is 40 capital goodsB Bcoz opportunity cost increases as u move to a lower point on the pe, it implies that the resources of Th e Country @pstry tter equipped to produce more of Capital goodsEqual. opportunity cost Resources of the country are equally suited to produced both goodsCapital Goods Shift of the PPC ( new PPC ) Change in the quantity or quality oF resources If productive capacity increases then | PPC shift to the RIGHT EG: Discovery of new resources Increase in population Increase in training/edueation: Improvements in technology. Consumer goods If productive capacity decreases them PPC shift to the LEFT EG ; Depletion of oil reserves Emigration of people Natural calamities/ Virus/ lockdown increased death rate / reduce enterprise activityCapital Goods Movement of PPC ( no new PPC ) Consinnepaeee No change in the quantity or quality Of resources. Either underutilisation Productive capacity does not change Or more utilisation of existing resources Ato B : Producing more consumer goods And less capital goods B to A ; Producing more capital goods and less consumer goods B to C: underutilising resources. Increase in unemployment C to A: utilising more resources + Becoming more productive1. Efficiency: A and B is efficient, bcoz Using all resources Productive efficiency: producing at the lowest possible cost . A and B Allocative efficiency: producing what is indemand. 8B Pareto optimality : where it is impossible to make something better off without making something worse off. Aandi &Demand Willingness and ability to buy a product at a certain price aba given 2eriod of time Shift (new curve) > Bae Movement ( no new curve ) ea ee e s Contracted / expanded Trending g Price of the product Advertising Ae P i = Prices of substitutes \ © PI Prices of complements DI Incomes ° P Do QQ i Es period of time IBS Surplus anid a certain Shift ( new curve ) Movement ( no new curve ) Increase / decrease Extension/ contraction Cost of production ~ SS > pricechthelrcnes Indirect taxes i Technology c Subsidies Te Availability of resources Weather conditions D e eq =: Supply : willingness and ability to sell a pro ct at a certain pric a 1] ae a nn ee pee -~Consumer surplus : consumers who are willin 9 to pay a price above the equilibrium Price for the good By Producer surplus : producers who are willin ig to sell the product at a price lower than the equilibrium price 7 S Sc BO iM To Si Sas eeeP) Govt indirect tax revenue ft Consumer burden % Producer burden_ ORR Old consumer expense EFGHI od hee revenue EFGHI New producer revenue H New consumer expense | t Bcery Govt revenue : BCEF Consumer burden. ? Producer burden Hc teUsed for merit goods & below the equilibrium price. Original consumer expense = BCEF, Original producer revenue = PCErS New producer revenue New consumer expense “EF OldConsumer surplus = Old producer surplus=BE Maximum price or price ceiling to have an impact on the market needs to be placedPrivatisation A public sector business (Government run business ) Is converted to a private sector Business ( owned and controlled By private individuals ) Advantages Increase efficiency Provide better service quality Government needed finance Private sector has more technology / skilled workers Nationalisation When a private sector business is converted to a public sector Advantages As the business Is of strategic importance to the country Eg: power , transport To prevent closure of business so unemployment doesn’t occur As funding to run the business is very high and only government can afford it To offer affordable goads and services to citizens\ QiQ Govt indirect tax revenue Producer burden Ad valorem Tax : increased % of tax charged as quantity increases Cost of production higher as quantity increasesYED Mesures responsiveness of income elasticity of demand change in quantity demanded to i a change in income = % change in QD/ % chnge in Y =o normal good >0<1 necessity goods _eg- food (inelastic) >1. luxury good eg - cars (elastic) inferior good <0 eg: public transportationIncome jYED come Q1 Quantity of good Necessity goods Luxury goods YED. Q. Qi 7 7Quantity Inferior goods Income YED QuantitymT RT Be aXED ( Cross elasticity of demand) Sum 1: QD A = 100 QD1A = 150 a meaures of responsiveness of RPB= 50, PiB=7G change in Qd of a product toa =725 change in the price of another + ve : substitutes product. 1.25 > 1 elastic ( close sustitute: XED =_% change in QD A so change in QD A > change in Price B % change in price of B Eg: coke & pepsi = new Q - old Q* 100 Sum2:QDA=100 QD1A=50 SET PB=50 P1B=70 new P - old P * 100 old P =~ 1.25 - ve complementary goods 450-100/100. * 100 = 50_ 1.25 > 1 elastic ( close complementary goods ) change in QD A > change in price B 70-50/50*100 49Substitutes elastic > 1 closely related inelastic < 1 not closely related prige of coke Price of coke XED | P Qi. Q i Quantity of pepsi CiQ Guanes XED = 0 unrelated goods MazzaComplementary goods = -ve inelastic < 1 not closely related elastic > 1 closely related Pie , Price of cell phones io LL Qu a of sim caraCircular flow of income Injections : Leakages : Subsidies Taxation FDI Savings - Imports ye EXPORTS fin* Macro economic Aims: 1. Economic Growth increase GDP ( GROSS DOMESTIC PRODUCT) = The! 2. Full employment: reduce the unemployment 3. Price stability: Inflation low and stable When the average prices of goods and Services increases for a particular period of Time 4. Balance of payment stability: Export = > Imports 5. Redistribution of income : Reducing the gap between rich and poor Ways: Government will tax more to the rich and less to the poor (progressive tax) ij Increase minimum wage Unemployment benefits Government run schools and hospitalsAchieved through taxation Indi 2d on incom Tax charged on the purchase of goods and services ar compan Die tne: Govt tax i Consumer Geetonn a Se burden J Prodi — Proportional tax ‘Regressive ta: IncomesAims conflict Economy growth. Vs Price stability GDP or output rises xe Aggregate supply increase Employment inc FULL EMPLOYMENT Incomes inc Aggregate demand increase Cause Demand P Inflation low / stable inflation Average Prices fl | Te JN &0\ uy y { Real GDPi inflation: Rise in the prices of goods and services overs ‘Types . Us aon _ Prices Causes 1. Demand pull inflatior + _ 2, Cost push inflation ‘Aggregate demand increases Cost of production increases of aA!Consumer price index (CPI) : used to calculate inflation -ate if the eOUntEy for @ specific period of time Steps: -Choose a basket of goods and services used by general households: ~check the W - weights of each good, I.e., the amount of income spent on! each good. -Calculate PI- the changes in the prices of eoods and services from thelr base year price - base year is a year in which inflation is ned to be low and stable and the prices of goods are assumed to be 100. - Calculate the WPI = multiplication of W and PI OF EACH PRODUCT -Calculate the total of the WPI column To get the current price of the: basket of goods - compare this price to the base year / previous year price to check the change in inflation rateted price index 33 28.5 20 21.4 102.9 % change in inflation = new- old * 109 = 99.4 —jo@ we )oe Old |oe =T Dae\ reduce govt spending reduce disposable income | spending reduce agg demand tas _ agg supply fa ‘economic growth aggregate supply increases ‘utputfeconomic growth incr demand for feduce unemployment Cae causes demand pul inflation yy f= prices rise/ affordability falls standard oincrease interest rates : borrwing avings fall as fais as cost of borrowing oo Savings fa increases + savings increase as sable income increase spending fetus op savings increases fen, poring duce disposable eoma aggregate demand increase francine aggregate supply increases, agg demand falls output/ecanomi picebiaidlct es pees Unnleeses nomic growth/output fais demand for workers increases feduce unemployment increase in living standards reduces demand pull inflation causes demand pull inflation so affordability increase as fem prices rise/ affordability falls prices fal Ce eet cil) oe ca aExpantionary fiscal or monetary policy increases aggregate demand Contractionary fiscal or monetary policy decrease in aggregate demand Price } | oe AS ~ A | %Supply side policy : used to increase aggregate supply by encouring business activity 1, improve infrastructure Sy 2. educate / train workers research and | development assistance | per loans 4.ch ico se: ie eeeExchange rate : value of one country's currency against another countries USD/INR = 70 USD/ INR = 65 Appreciation of Rupees USD./ INR = 75 Depreciation of Rupees Currency is worth more Currency worth falis = orts a AS Increase YmfPOrS become cheaper Tapes Cost of production!mports increase . ‘ 4 Reducing Current account deficit ? pposite points Reduction in cost push inflation Imports may be Exports Exports \ Mon yenattY Exports become expensive y Exports decrease Opposite points Current account deficit ? Output reduces Reduce economic growth Increase unemploymentvv Price of $s in £s BS QQ Quantity of $s Figure 4,12 The effect of an increase in the supply of currencyRevaluation: when a country’s government increases the value of its currency, against another country’s currency Devaluation: when a country’s government decreases the value of its currency against another country’s currency Increase in supply of currency : Print more currency Buys foreign bonds Decrease the demand of currency Decrease the interest rates , Reduces FDI0.25 Price of UAE Dirham in $s 0 Q Qa Figure 4.14 Maintaining the value of the UAE dirham Fixed exchange rate system2 PRD Price of curency ‘Quantity of cureney Figure 4.15 A managed float ‘Amanaged float A managed float, in effect, combines features of a floating exchange rate system and fixed exchange rate system. It usually involves a government allowing the exchange rate to be determined by market forces within a given band, which has upper and lower limits. Figure 4.15 shows that the government sets a central value of P, an upper band of P,, which it does not want the exchange rate to exceed, and a lower limit of P,, which it does not want it to fall below. If the exchange rate is within the limits, for example at P., no action will be taken. If, however, demand for the currency were to rise to D,, the central bank would sell the domestic currency to increase supply to S, and so keep the exchange rate within the desired band.| MORTON Te Foreign exchange USD/INR | Rs75—1$ | f untri r = } ae by ey aE PAC RTEY, Rs. 70— 1$ appreciation of rupees against that of another country In Rs. 80-— 1% depreciation for rupees a given period of time. Fixed exchange rate: Floating exchange rate determined by market forces of Govi decides the exchange rate demand and supply. Pros : encourages international trade and business confidence’ as exchange rate stability occurs Pros opposite Cons : Govt opportunity cost as i opposite lesser resources for other aims, value of do not know the t the currency rer i ee i oeTOT ( terms of trade )= index of export prices Index of import prices When export prices increa: Marshall Lerner = prices of imports and exports are st4stic In long run Jcurve = prices of imports and exports ingy In short run + During dep\eciation of currency, demand for imports initially doesn’t change a5: available in short run. But in the long run substitutes are found t reduces and go into surplus (OM Meerprices fall } curve : PED ( imports ani (_[prvort Export revep Import overt ficit position will worsen in SR t Th P4 aan) Export revenue Import expense Be Deficit position Yl! improve/ experience surplusAbsolute Poverty : when people Unemployment : when labour labour force = cannot afford basic necessities force is unable to find jobs people who their income is lower than 1.25 $ are willing and per day Unemployment rate able to work =no of unemployed *100 Relative poverty : When people “TabourTorce- Cone can afford basic necessities but ow economic. Types growth their income is lower than the 1. Frictional unemployment “Opportunity cost | Ee eae income (temporary ): seasonal, search for Govt as Why reduce poverty Unemployment improve std of living 2. structural unemployment benefits, lesser since income low, AD low , AS (industry ) : technological, finance to investin | fow , output low , reduce regional healtheare economic growth -incomes low 80 demand for labour fall 3, Cyclical unemployment (whole increase unemployment(cyclical) country): Aggregate demand revenue a falls , recession -Jow std of living. more crit")Economic growth vs Increase in output or GDP Quantity Fails Economic Development Economic growth + std of living 4s + Quality HDI ( Human, Development Index) L Life expectaney 1 Income levels E Education levels HDI is not a good measure of std oF living consider the following : Quantity me inequality Green GDP ( GDP that does not cause external cost: ike pollution) Women participationA Comparative Advantage USA should supply coffee as they have a lower opportunity cost for it compared to UK Pros of international trade : take adv of comparative or absolute advantage ( specialisation) more variety cheaper and better quality maintain good relations with other countries increase export revenue increases competition and increases efficiency B Absolute Advantage USA has absolute producing Tea and UK absolute advantage | Coffee. Lowest | Cons of international trade : To prevent dumping ( when foreign goods are sold to developing countries at lower than cost price/loss making prices) Domestic businesses cannot compete with international competition Output/economic growth fall Increases unemployment to prevent depletion/expioitation of domestic resourcesTrade protection : Increase barriers of international trade. making it difficult for factors of production to move from one country to another. Ways : 1. Tariff ( Tax on imports) 2. Quota ( limit of the quantity of imports) 3. Embargo ( ban ) 4. Subsidies to domestic firms 5. exchange controls ( limit on the foreign currency given to citizens) 6. red tape/ excessive PaperworkTrade creation : bcozf the trade block it is now cheaper to dUmorts Inefficiency Consumer Of domestic Surplus IncreaseTrade diversion: bcoz of the trade block the imports become snore expensive reducing the imports. Custom union with UK , so charge tariff to USA. FY 3 Pio\ Production 2.2.9.0 @ oe 8 OgTrade block : an agreement between countries agreeing to have free trede ; amongst member nations Types : 1. Free trade areas 2. Custom unions A K YZ) Ne 3. Economic Unions * Free trade amongst member nations Common barrier against non member nations Common currency Common fiscal and monetary policiesTrade creation ce creation Entering into the trade block led To resources being cheaper Trade diversion eee Entering into the trade block led to resources becoming more expensiveKeynesian yoy shows price/ wage rigidity Govt help is needed to acheive full employment Planned economy/ communist v SR a New classical avg prices LRAS Pl i ha 01 ae Yie Real flexible prices/ wages qoP Govt help not needed , Market forces enough to reach full employment Capitalist/ MArket economic systemC+1+G+(KM) C: consumer expenditure |: Investments G: Government expenditure X: exports M: Imports (X-M) : net exports t Aggregate demand : Total demand of goods and services in a country in @ given period of time Aggregate supply : Total supply of goods and services in a country in a given period of time GDP ( gross domestic product ). total output of goods and services made in a country with its resources in a given period of time BOP records a country’s international transactions averagp pri Real GDPShort run Agg Supply Long run Agg Supply Keynesian supply curve Neo classical supply curve different elasticities Perfectly inelastic in the long run as resources as used up. Avg prices SRAS avg LRAS price used up capacity D Yio Real GDP spare capacity fe : full employment Flexi wages / Flexi prices Real GDP Sticky wages / sticky pricesSticky wages / sticky prices ah 3 even though AD increases from AD to AD1 and output has increased from Y to Y1 indicating higher real GDP. the PRices/ Wa wages in the market has not 3 /0 aft changed as the businesses here © WwW have spare capacity/ 4 ca sh underutilising existing resources . ap So it doesnt increase cost of production for them to increase: output.Flexi wages / Flexi prices the full employment Even though output did not increase as AD increased to AD1. the prices increased from P to PI as the country was already producing at full capacity so when AD increased it caused a shortage in the market this caused inflation as any change will change this is known as flexi wages or flexi prices‘gin and some people may lose asa result ofinflation. For Instance, if the rate of interest does not rise inline wth Inflation, borrowers wil gain and lenders (savers) will lose. ‘This is because borrowers wll pay back lessin eal terms and lenders will receive less. ‘Menu costs: These affect firms and are the costs Involved in changing prices. For example, catalogues, price tags, barcodes and advertisements have to be changed. This involves staff time and is unpopular with customers, ‘Shoe leather costs: These aro the costs involved in moving ‘money from one financial institution to another in search of the highest rate of interest Fiscal drag: This is now sometimes referred to as corresponding to diferent tax rates are not adjusted line with inflation. Asa result, people and firms are ged into higher tax brackets, ican be argued, however, that this isa cost ofan inefficient tax system rather than a cost of inflation, Discouragement of investment: Unanticipated inflation ‘can create uncertainty and so make it more dificult {or firms to plan ahead. This may dissuade firms from investing, which will have an adverse effect on economic growth. Inflationary noise: This is also called ‘money ilusion’. This arises when inflation causes consumers and firms to confuse price signals. Inflation can make it difficult to assess what is happening to relative prices, Arisein. the price of a product may not mean that it has become more expensive relative to other products. indeed, the product may have risen in price by less than inflation ‘and so may have become relatively cheaper. inflationary ‘noise can result in consumers and firms making the wrong decisions. For example, firms seeing the price of their products rising may increase output when the higher price is the result of inflation rather than. increased demand for thei products. This may result in a isallocation of resources, Inflation causing inflation: Inflation may generate ‘come to expect prices to rise. Asa result, a actin a way that will cause’