Beruflich Dokumente
Kultur Dokumente
Public sector decision-making also requires defining ‘the public’. This is not a
straightforward task.
Which definition of ‘the public’ is correct for the analysis; Is it just the city, or the city and its
neighboring communities?
This question has no single answer as it depends on the criteria applied by the decision
makers.
The public normally refers to all constituents within the defined scope, whether they are
individuals, households, organizations, public and private organizations and even the
resources within the scope.
The goal of this chapter is to help you learn how to use economics to evaluate decisions and
their effects within society, from public sector perspective as well as private sector
perspective.
FOUNDATIONS OF ECONOMICS
Economic analyses are important to a variety of public and private sector activities.
e.g.
1. Govt agencies use economics to evaluate the benefits and costs of different
engineering projects
2. Local govts. Use it to determine user fee for public facilities
3. Private firms use it to determine how many workers to employ
4. Individuals use it to make daily decisions like whether to buy a new computer, take a
vacation or invest the money to spend later
CONSUMPTION-
It means to use or derive benefits from an economic good or service. A consumption activity
can be going to a park, watching a movie, buying a computer or benefiting from any public
safety program
PRODUCTION-
It means to create or make available an economic good/ service. It can include construction of
new houses, provision of labor et cetera
HOUSEHOLD-
A Household is a basic unit of production (and consumption), involving one or more
individuals.
Households make decisions about work, spending and use of personal property. These
decisions can be based on any number of goals, but in general, economics assumes that
people will try to maximize their satisfaction
FIRM- A Firm is a basic unit of production (or consumption), involving the conversion of
inputs into outputs (goods and services) Profit maximization is primary goal of most of the
firms.
The quantity supplied refers to the amount of a certain good producers are
willing to supply when receiving a certain price.
The correlation between price and how much of a good or service is supplied
to the market is known as the supply relationship. Price, therefore, is a
reflection of supply and demand.
The relationship between demand and supply underlie the forces behind the
allocation of resources. In market economy theories, demand and supply
theory will allocate resources in the most efficient way possible. How? Let us
take a closer look at the law of demand and the law of supply.
In other words, the higher the price, the lower the quantity demanded.
The amount of a good that buyers purchase at a higher price is less because
as the price of a good goes up, so does the opportunity cost of buying that
good. As a result, people will naturally avoid buying a product that will force
them to forgo the consumption of something else they value more. The chart
below shows that the curve is a downward slope.
Imagine that a special edition CD of your favorite band is released for $20.
Because the record company's previous analysis showed that consumers will
not demand CDs at a price higher than $20, only ten CDs were released
because the opportunity cost is too high for suppliers to produce more.
If, however, the ten CDs are demanded by 20 people, the price will
subsequently rise because, according to the demand relationship, as demand
increases, so does the price. Consequently, the rise in price should prompt
more CDs to be supplied as the supply relationship shows that the higher the
price, the higher the quantity supplied.
If, however, there are 30 CDs produced and demand is still at 20, the price will
not be pushed up because the supply more than accommodates demand.
In fact after the 20 consumers have been satisfied with their CD purchases,
the price of the leftover CDs may drop as CD producers attempt to sell the
remaining ten CDs.
The lower price will then make the CD more available to people who had
previously decided that the opportunity cost of buying the CD at $20 was too
high.
D. Equilibrium
When supply and demand are equal (i.e. when the supply function and
demand function intersect) the economy is said to be at equilibrium.
At this point, the allocation of goods is at its most efficient because the amount
of goods being supplied is
exactly the same as the amount
of goods being demanded.
In the real market place equilibrium can only ever be reached in theory, so the
prices of goods and services are constantly changing in relation to fluctuations
in demand and supply.
E. Disequilibrium
1. Excess Supply
If the price is set too high, excess
supply will be created within the
economy and there will be
allocative inefficiency.
At price P1 the quantity of goods that the producers wish to supply is indicated
by Q2.
At P1, however, the quantity that the consumers want to consume is at Q1, a
quantity much less than Q2. Because Q2 is greater than Q1, too much is
being produced and too little is being consumed.
The suppliers are trying to produce more goods, which they hope to sell to
increase profits, but those consuming
the goods will find the product less
attractive and purchase less because
the price is too high.
2. Excess Demand
Excess demand is created when price is
set below the equilibrium price.
Conversely, the quantity of goods that producers are willing to produce at this
price is Q1.
Thus, there are too few goods being produced to satisfy the wants (demand)
of the consumers.
However, as consumers have to compete with one other to buy the good at
this price, the demand will push the price up, making suppliers want to supply
more and bringing the price closer to its equilibrium.
1. Movements
2. Shifts
A shift in a demand or supply curve occurs when a good's quantity
demanded or supplied changes even though price remains the same.
For instance, if the price for a bottle of beer was $2 and the quantity of
beer demanded increased from Q1 to Q2, then there would be a shift in
the demand for beer.
Utility, then, is used to explain how and why individuals and economies aim to
gain optimal satisfaction in dealing with scarcity.
people are driven to find pleasure and avoid pain. The viewpoint that people
maximize utility, known as utilitarianism, has been taken up by the field of
economics, but also criticized by some who claim that pleasure and freedom
from pain are not the only goals that matter in life.
The amount of a person's total utility thus corresponds to the person's level of
consumption.
Usually, the more that a person consumes, the larger his or her total utility will
be.
Although the total amount of utility gained usually increases as more of a good
is consumed, the marginal utility usually decreases with each additional
increase in the consumption of a good. This decrease demonstrates the law
of diminishing marginal utility.
Because there is a certain maximum threshold of satisfaction, the consumer
will no longer receive the same pleasure from consumption once that
threshold is crossed.
In other words, total utility will increase at a slower pace as an individual
increases the quantity consumed.
For example, the pleasure of eating the first cookie is much greater than the
pleasure received from eating the tenth or eleventh cookie in a sitting.
Figure 10 This table shows that total utility will increase at a much slower rate as marginal utility diminishes with each
additional bar.
ELASTICITY IN ECONOMICS
We’ve seen that the demand and supply of goods react to changes in price,
and that prices in turn move along with changes in quantity.
Usually these kinds of products are readily available in the market and a
person may not necessarily need them in his or her daily life, or if there are
good substitutes.
For example, if the price of Coke rises, people may readily switch over to
Pepsi.
If a change in price results in a big change in the amount supplied, the supply
curve appears flatter and is considered elastic.
On the other hand, if a big change in price only results in a minor change in
the quantity supplied, the supply curve is steeper and its elasticity would be
less than one. The good in question is inelastic with regard to supply.
For example, if the price of a good is very high and some firms are making
extra profits in that sector, other firms will be induced to start producing that
same good – in competition with the others – which will increase supply and
reduce the selling price.
In a market with many buyers and sellers, both the consumer and the supplier
have equal ability to compete on price.
3. all firms are price takers (they cannot influence the market price of their
product);
What’s Monopoly?
6. For example, in Saudi Arabia the government has sole control over the
oil industry.
What is an Oligopoly?
This select group of firms has control over the price and, like a monopoly, an
oligopoly has high barriers to entry to keep out potential competitors.
The products that the oligopolistic firms produce are often nearly identical and,
therefore, the companies, which are competing for market share, are
interdependent as a result of market forces.
Assume, for example, that an economy needs only 100 widgets. Company X
produces 50 widgets and its competitor, Company Y, produces the other 50.
The prices of the two brands will be interdependent and, therefore, similar.
So, if Company X starts selling the widgets at a lower price, it will get a greater
market share, thereby forcing Company Y to lower its prices as well.
CONCLUSIONS: