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ECON 201, Winter 2010 Lecture Notes on The Price Theory: Demand, Supply, Market Equilibrium, and Applications
This lecture note discusses the price theory and its applications. The theory is introduced after a brief review of some basic concepts. The demand and supply of a normal good are de…ned and explained in detail. Practice problems and examples are used for illustration. The concept of market equilibrium is introduced and the e¢ ciency conditions are explained. The government interventions, through the implementation of price ceilings, ‡ oors, taxes, quotas, and subsidies, and the e¤ects of these policies on the market equilibrium are discussed. The notion of elasticity is explored and …nally, externalities and the other causes of market failure are explained by means of examples.
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Introduction and Basic Concepts
A. The Economic Concept
Economics is de…ned as a social science that aims to study how the society allocates its scarce resources to satisfy the society’ unlimited needs and wants in the most e¢ cient way. s Since resources are limited (scarce) and the needs and wants are unlimited, therefore, we can say that economics is the study of how people make choices. De…nition 1 Resources (factors of production) are things that are used to produce other things to satisfy people’ wants. s De…nition 2 Production is de…ned as any activity that leads to converting resources into products for consumption. The resources used in production are called the factors of production (FOP). The FOP can be classi…ed into land, labor, capital, and entrepreneurship. De…nition 3 Land is the natural (non human) resource that is available from nature. Land as a resource (factor of production) includes location, minerals, climate, water, and vegetation. De…nition 4 Labor is the human resource, which includes all contributions by individuals who work. De…nition 5 Capital can be divided into physical capital and human capital. Physical capital refers to all manufactured resources which includes buildings, equipment, and machines. Human capital refers to the accumulated training and education of workers (investing in people). De…nition 6 Entrepreneurship (actually a subdivision of labor) involves human resources that perform the functions of organizing, managing, assembling the other factors of production, and making basic decision to improve the business. De…nition 7 Wants refers to all what people would buy (consume).
B. The Economic Problem
The economic problem, also known as ‘ scarcity problem’ refers to the gap between the , limited resources and the unlimited needs and wants of the society.2 Economic P roblem =) Choice =) Opportunity Cost implies implies
Even if we managed to increase our resources, our needs and wants will also increase...