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Introduction To Economic Theory

The document introduces economic models and theories. It provides examples of different types of models, including models of government intervention in energy markets and oligopoly market structures. It discusses key concepts like comparative statics versus dynamic analysis and partial versus general equilibrium. It also provides an overview of the circular flow of economic activity between households and businesses.

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Taek Woon
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59 views

Introduction To Economic Theory

The document introduces economic models and theories. It provides examples of different types of models, including models of government intervention in energy markets and oligopoly market structures. It discusses key concepts like comparative statics versus dynamic analysis and partial versus general equilibrium. It also provides an overview of the circular flow of economic activity between households and businesses.

Uploaded by

Taek Woon
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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INTRODUCTION TO ECONOMIC

THEORY
MODELS ARE ABSTRACTION
MODELS ARE ABSTRACTION
A Common feature of all model is that they focus
only on the essential elements of an object or
process.
Models that are consistently predict a broad range
of real world phenomena are classified as theories.
Not all models are theories; however, most of the
models encountered in our text are regarded
EXAMPLE OF A MODEL
Intervention in the energy industry has been
practiced by government in at least for forms: price
and tax administration, licensing, rationing, and
corporate participation.
The petroleum product demand function that can be
expressed as:
Qt = a bP
where Qt is the total industry sales;
P represents the selling price of the
private firms acting jointly; and
a and b are positive coefficients.
Start with three firms of equal sizes acting initially as
a joint monopoly with identical unit variable cost of k.
Profit will be maximized when:
(+)
=
2
And the resultant sales would be:
(+)
QT=
2
One can conceive of two sales policy options that
government can take.

SALES NEUTRAL STRATEGY : In the sense that regardless of


the price it sets, it leaves the elasticity of demand facing the
private firms the same as before the entry of government.

DISCRIMINATORY SALES POLICY : It elects to sell the


product to buyers who are prepared to pay higher prices
for the commodity.
Three Pricing strategies in reaction to the price set by the
government firms:
Strategy A Select a price level that will maximize joint
monopoly profits after allowing the government firm to sell all it can
at the price that it selects.
Strategy B Strategy B price within the government firms
level.
Strategy C Match the government price in cooperative
fashion.
COMPARATIVE STATICS VS DYNAMIC ANALYSIS

COMPARATIVE STATICS : focuses on the shift in equilibrium positions


(statics) for an individual decision unit, a market, or an economic
system.
Equilibrium : refers to a state in which there a balance of
internal forces and no tendency for the situation to change unless
outside force intervene.

DYNAMIC ANALYSIS: focuses on the pattern and rate of change for


some variables between points of time.
PARTIAL VS GENERAL EQUILIBRIUM

PARTIAL EQUILIBRIUM ANALYSIS: analysis compares


equilibrium changes for one decision unit or one market
independent of related changes in the economic system.
Demand for the commodity can be expressed as :
Qd = f(P)
GENERAL EQUILIBRIUM ANALYSIS: recognizes the
interdependence of all decision units and all markets in the
economic system.
A more realistic demand equation can now be
expressed as :
Qd = f(P, Y, P0 , Pe , Ae)

Where: P = Price Y= Income P0= Population


Pe= Price Expectations Ad= Advertising and Promotions
AN OVERVIEW OF THE ECONOMY

THE CIRCULAR FLOW OF ECONOMIC ACTIVITY

HOUSEHOLD : Basic Consuming Unit


FIRM : Basic producing unit
GOODS AND SERVICES
PAYMENTS

BUSINESS
FIRMS
HOUSEHOLD

RENT, INTEREST, WAGES &


PROFIT
LAND, LABOR, CAPITAL AND
ENTREPRENEUR.
FINANCIAL FLOW which is the money flow, depicted in
the money payment by the firm to the household of its
money income and by the household to the firm for its
purchase of goods and services.

PHYSICAL FLOW is the goods flow, the flow of economic


resources from the household to the firm and in the flow of
goods and services from the firm to the household.

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