Welcome ToWelcome To

Avia 3040Avia 3040

Aviation EconomicsAviation Economics

Faculty: Dr. Munir Mahmud

Office: Hazy 342

Phone: (435)652-7626

E-mail: mahmud@dixie.edu

Office Hours: MWF 11–12:45 pm. & By Appointments

Text Book:Text Book:

Principles of Economics, 6th Edition, 2010 – South Western Cengage Learning.ISBN: 978-1-426-64835-9

Prerequisites:Prerequisites:

None

Grading:Grading: 4 Take Home Assignments.

4 In-Class Exams. Final Take Home Exam.

Make-UP Policy:Make-UP Policy: Unless there is a compelling reason, no “Make-up” exam will be given. Late assignments will be subject to a 30% point deduction.

Distribution of Points:

Take Home Assignments (4) 10% each

In-Class Exams (4) 10% each

Final Take home Assignment 20%

-----------------------------------------------------------Total 100%

How would the point grade be converted into a letter grade?

General Rule:General Rule:

100-90 = A 72-70 = C 89-87 = A- 69-67 = C- 86-83 = B+ 66-64 = D+

82-80 = B 63-60 = D79-77 = B- 59-57 = D-76-73 = C+ Below 57 = F

Academic Integrity:Academic Integrity:

All students are expected to act with civility, personal integrity; respect other students' dignity, rights and property; and help create and maintain an environment in which all can succeed through the fruits of their own effortsown efforts. An environment of academic integrity is requisite to respect for self and others and a civil community.

Academic integrity includes a commitment to not engage in or tolerate acts of falsification, misrepresentation or deception. Such acts of dishonesty include cheatingcheating or copyingcopying, plagiarizingplagiarizing, submitting another persons' work submitting another persons' work as one's ownas one's own, using Internet sources without using Internet sources without citationcitation, fabricating field data or citationsfabricating field data or citations, , "ghosting"ghosting" (taking or having another student take an exam), stealing examinations, tampering with the academic work of another student, facilitating other students' acts of academic dishonesty, etc.

Academic dishonesty violates the fundamental ethical principles of the University community and compromises the worth of work completed by others. A student should avoid academic dishonesty when preparing work for any class.

Sanctions for breaches of academic integrity may range (depending on the severity of the offense) from F for the assignmentF for the assignment to F for the courseF for the course. In severe cases of academic dishonesty, including, but not limited to, stealing exams or "ghosting" an exam, students may be expelled from the college.

Disability:Disability:"If you are a student with a medical, psychological, or learning disability or think you might have a disability and would like accommodations, contact the Disability Disability Resource Center (652-7516)Resource Center (652-7516) in the Student Services Student Services CenterCenter. The Disability Resource Center will determine eligibility of the student requesting special service and determine the appropriate accommodations related to their disability.

It is encouraged that students requesting accommodation do so within the first two weeks of classes, so that, once identified, a reasonable accommodation can be implemented in a timely manner.

Your Rebel Mail Account:Your Rebel Mail Account:

Important class and college information will be sent to your Rebel mail email account.  This information includes your DSC billDSC bill, financial aid/scholarship noticesfinancial aid/scholarship notices, notification of dropped classes, reminders of important dates and events, and other information critical to your success in this class and at DSC.  All DSC students are automatically assigned a Rebelmail email account.  If you don’t know your user name and password, go to www.dixie.edu and select “Rebelmail,” for complete instructions.  You will be held responsible for information sent to your Rebelmail email, so please check it often.

Lecture: 1Lecture: 1

Chapter 1: IntroductionChapter 1: Introduction

Natural Resources:Natural Resources:

The land, water, metals, minerals, animals, The land, water, metals, minerals, animals, and other gifts of nature that are available and other gifts of nature that are available for producing goods and services.for producing goods and services.

Renewable Natural Resources:Renewable Natural Resources:

Our supply of forests.

Sea and land animals.

Water and Grasses.

Question:Question: Are renewable natural resources inexhaustible?

Nonrenewable Natural Resources:Nonrenewable Natural Resources:

Metal and Mineral Resources.Metal and Mineral Resources.

Insatiable Wants:

WantWant NeedNeed DemandDemand

Things we desire.

Things we require.

Wants that are backed by purchasing power.

Scarcity and EconomicsScarcity and Economics

What is Economics?What is Economics?

Economics is the study of how we work together to transform scarce resourcesscarce resources into goods and services to satisfy the most pressing of our unlimited wantsunlimited wants, and how we distributedistribute these goods and services among ourselves.

Economics as a part of Social Science:

Consumer Sovereignty:Consumer Sovereignty:

The ability of consumers to exercise complete control over what goods and services the economy produces (or does not produce) by choosing what goods and services to buy (or not buy).

Sociology, Anthropology, Political Science and Psychology

Economics Focuses on 4 Central Issues:Economics Focuses on 4 Central Issues:

1.1. Who produces what?

2.2. How it is produced?

3.3. Who consumes?

4.4. Who decides?

Economic Model:Economic Model:

It is a simplified representation of complex economic relationships. Sometimes to untangle the complexities of the relationship, economists have to abstract from realityabstract from reality.

The Assumption of Ceteris ParibusCeteris Paribus:

It means, “Everything else is remaining Everything else is remaining the samethe same”.

The Circular Flow Model:

Labor, Land, Capital &Labor, Land, Capital &Entrepreneurship.Entrepreneurship.

Goods and Services.Goods and Services.

Resource Market

Product Market

Wages, Rent, Interest & ProfitWages, Rent, Interest & Profit

Consumer spending for goods & servicesConsumer spending for goods & services

Micro and Macro EconomicsMicro and Macro Economics

Microeconomics:Microeconomics: It studies the behavior of an individual household, firm or even industry.

Macroeconomics: ItMacroeconomics: It focuses on the behavior of the economy as a whole.

Positive and Normative Economics:Positive and Normative Economics:

Positive Economics:Positive Economics:

A subset of Economics that analyzes the way economy actually operateseconomy actually operates (a factual statement).

Normative Economics:Normative Economics:

A subset of Economics founded on value judgements and leading to assertions of what ought to bewhat ought to be.

Chapter 2Chapter 2

Production Possibilities and Production Possibilities and Opportunity CostsOpportunity Costs

This chapter discusses This chapter discusses principles principles associatedassociated with with

Division of Labor and SpecializationTechnological Change and Economic Growth

The Law of Increasing CostsOpportunity CostsProduction PossibilitiesFactors of Production

Absolute and Comparative Advantage

What are the Factors What are the Factors of Production?of Production?

LaborLabor CapitalCapital Land Land EntrepreneurshipEntrepreneurship

What is Labor?What is Labor?

The physical and intellectual effort of people engaged in producing goods and services

What is Capital?What is Capital?

ManufacturedManufactured goods used to makemake and/or marketmarket other goods and services

What is Human Capital?What is Human Capital?

The knowledge and skills acquired by labor, principally through education and training

What is Land?What is Land?A natural-state resource

such as real estate, grasses and forests, and metals and minerals

Who is anWho is an Entrepreneur?Entrepreneur?

A person who alone assumes the risks and uncertainties of a business

He is also the person He is also the person who takes the initiative and who takes the initiative and comes up with the essential idea comes up with the essential idea of the business.of the business.

What is Production What is Production Possibilities?Possibilities?

In order to understand what is meant by PPF, we would first consider a hypothetical economy.

Production Possibilities FrontierProduction Possibilities Frontier

Robinson Crusoe’s Production Possibilities:Robinson Crusoe’s Production Possibilities:

ConsumptionGoods

Capital Goods

6 0

5 1

3 2

0 3

ConsumptionGoods

Capital Goods

6 0

5 1

3 2

0 3

Con

sum

ptio

n G

oods

Capital Goods

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

Production Possibilities?Production Possibilities?

The combinations of goods that can be produced when resources and technology are used fully & efficiently

Con

sum

ptio

n G

oods

Capital Goods

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

Production Possibilities CurveProduction Possibilities Curve

Capital Goods

Unattainable

Inefficient

Con

sum

er G

ood

s

3434

What is true along the What is true along the Production Production Possibilities Curve?Possibilities Curve? available resources are available resources are

used fullyused fully most efficient most efficient

combination of resourcescombination of resources

What choices are made along What choices are made along the Production Possibilities the Production Possibilities curve?curve?

To have more of one product, units of the other product have to be given up

Opportunity Cost:Opportunity Cost:

The quantity of other goods The quantity of other goods that must be given up to that must be given up to obtain a goodobtain a good

Law of Increasing Law of Increasing Costs:Costs:

The opportunity cost of The opportunity cost of producing a good increases producing a good increases as more of the good is as more of the good is producedproduced

Con

sum

ptio

n G

oods

Capital Goods

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

How do we have How do we have more of everything?more of everything?

By increasing our resourcesBy increasing our resources

Increased ResourcesIncreased Resources

Capital Goods

Con

sum

er G

ood

s

4141

What other ways can we What other ways can we increase our PPF?increase our PPF?

Innovations - an idea that Innovations - an idea that takes the form of new takes the form of new applied technologyapplied technology

Technology - an Technology - an improvement in capitalimprovement in capital

InnovationsInnovations

Capital Goods

Con

sum

er G

ood

s

4343

Con

sum

ptio

n G

oods

Capital Goods

0 1 2 3 4 5 6 7 8

9

1

2

345

67

8

0 1 2 3 4 5 6 7 8

9

1

2345

78

6

Once Rich it is Easier to Get RicherOnce Rich it is Easier to Get Richer

Once Poor it is Easy to Stay PoorOnce Poor it is Easy to Stay Poor

Rich Country Poor Country

Con

sum

ptio

n G

oods

Capital Goods

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

The Indestructible Nature of IdeasThe Indestructible Nature of Ideas

Does division of labor increase Does division of labor increase productivity?productivity?Does division of labor increase Does division of labor increase productivity?productivity?

Yes. People become more proficient in one activity which results in greater output per person

Specialization of labor :Specialization of labor :

The division of labor into The division of labor into specialized activities.specialized activities.

Adam Smith: Adam Smith:

““One man draws out the wire, another One man draws out the wire, another straightens it, a third cuts it, a fourth straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for points it, a fifth grinds it at the top for receiving the head; to make the head receiving the head; to make the head requires two or three distinct operations, requires two or three distinct operations, to put it on is a peculiar business, ...........”to put it on is a peculiar business, ...........”

The reason for such division of labor, he noted, is that these 10 people could make as many as 48,000 pins48,000 pins in a day. If they had each worked separately and independently, they could not have produced more than 200200.

Production ofFish

Production ofShirts

Crusoe Island 2 8

YakamayaIsland

8 2

Production of Fish & Shirts per 8-hour DayProduction of Fish & Shirts per 8-hour Day

Example 1:

Absolute Advantage:Absolute Advantage: A country’s ability to produce a good A country’s ability to produce a good

using fewer resources than the using fewer resources than the country with which it tradescountry with which it trades

The Theory of Absolute AdvantageThe Theory of Absolute Advantage states that a country should completely states that a country should completely specialize and produce the good in specialize and produce the good in which it has absolute advantage.which it has absolute advantage.

Production ofFish

Production ofShirts

Crusoe Island 8 8

YakamayaIsland

8 2

Production of Fish & Shirts per 8-hour DayProduction of Fish & Shirts per 8-hour Day

Example 2:

In Crusoe Island,In Crusoe Island, 1 Fish = 1 Shirt1 Fish = 1 Shirt

In YakamayaIn Yakamaya, 1 Fish = 2/8 = 1/4 Shirt1 Fish = 2/8 = 1/4 Shirt & 1 Shirt = 4 Fish

& 1 Shirt = 1 Fish1 Shirt = 1 Fish

1 S 1 F

4 F1/4 S

International Exchange Rate, 1 Shirt = 2 Fish

Comparative Advantage:Comparative Advantage: A country’s ability to produce a A country’s ability to produce a

good at a lower opportunity cost good at a lower opportunity cost than the country with which it than the country with which it tradestrades

The Theory of Comparative AdvantageThe Theory of Comparative Advantage states that a country should completely states that a country should completely specialize and produce the good in specialize and produce the good in which it has comparative advantage.which it has comparative advantage.

What should a country What should a country specialize in producing?specialize in producing?

In those goods and services In those goods and services in which it has a in which it has a comparative advantagecomparative advantage

Should a country produce Should a country produce that with which it has an that with which it has an Absolute Advantage?Absolute Advantage?

No! Not unless it also has a Not unless it also has a comparative advantage in comparative advantage in those goods and servicesthose goods and services

Why?Why?

Because by so doing its opportunity costs may be too high

Production ofFish

Production ofShirts

Crusoe Island 10 4

YakamayaIsland

8 2

Production of Fish & Shirts per 8-hour DayProduction of Fish & Shirts per 8-hour Day

Example 3:

In Crusoe IslandIn Crusoe Island, 1 Fish = .4 Shirt

In YakamayaIn Yakamaya, 1 Fish = 2/8 = 1/4 Shirt && 1 Shirt = 4 Fish

&& 1 Shirt = 2.5 Fish

.4 S 2.5 F

4 F.25 S

International Exchange Rate, 1 Shirt = 3 Fish

Chapter 3Chapter 3

Demand and SupplyDemand and Supply

What is the Law of What is the Law of Demand?Demand?

When price increases the quantity demandedquantity demanded decreases

What is a What is a Demand Schedule?Demand Schedule?

Shows the specific quantity of a good or service that people are willing and able to buy at different prices

PricePrice Quantity DemandedQuantity Demanded

$10$10 00

$9$9 11

$8$8 22

$7$7 33

$6$6 44

$5$5 55

What is a What is a Demand Curve?Demand Curve?

Graphically depicts the relationship between price and quantity demanded

Demand Curve

Demand Curve

P1

Q1

P2

Q2

Pri

ce

Quantity

Individual Demand Curves for FishIndividual Demand Curves for Fish

Price QuantityDemanded

10 09 18 27 36 45 54 63 72 81 9

Claudia’s Demand Claudia’s Demand for Fishfor Fish

7

0 1 2 3 4 5 6 7 8

9

1

2

345

6

8

10

9 10

Individual Demand Curves for FishIndividual Demand Curves for Fish

Price QuantityDemanded

10 19 38 57 76 95 114 133 152 171 19

Chris’s Demand for Fish

7

0 1 2 3 4 5 6 7 8

9

1

2

345

6

8

10

9 10

What is Market Demand?What is Market Demand?

The horizontal sum of all The horizontal sum of all individual demands in a marketindividual demands in a market

Market Demand Curve:Market Demand Curve:

Individual 1Individual 1

P1

Q1

Individual 2Individual 2

P1

Q2

Market DemandMarket Demand

P1

Q1+Q2

P2

Pri

ce

Quantity

7

0 1 2 3 4 5 6 7 8

9

1

2

345

6

8

0 1 2 3 4 5 6 7 8

9

1

2345

78

6

Market Demand CurveMarket Demand Curve

Claudia’s Demand Chris’s Demand

10 10

9 109 10

Pri

ce

Quantity

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

Market Demand CurveMarket Demand Curve

10

9 10

Gottheil 2e Comprehensive (Exhibit 3.1), Micro (Exhibit 3.1), Macro (Exhibit 3.1)©2000 South-Western College Publishing

Individual Demand Curves for FishIndividual Demand Curves for Fish

8

Gottheil 2e Comprehensive (Exhibit 3.2), Micro (Exhibit 3.2), Macro (Exhibit 3.2)©2000 South-Western College Publishing

The Market Demand CurveThe Market Demand Curve

9

What is a What is a Supply Schedule?Supply Schedule?

Shows the specific quantity of a good or service that suppliers are willing and able to provide at different prices

PricePrice Quantity SuppliedQuantity Supplied

$5$5 00

$6$6 11

$7$7 22

$8$8 33

$9$9 44

$10$10 55

What is a Supply Curve?What is a Supply Curve?

Depicts the relationship between price and quantity supplied

Supply Curve

Supply Curve

P1

Q1

P2

Q2

Pri

ce

Quantity

S

What is What is Market-Day Supply?Market-Day Supply?

A market situation in which the quantity of a good supplied is fixed, regardless of price

Market-Day Supply Curve for FishMarket-Day Supply Curve for Fish

Price QuantitySupplied

10 60009 60008 60007 60006 60005 60004 60003 60002 60001 6000

Supply Schedule for Fish for the Market-Day

7

0 1 2 3 4 5 6 7 8

9

1

2

345

6

8

10

9 10Quantity (1,000)

Pri

ce

Sup

ply

Cur

veS

uppl

y C

urve

S

P1

Q

P2

76

Market Demand Curve for FishMarket Demand Curve for Fish

Price QuantityDemanded

10 35009 40008 45007 50006 55005 60004 65003 70002 75001 8000

Demand Schedule & Curve for Fish:

7

0 1 2 3 4 5 6 7 8

9

1

2

345

6

8

10

9 10Quantity (1,000)

Pri

ce Excess Supply

Excess Demand

Equilibrium

What isWhat is Equilibrium Price? Equilibrium Price?

The price that equates the quantity demanded and the quantity supplied

Pri

ce

Quantity

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

Market-Day, Short-Run and Long-Run SupplyMarket-Day, Short-Run and Long-Run Supply

10

9 10

Market-Day SupplyShort-Run Supply

Long-Run Supply

Short-Run:Short-Run:

The time interval during which suppliers are able to change the quantity of some but not all the resources they use to produce goods and services.

Long-Run:Long-Run:

The time interval during which suppliers are able to change the quantity of all the resources they use to produce goods and services.

D

SP3

Q3

P1 Surplus

P2Shortage

81

Or Excess Supply

Or Excess Demand

Price QuantitySupplied

InitialQuantity

Demanded10 8500 35009 8000 40008 7500 45007 7000 50006 6500 55005 6000 60004 5500 65003 5000 70002 4500 75001 4000 8000

Fish Market with change in Demand:Fish Market with change in Demand:

Pri

ce

Quantity

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

Market Demand CurveMarket Demand Curve

10

9 10

S

D

Price QuantitySupplied

InitialQuantity

Demanded

Increase inQuantity

Demanded10 8500 3500 55009 8000 4000 60008 7500 4500 65007 7000 5000 70006 6500 5500 75005 6000 6000 80004 5500 6500 85003 5000 7000 90002 4500 7500 95001 4000 8000 10000

Fish Market with change in Demand:Fish Market with change in Demand:

Pri

ce

Quantity (1,000s)

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

Increase in Demand:Increase in Demand:

10

9 10

S

DD'

Price QuantitySupplied

InitialQuantity

Demanded

Increase inQuantity

Demanded

Decrease inQuantity

Demanded10 8500 3500 5500 15009 8000 4000 6000 20008 7500 4500 6500 25007 7000 5000 7000 30006 6500 5500 7500 35005 6000 6000 8000 40004 5500 6500 8500 45003 5000 7000 9000 50002 4500 7500 9500 55001 4000 8000 10000 6000

Fish Market with change in Demand:Fish Market with change in Demand:

Pri

ce

Quantity (1,000s)

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

Decrease in Demand:Decrease in Demand:

10

9 10

S

DD"

Change in Quantity Demanded:Change in Quantity Demanded:

A change in quantity demanded of a good A change in quantity demanded of a good that is caused solely by a change in the that is caused solely by a change in the price of that good.price of that good.

Change in Demand:Change in Demand:

A change in quantity demanded of a good that A change in quantity demanded of a good that is caused by factors other than the price of that is caused by factors other than the price of that good. good.

Factors that cause changes in Demand:Factors that cause changes in Demand:

Changes in Income.Changes in Income.

Changes in Taste.Changes in Taste.

Changes in the Prices of Other Goods. Changes in the Prices of Other Goods.

Substitute Goods:Substitute Goods:

Goods that can replace each other. When the price of one increases (decreasesdecreases),), the demand for the other increases (decreasesdecreases).

Complementary Goods:Complementary Goods:

Goods that are generally used together. When the price of one increases (decreases), the demand for the other decreases (increases)

Factors that cause changes in Demand:Factors that cause changes in Demand:

Changes in Income.Changes in Income.

Changes in Taste.Changes in Taste.

Changes in the Prices of Other Goods. Changes in the Prices of Other Goods.

Changes in the expectations about future prices.Changes in the expectations about future prices.

Changes in the population size.Changes in the population size.

Quantity

Pri

ce

0

P1

P2

Q1 Q2

Change in Quantity DemandedChange in Quantity Demanded

QuantityQuantity

Pri

ceP

rice

00

PP11

QQ11 QQ22

Change in DemandChange in Demand

DDDD11

Price QuantityDemanded

InitialQuantitySupplied

Increase inQuantitySupplied

10 3500 8500 95009 4000 8000 90008 4500 7500 85007 5000 7000 80006 5500 6500 75005 6000 6000 70004 6500 5500 65003 7000 5000 60002 7500 4500 55001 8000 4000 5000

Fish Market with change in Supply:Fish Market with change in Supply:

Pri

ce

Quantity (1,000s)

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

Increase in Supply:Increase in Supply:

10

9 10

S

D

S'

Factors that cause changes in Supply:Factors that cause changes in Supply:

Changes in Technology.Changes in Technology.

Changes in Resource Price.Changes in Resource Price.

Changes in the Prices of Other Goods. Changes in the Prices of Other Goods.

Changes in the Number of Suppliers.Changes in the Number of Suppliers.

Pri

ce

Quantity (1,000s)

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

Increase in Demand & Supply:Increase in Demand & Supply:

10

9 10

S

D

S'

D'

Pri

ce

Quantity (1,000s)

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

Increase in Demand & Supply:Increase in Demand & Supply:

10

9 10

S

D

S'

D'

Pri

ce

Quantity (1,000s)

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

Increase in Demand & Supply:Increase in Demand & Supply:

10

9 10

S

D

S'

D'

Pri

ce

Quantity (1,000s)

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

Increase in Demand & Decrease in Supply:Increase in Demand & Decrease in Supply:

10

9 10

S

D

S'

D'

Pri

ce

Quantity (1,000s)

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

Increase in Demand & Decrease in Supply:Increase in Demand & Decrease in Supply:

10

9 10

S

D

S'

D'

Pri

ce

Quantity (1,000s)

0 1 2 3 4 5 6 7 8

9

1

2

34

5

6

7

8

Increase in Demand & Decrease in Supply:Increase in Demand & Decrease in Supply:

10

9 10

S

D

S'

D'