Unit One Notes

Economics

Macro vs. Micro Economics

• Macro- study of entire economy
• Micro- study of parts of the economy

Positive vs, Normative

• Positive- claims that describe world as is
• Normative- claims that attempt to prescribe how world should be

Needs vs. Wants

• Needs- Basic requirement for survival
• Wants- Desires of citizens, much broader than needs

Scarcity vs. Shortage

• Scarcity- Most fundamental economic problem that all societies face, try to satisfy unlimited wants with limited resources
• Shortage- Quantity demanded is greater than quantity supplied
• Shortage is temporary
• Scarcity is permanent

Goods vs. Services

• Goods- tangible; can be bought, sold, produced
• Consumer Goods- Goods that are intended for final use by customer
• Capital Goods- Items used in the creation of other goods
• Services- Work that is performed

Factors of Production

• Land- Natural resources
• Labor- Work force
• Capital-
• Physical- Human made objects used to create other goods and services
• Human- Knowledge and skills gained through work and education
• Entrepreneurship- Innovative & risk-taker

Trade-offs

• Alternatives that we give up wherever we choose one course of action over another

Opportunity Cost

• Most desirable alternative given up by making a decision

Guns or Butter

• Military or Agriculture

Production Possibilities Graph

Production Possibilities Graph

• Alternative ways to use resources
• Any point inside the curve consists of underutilization. It is attainable but inefficient.
• Causes of this could be: Recession, Famine, War, Unemployment, Population Decrease
• Any point on the curve is efficient and attainable
• Any point outside the curve is unattainable
• Causes for this may be: Economic growth, technology, discovering new resources
• Key Assumptions when looking at PPG’s include:
• Two goods are produced (Consumer vs. Capital)
• Full employment
• Fixed Resources (Land, Labor, Capital)
• Fixed state of technology
• No international trade

Demand and Supply

Demand

• Demand is the quantities that people are willing and able to buy at various prices
• The Law of Demand
• Inverse relationship between price and quantity demanded
• A change in quantity demanded is caused by a change in price
• Causes for a change in demand include:
• Change in buyers taste
• Change in number of buyers
• Change in income
• Normal good
• Inferior good
• Change in price of related goods
• Substitute goods
• Complementary goods
• Change in expectations

Supply

• Supply is the quantities that producers/sellers are willing and able to produce and sell at various prices
• The Law of Supply
• There is a direct relationship between price and quantity supplied
• A change in quantity supplied is caused by a change in price
• Causes for a change in supply include:
• Change in weather
• Change in technology
• Change in cost of production
• Change in taxes or subsidies
• Change in number of sellers
• Change in expectations

Price Elasticity of Demand

• Tells how drastically buyers will cutback or increase their demand for a good when a price rises or falls
• Elastic Demand: When demand changes greatly due to a change in price
• E>1
• Inelastic Demand: Demand will not change for a product even if price changes
• E<1
• Unit Elastic
• E=1
• Calculating Elasticity
• Percent change in quantity
• (New Quantity-Old Quantity)/Old Quantity
• Percent change in price
• (New Price-Old Price)/Old Price
• Price elasticity of demand
• (Percent Change in Quantity/Percent Change in Price)

Economics Cont’d

Equilibrium

• The point at which supply curve and demand curve intersect
• All resources being used efficiently

Shortage

• QD>QS

Surplus

• QS>QD

Price Floor

• Government price control on how low a price can be charged for a product

Price Ceiling

• Government imposed limit on how high a price is charged

Fixed Cost

• Cost that does not change no matter how much is produced
• Rent

Variable Cost

• Cost that changes depending on how much is produced

Formulas:

• Marginal Cost: (New TC - Old TC)
• Total Cost: (TFC + TVC)
• Average Fixed Cost: (TFC/Quantity)
• Average Total Cost: (AFC + AVC) or (TC/ Quantity)

Expansionary (Growth)

• Real output in the economy is increasing and the unemployment rate is declining
• Look at construction (more growth)

Peak

• Real output is at its highest peak
• Do not know this until it is over

Contractionary Phase (Recession)

• Real output in the economy is decreasing and the unemployment rate is rising
• Typically lasts about 14 months

Troughs

• Where you reach your lowest point of real GDP
• One business cycle is from trough to trough
• Average business cycle is 6 years