Unit 1

Macroeconomics - It is the study of the major components in economy.

• GDP
• Inflation
• International Trade

Microeconomics - It is the study of how households and firms make decisions and how they interact in markets.

• Supply and Demand
• Market Structures

Positive Economics vs. Normative Economics

Positive: Claims that attempt to describe the world as is. Very descriptive.
   Ex. minimum wage laws causes unemployment.

Normative: Claims that attempt to prescribe how the world should be. Very prescriptive in nature and opinion based.
   Ex. the government should raise the minimum wage.

Needs vs. Wants

Needs: Basic requirement for survival

Wants: Desire of citizens and broader than your needs

Scarcity vs. Shortage

Scarcity: Most fundamental economic problem facing all societies. Satisfying unlimited wants with limited resources .

Shortage: Quantity demanded is greater than quantity supply.

Goods vs. Services

Goods: Tangible Commodities

•  Consumer Goods: goods that are intended for final use by the consumer

Capital Goods: items used in the creation of other goods, such as factory machinery and trucks

Services: Work that is performed for someone else.

Factors of Production

1. land
2. labor
3. capital

             Human: knowledge and skills ( gained through education and experience)
             Physical: human made object used to create other goods and services
             Entrepreneurship: innovative and risk taker

Trade Offs - Alternatives that we give up whenever we choose on course of action over another

Opportunity Cost- Most desirable give up by making a decision

Production Possibility Graph

• Shows alternative ways to use resources
• Each point shows a trade off

 

 *on the curve = attainable

Point D (inside curve)

• decrease in population
• recession
• war
• famine
• underemployment
• unemployment

Point E (outside curve)

• economic growth
• technology
• new resources

Productive Efficiency

• any point on the curve
• concave out
• producing at the lowest cost allocating resources efficiently and full employment of resources

Allocative Efficiency

• where to produce on the curve
• looking for the best combination possible

Key Assumptions

• Two goods are produces
• Full employment
• Fixed resources (land, labor, capital)
• Fixed state of technology
• No international trade

Demand

Demand: the quantities that people are able and willing to buy at various prices

The Law of Demand: there is an inverse relationship between price and quantity demanded. When price increases, quantity decreases. When price decreases, quantity increases. (Demand Curve goes down)

What causes a "change in quantity demanded"? (∆ QD)
∆ in Price

What causes a "change in demand"? (∆ D)

1. ∆ in buyer's taste (advertising)
2. ∆ in number of buyers (population)
3. ∆ in income
• Normal Goods: goods that buyers buy more of when their income rises
• Inferior Goods: goods that buyers buy less of when their income rises
4. ∆ in price of related goods
• Substitute Goods: goods that serve roughly the same purpose to buyers. ex. coke & pepsi
• Complimentary Goods: goods that are often consumed together. ex. care & gas, fries & ketchup
5. ∆ in expectations (thinking of the future)

Elasticity of Demand: tells how drastically buyers will cut back or increase their demand for a good when the price rises or falls

• Elastic Demand: demand will change greatly given a small change in price (wants)
• E > 1
• Ex. movie tickets, steak, fur coats
• Inelastic Demand: demand for a product will not change regardless of price (needs)
• E < 1
• Ex. milk, gasoline, medicine
• Unit Elastic: E = 1

How to Calculate Price Elasticity of Demand (PED)

1. (New Quantity - Old Quantity) ÷ Old Quantity
2. (New Price - Old Price) ÷ Old Price
3. abs(% ∆ in Quantity) ÷ abs(% ∆ in Price)

Supply

Supply: the quantities that producers or sellers are willing and able to produce or sell at various prices

 

The Law of Supply: There is a direct relationship between price and quantity supplied. As price increases, quantity increases. As price decreases, quantity decreases. (Supply curve goes up)

 

What causes a "change in quantity supplied"? (∆ QS)

∆ in Price

What causes a "change in supply"? (∆ S)

1. ∆ in weather
2. ∆ in technology
3. ∆ in taxes or subsidies (money the government gives you)
4. ∆ in cost of production
5. ∆ in number of sellers
6. ∆ in expectations

Equilibrium-a point at which the supply curve and the demand curve intersect (economy is using their resources efficiently)





Price Ceiling- Government imposed limit on how high you can be charged for a product or service

• Below the equilibrium point
• Ex. Rent Control

Price Floor- Government imposed minimum on how low a price can be charged on a product or service

• Above the equilibrium point
• Ex. Minimum Wage

Marginal Revenue- the additional income from selling one more unit of a good

 

Fixed Cost (TFC)- a cost that does not change no matter how much is produced

 

Variable Cost- a cost that fluctuates

Total Cost = TFC + TVC

Marginal Cost = New TC - Old TC

Average Fixed Cost = TFC ÷ Quantity

Average Variable Cost = TVC ÷ Quantity

Average Total Cost = AFC + AVC or TC ÷ Quantity

Shortage: QD > QS

Surplus: QS > QD