Chapters 1, 2, 4: The Principles of Economics
Division of Labor: (PowerPoint, Taylor 4E CH 01)
People earn income by specializing in what they produce and then use that income to purchase the products they desire.
Within a budget constraint, what is the effect of personal preferences? (PowerPoint, Taylor 4E CH 02)
Personal preferences determine specific choices, as well as the actual choice.
Total Surplus: (PowerPoint, Taylor 4E CH 04) (Please Note: Professor said that we would get into this more in Module 2, so there is not as much emphasis on this.)
Larger at the equilibrium quantity and price than it will be at any other quantity and price.
Price Controls: (PowerPoint, Taylor 4E CH 04)
Laws that the government enacts to regulate prices, which comes in two ways: 1) Price Ceilings 2) Price Floors
The Macroeconomics Perspective: (PowerPoint, Taylor 4E CH 01)
Looks at the economy as a whole, focusing on overall issues like growth in the standard of living, unemployment, inflation, and levels of foreign trade. (Like, the whole pie, not just pieces.)
Scarcity: (Accessible Lecture Notes)
Naturally occurring phenomenon causing resources to be limited due to the reproduction cycle of renewable resources and the lack of reproduction of nonrenewable resources.
The formula for how compound interest accumulates over time is: (PowerPoint, Taylor 4E CH 02)
(Present amount) × (1 + Interest rate) number of years = Future amount.
If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. Following this, what will then exist? (PowerPoint, Taylor 4E CH 04)
*Excess demand* or a *shortage* will exist.
If the price is above the equilibrium level, then the quantity supplied will exceed the quantity demanded. Following this, what will then exist? (PowerPoint, Taylor 4E CH 04)
*Excess supply* or a *surplus* will exist.
In general, economic analysis consists of four steps: (Accessible Lecture Notes)
1) Characterize the market system. 2) Identify goals and constraints in that system. 3) Find the equilibrium of the system. .4) Determine what happens when a variable or variables change.
Economic analysis involves two key components: (Accessible Lecture Notes)
1) Economic methodology - school of thought (world view). 2) economic methods - models, assumptions, theory.
Through monetary policy and fiscal policy, the four main goals of macroeconomics are: (End: PowerPoint, Taylor 4E CH 01)
1) Growth in the standard of living. 2) Low unemployment. 3) Low inflation. 4) Sustainable Balance of trade. (As a friendly reminder, the two types of policies for pursuing the goals above include monetary policy and fiscal policy.)
Common Misperceptions (End - PPF Model)
1) Not all costs are monetary costs. Opportunity costs are expressed in terms of how much of another good, service, or activity must be given up in order to pursue or produce another activity or good. For example, when you head out to see a movie, the cost of that activity is not just the price of a movie ticket, but the value of the next best alternative, such as cleaning your room. 2) Going from an inefficient amount of production to an efficient amount of production is not economic growth. For example, suppose an economy can make two goods: chocolate donuts and cattle prods. But half of their donut machines aren't being used, so they aren't fully using all of their resources. Graphically, that would be represented by a combination of goods in the interior of their PPC. If they then put all of those donut machines to work, they aren't acquiring more resources (which is what we mean by economic growth). Instead, they are just using their resources more efficiently and moving to a new point on the PPC. 3) On the other hand, if this economy is making as many donuts and cattle prods as it can, and it acquires more donut machines, it has experienced economic growth because it now has more resources (in this case, capital) available. This would be represented in a PPC graph as a shift outward of the entire PPC curve.
When using the supply and demand framework to think about how an event will affect the equilibrium price and quantity, proceed through four steps: (PowerPoint, Taylor 4E CH 04)
1) Sketch a supply and demand diagram to think about what the market looked like before the event. 2) Decide whether the event will affect supply or demand. 3) Decide whether the effect on supply or demand is negative or positive; draw the appropriate shifted supply or demand curve. 4) Compare the new equilibrium price and quantity to the original ones.
Individuals face three main categories of trade-offs: (PowerPoint, Taylor 4E CH 02)
1) The consumption choice of what quantities of goods to consume. 2) The labor-leisure choice of what quantity of hours to work. 3) And, the intertemporal choices that involve costs in the present and benefits in the future, or benefits in the present and costs in the future.
An interest rate has three components: (PowerPoint, Taylor 4E CH 02)
1) The risk premium to cover the risk of not being repaid. 2) The rate of expected inflation. 3) And, the time value of money, as compensation for waiting to spend.
What three questions does the economy answer? (This is the *economies of scale*.) (PowerPoint, Taylor 4E CH 01)
1) What is produced? 2) How is it produced? 3) Whom is it produced for?
In the study of economics, coordination refers to solving the three central problems facing any economy: (Accessible Lecture Notes)
1) What, and how much to produce? 2) How to produce it? 3) For whom to produce it?
Giffen Good: (Accessible Lecture Notes)
A Giffen Good is a good that does not obey the Law of Demand. A Giffen good's demand increases as price increases due to the fact that the Giffen good is ultra-necessary for basic survival. Without the good, the consumer dies. Professor Giffen discovered that, in Ireland, from 1845 to 1850 during the potato famine, the price of potatoes increased as the supply of potatoes decreased. During this same time period, the demand for potatoes increased.Professor Giffen found that potatoes were used for every meal. However, for one meal a week - usually for the Sunday midday dinner, the families would include a piece of lamb, fish, or other protein to supplement the meal. However, when the price of potatoes increased, the meat had to be foregone and more potatoes were used to make a full meal. Later studies using Professor Giffen's work, found that similar situations occurred during rice famines in China and sorghum famines in African nations. When a good is an ultra-necessary good, then it will have an upward sloping demand curve.
Contraction: (PPF Model)
A decrease in output that occurs due to the under-utilization of resources; in a graphical model of the PPC, a contraction is represented by moving to a point that is further away from, and on the interior of, the PPC.
Normal Good: (Accessible Lecture Notes)
A good is defined as a normal good in the case where income increases causes an increase in the demand for that good, ceteris paribus; and in the case where income decreases causes a decrease in the demand for that good, ceteris paribus.
Inferior Good: (Accessible Lecture Notes)
A good is defined as an inferior good in the case where income increases causes a decrease in the demand for that good, ceteris paribus; and in the case where income decreases causes an increase in the demand for that good, ceteris paribus
Production Possibilities Curve: (PPC/Production Possibilities Frontier) (PPF Model)
A graphical model that represents all of the different combinations of two goods that can be produced; the PPC captures scarcity of resources and opportunity costs.
Shortage: (Accessible Lecture Notes)
A market condition in which the quantity demanded is greater than the quantity supplied, as shown on the Demand and Supply graph.
Market: (Start - Circular Flow Model)
A place where buyers and sellers meet to engage in mutually beneficial, voluntary exchanges of goods, services, or productive resources.
Economic System: (Circular Flow Model)
A system of allocating the means of production and the goods and services produced in an economy.
Demand Schedule: (Start: PowerPoint, Taylor 4E CH 04)
A table that shows the quantity demanded at different prices in the market.
The division of labor allows individuals and firms to specialize and to produce more for several reasons; here are three: (PowerPoint, Taylor 4E CH 01)
A) It allows the agents to focus on areas of advantage due to natural factors and skill levels. B) It encourages the agents to learn and invent. C) It allows agents to take advantage of *economies of scale*, the set of social institutions that answers what is produced, how is it produced, and for whom is it produced.
Growth: (PPF Model)
An increase in an economy's ability to produce goods and services over time; economic growth in the PPC model is illustrated by a shift out of the PPC.
Firms: (Circular Flow Model)
Business entities that demand land, labor, and capital from households in the resource market and produce goods and services, which they supply to households in the product market.
Examining the Changes in Supply & Demand: (Accessible Lecture Notes)
Change in Quantity Demanded verses Change in Demand: Change in Quantity Demanded = Movement along the demand curve. Caused by a change in the market price of the product. Change in Demand = A shift in the demand curve, either to the left or right .Change in Quantity Supplied verses Change in Supply Change in Quantity Supplied = Movement along the supply curve. Caused by a change in the market price of the product. Change in Supply = A shift in the supply curve, either to the left or right.
2013 Index of Economic Freedom: (PowerPoint, Taylor 4E CH 01)
Countries with the Most Economic Freedom: 1) Hong Kong 2) Singapore 3) Australia 4) New Zealand 5) Switzerland 6) Canada 7) Chile 8) Mauritius 9) Denmark 10) United States of America Countries with the Least Economic Freedom: 168) Iran 169) Turkmenistan 170) Equatorial Guinea 171) Democratic Republic of Congo 172) Bruma 173) Eritrea 174) Venezuela 175) Zimbabwe 176) Cuba 177) North Korea
Marginal Analysis: (PowerPoint, Taylor 4E CH 02)
Decisions on the margin, involving a little more or a little less. (Concerning this, please note that most economic decisions and trade-offs are not all-or-nothing.)
Sunk Costs: (PowerPoint, Taylor 4E CH 02)
Due to this specific type of costs occurring in the past, which cannot be recovered, they should be disregarded in making current decisions.
Throughout human history, all nations of the world have attempted to resolve these three problems for their own population using various economic systems. Examples of some of the economic systems are... (Accessible Lecture Notes)
Feudalism, mercantilism, capitalism (pure-market system), socialism, and pure command system.
The Microeconomics Perspective: (PowerPoint, Taylor 4E CH 01)
Focuses on parts of the economy: individuals, firms, and industries. (Like, pieces of the pie, not the whole pie.)
Law of Supply: (PowerPoint, Taylor 4E CH 04)
Highlights that a higher price typically leads to a higher quantity supplied.
Budget Constraint: (AKA: Opportunity Set) (PowerPoint, Taylor 4E CH 02)
Illustrates the range of choices available. • The slope of the budget constraint is determined by the relative price of the choices. • Choices beyond the budget constraint are impossible. Choices inside the budget constraint are wasteful.
Command Economy: (Circular Flow Model)
In its purest form, a command economy answers the three economic questions by making allocation decisions centrally by the government.
Market Economy: (Circular Flow Model)
In its purest form, a market economy answers the three economic questions by allocating resources and goods through markets, where prices are generated.
Market-Oriented Economy: (PowerPoint, Taylor 4E CH 01)
Individuals and businesses make the most economic decisions, with the government playing a background role. (In other words, the government is not in the hot seat.)
Opportunity Cost: (PowerPoint, Taylor 4E CH 02)
Measures cost by what is given up in exchange. • Sometimes, opportunity cost can be measured in money. • But, it is often useful to consider whether time should be included as well. • Or, to measure it in terms of the actual resources that must be given up.
Economic Keywords and Terms: (Accessible Lecture Notes)
Methodology is a world view, a school of thought, the fundamental way of looking at the world in which one exists. Many methodologies exist in the discipline of economics. Some are: Neoclassical, Keynesian, Post-Keynesian, Marxian, Evolutionary, Behavioralist, Feminist-Marxian, Austrian, etc. Models are abstract representations of reality, just like a map of Nevada is not really Nevada, but an abstract representation of the real geographic area known as Nevada. Assumptions are ideas that are believed to exist or occur under specific given constraints or conditions. The given constraints are the exogenous variables. Ceteris Paribus is the Latin term used by economists to state that the assumptions are given - All else equal. This is the requirement that when analyzing the relationship between two variables - such as price and quantity demanded - other variables must be held constant. Exogenous variables exist outside the given economic system, but influence the given economic system, such as the weather, environmental regulation, military policies, etc. Endogenous variables exist inside the given economic system, and can influence other endogenous variables, and are influenced by other endogenous variables. Theories are predictions of human and economic behavior that have been developed by observing changes in variables in an economic system, based on specific assumptions of human and economic behavior.
In a mixed economy: (Accessible Lecture Notes)
Most economic decisions result from the interaction of buyers and sellers in markets, but the government plays a significant role in the allocation of resources.
Equilibrium Price and Equilibrium Quantity: (PowerPoint, Taylor 4E CH 04)
Occur where the supply and demand curves cross.
Equilibrium: (PowerPoint, Taylor 4E CH 04)
Occurs where the quantity demanded is equal to the quantity supplied.
The Production Possibilities Curve (PPC) is a model that captures scarcity and the opportunity costs of choices when faced with the possibility of producing two goods or services. (PPF Model)
Points on the interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC are unattainable. The opportunity cost of moving from one efficient combination of production to another efficient combination of production is how much of one good is given up in order to get more of the other good.
Law of Demand: (PowerPoint, Taylor 4E CH 04)
Points out that a higher price typically leads to a lower quantity demanded.
Price Floors (PowerPoint, Taylor 4E CH 04)
Prevent a price from falling below a certain level. • When set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result.
Price Ceilings: (PowerPoint, Taylor 4E CH 04)
Prevent a price from rising above a certain level. • When set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result.
Government Intervention: (End - Accessible Lecture Notes)
Price Controls - artificial price settings set by the government to control the market demand and supply. Price controls include, but are not limited to price ceilings, price floors, etc. Price controls tend to result in the formation of underground, illegal markets to accommodate the demand and supply not accommodated in the market. Price Ceiling - a legal maximum price for which a seller can sell their good or service.If the price ceiling is below the equilibrium price, then a shortage will most likely occur. Then, an underground, illegal market will form to accommodate buyers willing to take the risk and pay a higher price. Price Floor - a legal minimum price for which a seller can sell their good or service.If the price floor is above the equilibrium price, then a surplus will most likely occur. Then, an underground, illegal market will form to accommodate buyers willing to take the risk and pay a lower price.
Key Takeaways of Property Rights: (Circular Flow Model)
Property rights are the ability to own and use resources (and anything made from those resources). Property rights are like the rules of a game such as soccer or hide-and-seek. When everyone knows the rules, and those rules are consistently enforced, people can focus on playing their best and having fun.
In either case of if the price is above or below the equilibrium level, economic pressures will... (PowerPoint, Taylor 4E CH 04)
Push the price toward the equilibrium level
Supply Curve: (PowerPoint, Taylor 4E CH 04)
Represents the relationship between quantity supplied and price on a graph.
Scarcity vs. Shortage: (Accessible Lecture Notes)
Scarcity is the naturally occurring phenomenon that makes resources limited and human wants unlimited. Due to the existence of scarcity, humans are forced to make choices concerning the coordination (use and distribution) of available resources. Note: Do not confuse scarcity with shortage!
Demand Curve: (PowerPoint, Taylor 4E CH 04)
Shows the relationship between quantity demanded and price in a given market on a graph.
Productivity: (Technology) (PPF Model)
The ability to combine economic resources; an increase in productivity causes economic growth even if economic resources have not changed, which would be represented by a shift out of the PPC.
To find the opportunity cost of any good X in terms of the units of Y given up, we use the following formula: (PPF Model)
X=(Y1−Y2)÷(X1−X2) units of good Y
Supply: (Accessible Lecture Notes)
Supply is a more complicated function that demand is. Supply consists of the production of the product and how that product might be part of a finished product that becomes a usable good has to be considered. However, like the definition of demand, the definition of supply involves two distinct, but related expressions: supply and quantity supplied. a. Supply is the amount of goods and services firms are willing and able to provide to the market at all price levels during a specific time period. b. Quantity supplied is the amount of goods and services firms are willing and able to provide to the market at a specific price during a specific time period. c. Like the law of demand, the law of supply incorporates the notion of supply and quantity supplied in describing human behavior. The law of supply states that: as the price of a good increases, ceteris paribus, the quantity supplied increases; and as the price of a good decreases, ceteris paribus, the quantity supplied decreases. Therefore, changes in quantity supplied are due to changes in price, and are reflected as movements along the supply curve. d. A change in supply is due to a change in a variable other than price, ceteris paribus, and is reflected as a shift in the supply curve. Variables that may cause a change in supply are: price and/or quantity available of input changes; firm's expectations changes; price and/or availability of substitute and/or complementary goods changes; technology changes; production capacity changes; etc... By examining supply and demand together, it is possible to calculate with mathematical equations and demonstrate with graphs the price and quantity at which the market is in equilibrium, excess demand, or excess supply. Also, one is able to examine the effects of shifts (changes) in demand and/or supply, changes in quantity demanded and/or quantity supplied, changes in equilibrium, and the points of disequilibrium.
Supply Schedule: (PowerPoint, Taylor 4E CH 04)
Table that shows the quantity supplied at different prices in the market.
In making a choice within the labor-leisure budget constraint, people will choose their budget constraints in a way that maximizes their satisfaction or utility. What is the definition of utility? (PowerPoint, Taylor 4E CH 02)
The basis on one's own distinctive personal preferences.
Demand: (Accessible Lecture Notes)
The definition of demand involves two distinct, but related expressions: demand and quantity demanded. a. Demand (market demand) is the amount of goods and services consumers are willing and able to purchase at all price levels during a specific time period. b. Quantity demanded is the amount of goods and services consumers are willing and able to purchase at a specific price during a specific time period. c. The law of demand incorporates the notion of demand and quantity demanded in describing human behavior. The law of demand states that: as the price of a good increases, ceteris paribus, the quantity demanded decreases; and as the price of a good decreases, ceteris paribus, the quantity demanded increases. Therefore, changes in quantity demanded are due to changes in price, and are reflected as movements along the demand curve. d. A change in demand is due to a change in a variable other than price, ceteris paribus, and is reflected as a shift in the demand curve. Variables that may cause a change in demand are: income changes; wealth changes; population changes; expectation changes; taste and preference changes, etc... e. The relationship between demand and income is obvious when discussing the different types of goods.
Concerning the Market-Oriented Economy and the Command Economy, most economies lie somewhere between these two extremes and have a substantial role for both the market and the government, although... (PowerPoint, Taylor 4E CH 01).
The emphasis varies in different countries.
One way to measure globalization is to look at the export/GDP ratio. Considering this, for the world economy and most individual countries... (PowerPoint, Taylor 4E CH 01)
The export/GDP ratio has risen in recent decades.
Efficiency: (PPF Model)
The full employment of resources in production; efficient combinations of output will always be on the PPC.
Producer Surplus: (PowerPoint, Taylor 4E CH 04) (Please Note: Professor said that we would get into this more in Module 2, so there is not as much emphasis on this.)
The gap between the price for which producers are willing to sell a product, based on their costs, and the market equilibrium price.
Consumer Surplus: (PowerPoint, Taylor 4E CH 04) (Please Note: Professor said that we would get into this more in Module 2, so there is not as much emphasis on this.)
The gap between the price that consumers are willing to pay, based on their preferences, and the market equilibrium price.
Command Economy: (PowerPoint, Taylor 4E CH 01)
The government makes most economic decisions; individual and business decisions play only a background role. (In other words, the government is in the hot seat.)
How is an economy interconnected? Please explain. (PowerPoint, Taylor 4E CH 01)
The interconnectedness of an economy is displayed in how a modern economy is entwined. Every person and every good is linked by economic transactions—sometimes directly, often indirectly— to a vast array of other goods, people, and businesses.
Deadweight Loss: (End: PowerPoint, Taylor 4E CH 04) (Please Note: Professor said that we would get into this more in Module 2, so there is not as much emphasis on this.)
The loss in total surplus that occurs when the economy produces at an inefficient quantity.
Opportunity Cost: (Accessible Lecture Notes)
The next best option you have that you must sacrifice in order to have your best (optimum) option.
Households: (Circular Flow Model)
The owners of resources—supplied to firms in the resource market—and the buyers of goods and services—demanded from firms in the product market.
Interest: (Circular Flow Model)
The payment firms make to households in exchange for capital.
Rent: (Circular Flow Model)
The payment firms make to households in exchange for land.
Wages: (Circular Flow Model)
The payment firms make to households in exchange for their labor.
Profit: (Circular Flow Model)
The payment to entrepreneurs who start or own businesses.
Inefficient Use (under-utilization) of Resources: (PPF Model)
The underemployment of any of the four economic resources (land, labor, capital, and entrepreneurial ability); inefficient combinations of production are represented using a PPC as points on the interior of the PPC.
Production Possibilities Frontier (PPF) (& Social Choices): (PowerPoint, Taylor 4E CH 02)
The set of choices faced by society as a whole. • The shape of the PPF is typically curved outward, rather than straight. • Choices outside the PPF are unattainable, and choices inside the PPF are wasteful. • Over time, a growing economy will tend to shift the PPF outwards.
Macroeconomics is: (Accessible Lecture Notes)
The study of aggregates in an economy, i.e., price level, employment level, interest rate, aggregate supply, aggregate demand, monetary system, fiscal policy process, and international trade. Macroeconomics is the study of the economy as a whole, including topics such as inflation, unemployment, and economic grow.
Economics: (Start - Accessible Lecture Notes)
The study of economies; the study of the choices people make to attain their goals, given their scarce resources; the study of choice under conditions of scarcity.
Microeconomics is: (Accessible Lecture Notes)
The study of individual units in an economy, i.e., the household and the firm. With microeconomic analysis, one studies individual decision making concerning consumption, utility, resource allocation, pricing, and profit. Microeconomics is the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
Social Surplus: (Tip: Consumer Surplus + Producer Surplus) (PowerPoint, Taylor 4E CH 04) (Please Note: Professor said that we would get into this more in Module 2, so there is not as much emphasis on this.)
The sum of consumer surplus and producer surplus.
Opportunity Cost: (PPF Model)
The value of the next best alternative to any decision you make; for example, if Abby can spend her time either watching videos or studying, the opportunity cost of an hour watching videos is the hour of studying she gives up to do that.
Economy: (Start: PowerPoint, Taylor 4E CH 01)
The way in which a society organizes the production, distribution, and consumption of goods and services.
Categories of Resources: (Accessible Lecture Notes)
These resources include land, labor, capital (both physical capital and human capital), and entrepreneurship. Land = all natural resources, both renewable (examples: water, fish, lumber, sunlight, etc.) and nonrenewable (examples: coal, copper, oil, etc.) Labor = the human capital input into the production process. Human capital is the knowledge, skills, education, talents, and abilities possessed by the individual. Capital = the physical capital produced in order to produce other products (examples, factories, plants, tools, machinery, transportation systems, etc.) Entrepreneurship = the willingness to take risk in the production process and/or market system.
Policies that shift supply and demand explicitly, through targeted subsidies or taxes, are often preferable to policies that attempt to set prices because: (PowerPoint, Taylor 4E CH 04)
They avoid the shortages, surpluses, and other unintended consequences that price ceilings and floors typically produce.
Law of Diminishing Returns: (PowerPoint, Taylor 4E CH 02)
This law holds that as increments of additional resources are devoted to producing something, the marginal increase in output will become smaller and smaller.
Diminishing Marginal Utility: (PowerPoint, Taylor 4E CH 02)
This law of points out that as a person receives more of something—whether it is a specific good or another resource—the additional marginal gains tend to become smaller.
The shape of the PPC also gives us information on the production technology (in other words, how the resources are combined to produce these goods). The bowed out shape of the PPC in Figure 1111 indicates that there are increasing opportunity costs of production. (PPF Model)
We can also use the PPC model to illustrate economic growth, which is represented by a shift of the PPC. Figure 2 illustrates an agent that has experienced economic growth. Combinations that were once impossible, such as 6 iPads and 4 watches, are now on the new PPC, thanks to the increase in resources or technology. (A similar example using units of guns is placed here.)
Increasing Opportunity Costs: (PPF Model)
When the opportunity cost of a good increases as output of the good increases, which is represented in a graph as a PPC that is bowed out from the origin; for example Julissa gives up 2 fidget spinners when she produces the first Pokemon card, and 4 fidget spinners for the second Pokemon card, so she has increasing opportunity costs.
Illustrate an increasing opportunity cost and describe the trend occurring. (Start - PPF Constant Opportunity Cost)
When the opportunity cost of a good increases as the output of the good increases, it makes a curve on the PPC.
Illustrate a constant opportunity cost and describe the trend occurring. (PPF Constant Opportunity Cost)
When the opportunity cost of a good remains constant as the output of the good increases, it makes a straight line on the PPC.
Constant Opportunity Costs: (PPF Model)
When the opportunity cost of a good remains constant as the output of the good increases, which is represented as a PPC curve that is a straight line; for example, if Colin always gives up producing 2 fidget spinners every time he produces a Pokemon card, he has constant opportunity costs.
Illustrate a decreasing opportunity cost and describe the trend occurring. (End - PPF Constant Opportunity Cost)
When the opportunity cost of producing each good decreases, or is less, it makes a straight line on the PPC.
Product Market: (Circular Flow Model)
Where firms supply goods and services to households in exchange for money.
Resource Market: (Circular Flow Model)
Where households supply land, labor, capital, and entrepreneurship/technology to firms in exchange for money.
Demand and Supply: (Accessible Lecture Notes)
Whether an individual or a nation is making a choice to purchase a product or do something, we make these choices based upon a want or need. How badly we want or need something determine what choices we make. This decision is part of what economists call supply and demand.
Price floors and price ceilings often lead to unintended consequences because buyers and sellers have many margins for action, which include: (PowerPoint, Taylor 4E CH 04)
• *Black markets*. • Side payments/ • Quality adjustments. • Shifts in who is involved in the transaction.
Why Society Must Choose: (Positive & Normative Statements) (End: PowerPoint, Taylor 4E CH 02)
• *Positive statements* describe the world as it is. • *Normative* statements describe how the world should be. • Even when economics analyzes the gains and losses from various events or policies, and thus draws normative conclusions about how the world should be, the analysis of economics is rooted in a positive analysis of how people, firms, and government actually behave, not how they should behave.
(Key Takeaways) Productive Efficiency: (PPF Model)
• All choices along a PPF display productive efficiency—it is impossible to use society's resources to produce more of one good without decreasing production of the other good.
Productive Efficiency & Allocative Efficiency: (PowerPoint, Taylor 4E CH 02)
• All choices in a production possibilities frontier display *productive efficiency*. • That is, it is impossible to use society's resources to produce more of one good without decreasing the production of the other good. • The specific choice along a production possibilities frontier that reflects the mix of goods that society prefers is the choice with *allocative efficiency*.`
Key Takeaways of Economic Systems: (End - Circular Flow Model)
• An economic system is any system of allocating scarce resources. Economic systems answer three basic questions: what will be produced, how will it be produced, and how will the output society produces be distributed? • There are two extremes of how these questions get answered. - In command economies, decisions about both allocation of resources and allocation of production and consumption are decided by the government. - In market economies, there is private ownership of resources—established though property rights—and the factors of production and consumption are all coordinated through markets. - In a market system, resources are allocated to their most productive use through prices that are determined in markets. These prices act as a signal for buyers and sellers. • Most economies are mixed economies that lie between these two extremes. • In either system, a rational agent would allocate resources and production using marginal analysis. • In command economies, this is more difficult to do because, without markets, prices fail at being an effective signal.
(Key Takeaways) Law of Diminishing Returns: (PPF Model)
• As additional resources are devoted to producing a good, the marginal increase in output will become smaller and smaller.
Factors that can shift the demand curve for goods and services, causing a different quantity to be demanded at any given price, include: (PowerPoint, Taylor 4E CH 04)
• Changes in tastes. • Population. • Income. • Prices of substitute or complement goods. • Expectations about future conditions and prices. (Please note that the opposite can occur also, causing a decrease in demand, such as a taste shift, population drop, income drop, and so on.)
(Key Takeaways) Production Possibilities Frontier: (PFP or Production Possibilities Curve) (Start - PPF Model)
• Defines the set of possible combinations of goods and services a society can produce given the resources available. • Choices outside the PPF are unattainable (at least in any sustainable way), and choices inside the PPF are inefficient.
Choosing What to Consume in a World of Scarcity: (Start: PowerPoint, Taylor 4E CH 02)
• Due to a world where people's desires exceed what is possible, economic behavior involves trade-offs in which individuals, firms, government, and society must give up things that they desire to obtain other things that they desire
The Ceteris Paribus Assumption: (PowerPoint, Taylor 4E CH 04)
• Economists often use the *ceteris paribus* or "other things being equal" assumption that while examining the economic impact of one event, all other factors remain unchanged for the purpose of the analysis.
The Production Possibilities Curve (PPC) is a model used to show the tradeoffs associated with allocating resources between the production of two goods. The PPC can be used to illustrate the concepts of scarcity, opportunity cost, efficiency, inefficiency, economic growth, and contractions. Concerning this, what is an example to demonstrate the above concept of the PPC? (PPF Model)
• For example, suppose Carmen splits her time as a carpenter between making tables and building bookshelves. • The PPC would show the maximum amount of either tables or bookshelves she could build given her current resources. • The shape of the PPC would indicate whether she had increasing or constant opportunity costs.
Circular Flow Model: (Circular Flow Model)
• Illustrates how a market economy works. In the model, households and firms engage in mutually beneficial exchanges of resources and products in the market. • Households are the owners of the factors of production and sell labor in exchange for a wage, land in exchange for rent, and capital in exchange for interest. Firms sell goods and services in exchange for money.
Circular Flow Diagram: (Circular Flow Model)
• In the model, money flows in one direction—counterclockwise—and goods, services, and resources flow in the opposite direction—clockwise. In a market economy, one of the main functions that money serves is to facilitate the exchange of goods in the product market and the exchange resources in the resource market.
Factors that can shift the supply curve for goods and services, causing a different quantity to be supplied at any given price, include: (PowerPoint, Taylor 4E CH 04)
• Natural conditions. • Input prices. • Changes in technology. • Government taxes, regulations, or subsidies. (Please note that the opposite can occur also, causing a decrease in supply, such as a poor natural conditions, a rise in input prices, an uncommon decline in technology, and so on.) (Bookmark left on Slide 16 out of 29.)
Explain the aspect of globalization (processes in a worldwide scope) in terms of the rise in economies. (PowerPoint, Taylor 4E CH 01)
• The last few decades have seen globalization evolve as a result of growth in commercial and financial networks that cross national borders. • Due to this, globalization makes businesses and workers from different economies increasingly interdependent (dependent on each other).
(Key Takeaways) Allocative Efficiency: (PPF Model)
• The specific choice along a PPF that reflects the mix of goods society most desires is the choice with allocative efficiency. We need more information than just the PPF to determine allocative efficiency.
(Key Takeaways) Comparative Advantage: (PPF Model)
• When a country's opportunity cost for a specific good is lower than another country's, we say that the country has comparative advantage for that good.