UNIT 1
Normal and Inferior goods
As income changes, demand changes for goods normal good: increase demand as income increases (luxury goods) inferior goods: decrease in demand as income goes up (used goods)
Law of increasing opportunity cost
As you produce more of one good, the opportunity cost increases because resources are not easily adaptable (so you give up producing more of the other good)
Production Possibilities Curve (PPC)
- Shows all possibilities an economy can use limited resources efficiently - Shows scarcity because society can only produce so much
Economics
- Study of scarcity and how people and society deal with it scarcity - unlimited wants, limited resources (people have to make choices because of scarcity)
Demand and Law of Demand
- different quantities of goods that consumers are willing and able to buy at different prices - inverse relationship between price and quant demanded
Constant opportunity cost
- straight line, because resources are easily adaptable for producing either good (not common)
Shifters of Supply
1. Change in technology 2. # of sellers 3. Availability and price of resources/ inputs 4. Government action: taxes and subsidies 5. Future expectations
Shifting PPC
1. Change in technology 2. Change in resource quantity or quality 3. Change in trade
Substitution effect Income effect Law of diminishing marginal utility
1. If the price goes up for one product, the demand for the other will increase 2. As price goes down, the purchasing power for consumer goes up 3. The more you buy of a good/service, the less satisfaction you get out of each additional consumption
4 Factors of production
1. Land: natural resources used to make goods/services 2. Labor 3. Capital (human:skills/knowledge, physical:human made resources) 4. Entrepreneurship: ambitious leaders that combine the other factors of production to make goods/ services
5 Key Economic Assumptions
1. Scarcity exists 2. Because of scarcity, choices must be made and choices have costs (trade off) 3. People make the choices that are in their best self interest 4. People make choices by comparing the marginal cost and benefit of each choice 5. Real life situations can be explained through simplified models and graphs
Society must answer these 3 economic questions
1. What goods/services to produce 2. How they will be produced 3. Who will consume them
PPC 4 Key Assumptions
1. only 2 goods/services produced 2. fixed resources 3. fixed technology 4. full employment of resources
Shifters of Demand
1. tastes and preferences 2. number of consumers 3. cost of substitutes/ compliments (related goods) 4. change in income 5. future expectations
Absolute and comparative advantage
Abs: produce most output/ uses less inputs Comparative: lower opportunity cost
Centrally Planned (command) Economy
Communist government, gov owns all resources and answer the 3 economic questions - often face problems like poor quality goods and shortages because there is no incentive for people to work harder, and people don't get choices for goods - usually corrupt leaders - often have low unemployment, good job security, and equal income so no poor people, also free health care
Consumer vs Capital goods
Consumer goods: created for direct consumption Capital goods: used to create other goods
Capital Goods and PPC
Countries that produce more capital goods will have more growth in the future because then they can make more consumer goods
Specialization and Trade
Everyone specialization in goods/services and trades with others - allows people to have more choices (consumers) - trade when both countries can benefit for a low opportunity cost
Factor Payments and Transfer Payments/ Subsidies
Factor payments: payments for factors of production Transfer payments/subsidies: When government redistributes income (welfare programs, social sector, government pays businesses)
Mixed Economy
Free market but also has some government intervention (this is almost all countries)
Free Market Economy
Individuals answer 3 economic questions and own their own resources - opportunity for profit is the incentive for people to produce goods efficiently - competition and self interest regulate the economy for low prices and high quality goods - wide variety of goods
Inelastic Demand
Inelastic: Steep/ "I" curve, straight line, not sensitive in change in price - no matter what ppl continue to buy bc necessity or few substitutes slope less than 1
Consumer Surplus
Max price willing to pay - Price paid
Economic system
Method used by society to produce and distribute goods (Command, Free-market, and Mixed economies)
Investment
Money spent by businesses to improve production
Product Market
Place where goods and services produced by businesses are sold to households
Resource Market
Place where resources (4 factors of production) are sold to businesses
Positive and Normative Statements
Positive: Based on facts Normative: With value judgements
Producer Surplus
Price - Seller's min selling price
Productive and Allocative efficiency
Productive: Using all resources efficiently Allocative: Choosing the best production output due to society's wants
Elastic Demand
Sensitive to price -- Flat curve, many substitutes, very expensive goods slope greater than 1
Microeconomics vs Macroeconomics
Study of small economic units (individuals, firms, industry, specific markets) Study of economy as a whole (economic growth, spending, inflation)
Inverse relationship because of?
Substitution effect Income effect Law of diminishing marginal utility
Supply and Law of supply
The quantity sellers are willing and able to sell at certain prices Inverse relationship with price and quantity supplied because as the price goes up sellers have incentive to sell more
Theoretical and Policy Economics
Theoretical- using the scientific method to make generalizations to develop theories Policy- Theories used to fix problems or meet goals
Trade off vs opportunity cost
Trade off: all the things you give up when making a choice Opportunity cost: the most directly related, desirable outcome given up from making that choice
Double shift
either price or quant will be indeterminate
Inelastic supply
insensitive to change in price -- steep most goods have inelastic short term supply (based on time)
Marginal Analysis
marginal = additional People continue to do things when marginal benefit > marginal cost
Price Ceiling
maximum legal price seller can charge must be below equilibrium to be effective causes shortage (and often black market) goal: make products more affordable
Price Floor
minimum legal price seller can charge must be above eq. to be effective to keep prices high and not fall to eq. causes surplus
Private and Public Sector
private: part of economy owned by individuals and businesses public: part of economy owned by gov
Elastic Supply
sensitive to change in price -- flat most goods elastic in long term
Elasticity
shows how sensitive quantity is to change in price