Unit 1

Macroeconomics vs. Microeconomics

• Macroeconomics: the study of the economy as a whole.
• minimum wage
• international trade
• supply and demand
• Microeconomics: the study of individual or specific unit of economy.
• market structures

Positive Economic vs. Normative Economics

• Positive economic: claims that attempt to describe the world as is.
• Collects & presents facts
• Normative economic: claims that attempt to prescribe how the world should be.
• "Ought to be" and "should be" opinion

Needs vs. Wants

• Needs: basic requirement for survival (food, water, shelter, clothes)
• Wants: desire of citizens

Goods vs. Services

• Goods: tangible commodities
• Capital good: items used in creation of other goods such as factory machines and trucks.
• Consumer good: goods that are used for consumers.
• Service: work that is performed for someone.

Scarcity vs. Shortage

• Scarcity: the most fundamental economic problem that all societies face. Were trying to satisfy unlimited wants with unlimited resources.
• Shortage: quantity demanded is greater than quantity supply.

Factors of Production

Resources required to produce goods and services.

1. Land-natural resources
2. Labor-work force
3. Capital
• Physical capital (tools, machinery, robots, factories)
• Human capital (skills, talents, and knowledge)
4. Entrepreneurship
• innovative
• risk taker

Trade-offs: alternatives that we give up whenever we chose one course of action over another.

Opportunity cost: form of trade-off. Next best alternative.

Production Possibility Curve (PPC)

It showed alternative ways in how to use a country's resources.

Four Assumptions of PPG

1. Two goods: resources are used to produce one or both of only two goods.
2. Fixed resources: the quantities of land, labor, capital, and entrepreneurship resources do not change.
3. Fixed technology: the information and knowledge that society has about the goods and services is fixed..
4. Technical efficiency:
   

Efficiency

Using resources in such a way in maximize the production of goods and services

• Allocative efficiency: the products being produced are the ones being desired by society.
• Productive efficiency: products are being produced in the least costly way.
• Under-utilization: using fewer resources than the economy is capable of using.

What Causes the PPC to Shift?

1. Technological change
2. Change in resources
3. Economic growth
4. Change in the labor force
5. Natural disasters/war/famine
6. More education (human capital)

Elasticity of Demand

A measure of how consumers react to a Δ in price.

• Elastic Demand: demand that is very sensitive to a Δ in price. The product is not a necessity and there are available substitutes. E > 1
• Inelastic Demand: demand that is not very sensitive to a Δ in price. The product is a necessity, there are a few substitutes and people will buy no matter what. E < 1
• Unit/Unitary Demand: E = 1

Cost of Production

• Total Revenue: the total amount of money a firm receives from selling goods and services. P x Q = TR
• Fixed Cost: a cost that does not change no matter how much of a good is produced.
• Variable Cost: a cost that rises or falls depending on how much is produced.
• Marginal Cost: the cost of producing one more unite of a good. TCnew - TCold
• Formula:
• TFC+TVC=TC
• AFC+AVC=ATC
• TFC/Q=AFC
• TVC/Q=AVC
• TC/Q=ATC
• TFC=AFC x Q
• TVC=AVC x Q

Price Elasticity of Demand (PED)

Step 1: Quantity          (New quantity - Old quantity)/Old quantity

Step 2: Price                (New price - Old price)/Old price

Step 3: PED                 (% Δ in quantity demanded)/% Δ in price

Supply and Demand

• Supply: the quantities that producers or sellers are willing and able to produce at various prices.
• Law of Supply: there is a direct relationship between price and quantity supply.
• Change in Supply:
1. Δ in expectation
2. Δ in weather
3. Δ in # of suppliers
4. Δ in cost of production
5. Δ in taxes or subsidies
6. Δ in technology
• Demand: the quantities that people are willing and able to buy at various quantities.
• Law of Demand: states there is an inverse relationship between price and quantity demanded.
• Change in Demand:
1. Δ in buyer's taste (advertisement)
2. Δ in # of buyers (population)
3. Δ in price of related goods
• complementary goods
• substitute goods
4. Δ in income
• normal good: an increase in income that causes an increase in demand.
• inferior good: an increase in income causes a fall in demand.
5. Δ in expectation (future)
• Equilibrium: the point at which the supply curve and the demand curve intersect. All resources are being efficiently used.
• Excess demand: occurs when the quantity demanded is greater than the quantity supplied.
• Price ceiling: occurs when the government puts a legal limit on how high the price of a product can be.
• Excess supply: occurs when the quantity supplied is greater than the quantity demanded.
• Price floor: the lowest legal price a commodity can be sold at.