UNIT 1 Economics Notes

(1/5/16) 

Macroeconomics          vs.         Microeconomics

- Large                                        - Small

- The study of the                       - The study of individual or specific units of the economy.

economy as a whole.                  - Supply & demand

- Inflation                                    - Market Structures

- Wage Laws                              - Business Organizations

- International Trade

Positive Economics         vs.         Normative Economics

- Attempt to describe                   - Attempt to prescribe how the world should be.

the world as is.                             - "Ought to be" & "Should be"                      

- Very descriptive in                    - (opinion based)

nature.

- "What is" (collects &

presents facts)

- Reliable/factual

- (fact based)

Needs                               vs.                         Wants

- Basic requirements                       - Desires of citizens

for survival.

1) Food

2) Water

3) Shelter

4) Clothing

Goods                               vs.                       Services

- Tangible (touchable)                      - Work that is preformed for someone else.

commodities.                                    - Ex./ hair salon, concerts, education etc.

1) Capital Goods: Items

used in the creation of

other goods, such as

machinery & trucks.

2) Consumer Goods:

Goods that are intended

for final use by consumer.

Scarcity                            vs.                       Shortage

- Most fundamental                            - Quantity demanded greater than quantity supplied

problem that all                                  - (Demand > Supply)

societies face.

- Trying to satisfy unlimited

wants w/ limited needs.

Ex./ Oil (most scarce resource)

(1/6/16)

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, trucks)

                   Human capital (skills, talent, knowledge acquired through education or experience)

4. Entrepreneurship - innovative; risk taker

Trade-offs:

Alternatives that we give up whenever we choose one course of action over another.

Opportunity Cost:

The next best alternative. (Form of trade-offs)

                             

Production Possibilities Curve (PPC) / Frontier (PPF)/ Graph (PPG) : Shows alternative ways on how to use a country's resources.

4 assumptions of the PPG (graph):

1. Two Goods: resources are used to produce one or both of only two goods.

2. Fixed Resources: land, labor, capital, and entrepreneurship.

3. Fixed Technology: the information and knowledge that society has about the production of goods and services is fixed.

4. Full Employment of Resources: using resources effectively.

 

A -On the curve

    -Attainable & efficient

    - More refrigerators are being produced than cars

B -On the curve

    -Attainable & efficient

C -On the curve

    -Attainable & efficient

    -More cars are being produced than refrigerators

X -Inside the curve

    -Attainable BUT inefficient

    -Underutilization

Y -Outside the curve

    -Unattainable

    -Currently not producing

Underutilization- using fewer resources than the economy is capable of using.

Efficiency- using resources in such a way to maximize the production of goods and services.

Allocative Efficiency- the products being produced are the ones that are the most desired by society.

Productive Efficiency- products are being produced in the least costly way and this would represent any point on the PPC.

3 types of movement that occur within the PPC:

1. Inside the PPC: occurs when resources are unemployed or underemployed.

2. Along the PPC

3. Shifts of the PPC: When a point moves from on the curve to outside the curve, the graph
increases. If it moves from on the curve to inside, the graph decreases.

(1/7/16)

What causes the PPC/PPF to shift? (6 causes)

1. Advances in technology

2. Change in Resources

3. Change in the Labor Force

4. Economic Growth

5. Natural Disasters/War/Famine

6. More education/training (human capital)

Inside the curve - underutilization-->attainable, but inefficient

On the curve -  attainable and efficient

Outside the curve - unattainable with the current resources

(1/11/6)

DEMAND

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

The Law of Demand: there is an inverse relationship between price and quantity demanded.

What causes a "change in quantity demanded"? (ΔQD) Δ in price

What causes a "change in demand"? (ΔD)

1) Δ in buyers taste (advertisement)

2) Δ in the # of buyers (population)

3) Δ in income (-normal goods  -inferior goods)

4) Δ in the price of related goods (-complementary goods  -substitute goods)

5) Δ in expectations

Normal goods: increase in income causes an increase in demand.

Inferior goods: increase in income causes a fall in demand.

Complimentary goods: ex./ fries w/ ketchup

Substitute goods: ex./Coke replaced by Pepsi

(1/12/16)

SUPPLY

Supply is the quantities that producers or sellers are willing and able to produce at various places.

The law of Supply: there is a direct relationship between price and quantity supplied.

What causes a "change in quantity supplied"? (ΔQS) Δ in price.

What causes a "change in supply"? (ΔS)

1) Δ in technology

2) Δ in weather

3) Δ in the costs of production

4) Δ in the # of sellers

5) Δ in taxes or subsidies

6) Δ in expectations

(1/13/16)

ELASTICITY OF DEMAND
- A measure of how consumers react to a change in price.

1) Elastic Demand: Demand that is very SENSITIVE to a change in price. E>1

                                 -Product NOT a necessity

                                 -Available substitutes

2) Inelastic Demand: Demand that is NOT very SENSITIVE to a change in price. E<1

                                    -Product IS necessity

                                    -FEW or NO substitutes

                                    -People will buy no matter what

3) Unitary Elastic: E=1

Ex./

Elastic Demand     |     Inelastic Demand

- Soda                          -Gas

- Steaks                        -Insulin/medicine

- Candy                        -Milk

- Fur Coats                   -Salt

                                     -Toothpaste

 *Price Elasticity of Demand: 3 Step Formula

1)Quantity (New Q - Old Q/ Old Q)

2)Price (New P - Old P/ Old P)

3)PED (% Δ in Q demanded/ % Δ in price)

TOTAL REVENUE- The total amount of $ that a firm receives from selling goods & services.

TR = P x Q

- Fixed Cost: A cost that does not change no matter how much is produced.

                     ex./ rent, mortgage, insurance, salaries

- Variable Cost: A cost that rises or falls depending upon how much is produced.

                          ex./ electricity (based upon usage)

- Marginal Cost: The cost of producing 1 more unit of a good.

(1/15/16)

Formulas:
TFC + TVC = TC

AFC + AVC = ATC

TFC/Q = AFC

TVC/Q = AVC

TC/Q = ATC

TFC = AFC x Q

TVC= AVC x Q

(1/17/16)

Equilibrium is the point at which the supply curve and the demand curve intersect.  At this point, all resources are being efficiently used.

Excess demand occurs when the quantity demanded is greater than the quantity supplied.  This will result in shortages, where consumers cannot get the quantities of items that they desire.

Price ceiling creates a shortage.  A price ceiling occurs when the government puts a legal limit on how high the price of a product can be.  In order for a price ceiling to be effective, it must be set below equilibrium. For example, the government sets a price ceiling on flu shots and shots are sold for less than what they are worth; therefore creating a shortage of flu shots. 

Ex: Rent control (New York & San Francisco)

Excess supply occurs when the quantity supplied is greater than he quantity demanded.  This will result in a surplus, where producers have inventories they cannot get rid of.

Price floor is the lowest legal price a commodity can be sold at. A price floor creates a surplus.  Price floors are used by the government to prevent prices from being too low. The most common price floor is the minimum wage.

(1/21/16)

BUSINESS CYCLE

Peak: The highest point of real GDP

         - This phase exhibits the lowest unemployment & the greatest amount of spending.

         - Inflation becomes a problem.

Expansion (Recovery): Where real GDP in increasing due to an increase in spending &

                                      a decrease in unemployment.

Contraction/Recession: Where real GDP is declining for 6 months due to a reduction in

                                      spending & an increase in unemployment.

Trough: The lowest point of real GDP & exhibits the highest amount of unemployment
               and the least amount of spending.