Unit 1

Unit 1: Basic Economic Concepts

Microeconomics vs. Macroeconomics

• Microeconomics: the study of how households and firms make decisions and how they interact in the market
• Ex: supply and demand, market structures
• Macroeconomics: The study of major components of the economy
• Ex: international trade, inflation, wage laws

Positive vs. Normative

• Positive: attempt to describe the world as-is, descriptive in nature
• Ex: Minimum wage laws cause unemployment
• Normative:claims that attempt to prescribe how the world be, very prescriptive in nature
• Ex: Governments should raise minimum wage

Wants and Needs

• Wants: Desires, broader than needs (toys)
• Needs: Basic requirement for survival (water, clothes, food, shelter)

Scarcity vs. Shortage

• Scarcity: Most fundamental economic problem a society faces, satisfying unlimited wants with limited resources
• Shortage: Situation in which quantity demanded is grayer than quantity supplied (food item isn't available)

Goods vs. Services

• Goods: Tangible commodities
• Capital goods: items used in the creation of other goods such as factory machinery and trucks
• Consumer goods: Intended for final use by the consumer services
• Services: work that is performed for someone

Factors of production

1. Land: natural resources
2. Labor: work exerted
3. Capital:
• Physical: Human made objects used to create other goods (building and tools)
• Human: knowledge and skills a worker gains through education and experience
4. Entrepreneurship: risk-taking innovation

Opportunity costs:most desirable alternative given up by making a decision

Terms:

• PPG: Production Possibilities Graph-shows alternative ways to use resources, each point reflects a trade off
• PPC: Production Possibilities Curve
• PPF: Production Possibilities Frontier
• graphs are concave- bowed up

Assumptions

1. Fixed technology: tech not changing
2. Fixed resources: no changes in factors of production
3. Full employment and productive efficiency
4. Two products are being considered

Productive and Allocative efficiency

• Productive: Producing goods at the lowest cost, allocating resources efficiency and full employment of resources, any point on curve
• Allocative: Combo of the most desired products by society or those who are in charge of economic decisions  where do we want to produce on the curve

PPC shifting (left or right)

• Right
1. Technological advancement
2. Discover new resources
3. Trade(comparative advantage)
4. Economic growth
• Left
1. Decrease in labor force/work skills/education
2. Permanent loss of productive capacity (war, taxes, government regulation)

Three types of movement

1. Inside the PPC: unemployment, underemployed (resources)- not using resources effectively
2. Outside the PPC: technology, economic growth
3. Along the PPC: ceteris paribu- all things remain constant

curved line-law of increasing cost

straight line- constant cost

Demand

• Demand is Quantities that people are willing and able to by at various prices.
• The Law of Demand is the inverse relationship between price and quantity demanded.
• Changes in price cause changes in quantity demanded
• Determinate
• Change in the number of buyers
• Change in buyers taste
• Change in income (inferior and normal goods)
• Change in price of related good (substitute and complimentary goods)
• Change in expectations

Supply

• Supply is the quantity that produces or sellers are willing and able to produce or sell at various prices
• The Law of Supply is the direct relationship between price and quantity supplied.
• Changes in price cause changes in quantity supplied.
• Determinate:
• Change in technology
• Change in weather
• Change in resources or factor prices
• Change in taxes or subsidies
• Change in number of suppliers
• Change in expectations

Elasticity of Demand- The measure of how consumers react to a change in price.

Elastic Demand

• Demand that is very sensitive to a change in price
• It will always be greater than 1 (E>1)
• The product is bot a necessity and there are substitutes
• Ex: soda, candy, fur coats, steak

Inelastic Demand

• Demand that is not very sensitive to a change in price
• It will always be less than 1 (E<1)s
• The product is a necessity and there are few to no substitutes
• People will buy no matter what
• Ex: salt, milk, insulin, gas

Unitary Demand

• always equal to 1 (E=1)

How to find elasticity of demand

1. (New quantity - old quantity) / Old quantity
2. (New price - Old price) / Old price
3. %change in quantity demanded / % change in price

Total revenue

• Total amount of money a firm receives from selling goods and services
• Price X Quantity = Total revenue            P X Q = Tr

Fixed Costs

• Cost that does not change no matter how much is produced
• Ex: salaries, mortgage, and car payments

Variable Costs

• Costs that fluctuates or changes depending upon how much is produced
• Ex: electricity bill, water bill

Marginal costs

• Costs of producing one additional unit of a good

Total costs

• Fixed cost + variable costs = Total costs

Marginal revenue

• New total revenue - old total revenue = marginal revenue

Formulas

• AFC = TFC / Q
• AVC = TVC / Q
• ATC = TC / Q   or   ATC = AFC + AVC 
• MC = new TC - old TC

Price Floor

• Set above equilibrium (surplus)
• minimum price paid for a product
• Quantity Supplied > Quantity Demanded
• Ex: Minimum wage

Price Ceiling

• Set below equilibrium (shortage)
• Maximum price paid for a product
• Quantity Demanded > Quantity Supplied
• Ex: Rent control

Business Cycle

• Average cycle is 6 years, one cycle is from trough to trough
• Recessions last about 14 months
• The bulk of a cycle is the growth stage
• Peak and trough are meaningless because we never know when we are in one until it is over
• If a recession losses more than 10% of real GDP, then it is a depression
• Trough means the end of a recession