- Macroeconomics- study of major components of an economy
- Microeconomics- study of how households and firms make decisions and how the interact in markets
- Positive Economics- attempting to describe the world as it is
- Normative Economics- describes the world how it should be
- Wants-
- desires of citizens
- broader than or needs
- Needs- basic requirements for survival
- Scarcity-
- most basic fundamental economic problem that all societies face
- unlimited wants with limited supply
- Shortage-situation where quantity demanded is less than quantity supplied
- Goods- tangible commodities, can be bought and sold
- Consumer Goods- goods intended for final use by the consumer
- Capitol Goods- items used in the creation of other goods such as factory machinery and trucks
- Services- work performed for someone else
Factors of Production
- Land (natural resources)
- Labor
- Capitol (Human & Physical)
- Human- knowledge and skills a worker gains through education and practice
- Physical- human made objects used to create other goods and services (tools, machinery, and buildings)
- Entrepreneurship
Opportunity Cost- the most desirable alternative; giving up by making a decision
Production Possibilities Graph
- Point D- Inefficient
- Point A, B, C- efficient
- Point E- Unattainable
- In between- overstated
- "Full Employment"- not 100% employment, or 100% productive
- 4% unemployment
- 80-90% factory capacity
- Productive Efficiency-
- producing at lowest cost, allocating resources
- at any point
- Allocative efficiency-
- combination most desired by society
- where to produce on the curve
- Growth- in the labor force, indicated shift in the PPG outward
- Loss- indicates an inward shift
Law of Increasing Opportunity Cost
- when resources are shifted from making one good or service to another, the cost of producing the second item is increasing
- this occurs because not all resources are equally shared for the production of all goods and services
4 Key Assumptions of Production Possibilities
- Only two goods can be produced
- Full employment of resources
- There are 4 fixed labors (FOP)
- Fixed technology
Demand
- Demand is the quantities that people are wiling and able to by at various prices
- The Law of Demand: there is and inverse relationship between price and quantity demanded
- Change in price causes a change in quantity demand
- Causes that change demand:
- Change in buyer's taste
- Change in the # of buyers
- Change in income
- Change in price of related goods (substitute/complimentary)
- Change in expectations
Supply
- Supply is the quantities that producers or sellers are willing and able to produce/sell at various prices
- The Law of Supply: there is a direct relationship between price and quantity supplied
- Change in price causes a change in quantity supplied
- What causes a change in supply:
- change in the # of suppliers
- change in taxes or subsidies
- change in weather
- change in technology
- change in cost of production/resource prices
- change in expectations
- change in anything except price
Elasticity of Demand
Elastic demand
- a product is elastic when demand will change greatly giving a small charge in price
- many substitutes
- includes luxury goods
- > 1
Inelastic Demand
- a product is said to be inelastic if the demand for it will not change, or it will change very little regardless of price
- few substitutes
- necessary
- < 1
Unitary Elastic
- = 1
Change in quantity/change in price = Price Elasticity of Demand
Price Ceiling/Floor Graphs
- Price floor- minimum price for a good or a service, ex: minimum wage
- Price Ceiling- Maximum price that can be legally charged for a good service, ex: rent control
Business Cycle
- Expansion- real output in the economy is increasing and the unemployment rate is declining
- Peak- real output at highest point
- Contraction/Recession Phase- real output is decreasing, unemployment rate is increasing
- Trough- lowest point of real GDP
- Peak and trough are meaningless because we never know we are in one until it is over
- If a recession loses more than 10% of Real GDP then it is a depression
- Trough means the end of a recession
