Unit 1 Notes

Unit One

• 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

1. Land (natural resources)
2. Labor
3. Capitol (Human & Physical)
1. Human- knowledge and skills a worker gains through education and practice
2. Physical- human made objects used to create other goods and services (tools, machinery, and buildings)
4. 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

1. Only two goods can be produced
2. Full employment of resources
3.  There are 4 fixed labors (FOP) 
4. 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