Unit 1 (PPG, Demand, Supply)

Macroeconomics: the study of the major components of the economy
ex. inflation, GDP, international trade
Microeconomics: the study of how households and firms make decisions and how they interact in markets
ex. supply and demand, market structures

Positive Economics: claims that attempt to describe the world as is. very descriptive. fact.

ex. Minimum wage laws causes unemployment

Normative Economics: claims that attempt to prescribe how the world should be. very prescriptive in nature. opinion-based.

ex. The government should raise the minimum wage.

Needs: basic requirements for survival

Wants: desires of citizens. (broader than needs)

Scarcity: the most fundamental economic problem facing all societies. It is basically satisfying unlimited wants with limited resources (permanent). 

Shortage: Situation where quantity demanded is greater than quantity supplied temporary).

Goods: tangible committees

• Consumer Goods: goods that are intended for final use by the consumer. ex. chocolate, car
• Capital Goods: items used in the creation of other goods. ex. factory machines, trucks

Factors of Production:

1. Land - natural resources
2. Labor - work force
3. Capital
• Human Capital - knowledge and skills; gain through education and experience
• Physical Capital - human made objects used to create other goods and services
4. Entrepreneurship - have to be an innovator & risk taker

• Tradeoffs: alternatives that we give up whenever we choose one course of action over another. 

• Opportunity Cost: the most desirable alternative given up by making a decision. 

      • guns v. Butter (govt spending money on war or food)

• Production Possibilities Graph: shows alternatives ways to use resources. 

• Productive Efficiency: producing at the lowest cost, allocating resources efficiently, and having full employment of resources. (Any point in the curve)

• Allocative Efficiency: where to produce on the curve; trying to find the best combination possible

5 Key Assumptions with PPG:

1) Two goods are produced

2) Full Employment

3) Fixed Resources (Land, Labor, & Capital)

4) Fixed state of technology

5) No international trade

- (B, D, C) Any point on the curve is productively efficient and attainable. 
- (A) Points inside the curve are considered "underutilization." They are attainable, but inefficient. Could be caused by decrease in population, recession, war, famine, underemployment, etc.

- (X) Points outside the curve are unattainable. Could be reached through economic growth, new technology, and new resources.

Full Employment (FE):
- Not 100% employment
- Not 100% productive
- ≈ 4% unemployment
- ≈ 80% factory capacity

Curve shift to the right = Increase in Demand
Curve shift to the left = Decrease in Demand
Straight Line Curve = Constant Opportunity Cost
Concave Possibilities Curve = Increasing Opportunity Cost

Demand

Demand: the quantities that people are able and willing to buy at various prices
The Law of Demand: there is an inverse relationship between price and quantity demanded. When price increases, quantity decreases. When price decreases, quantity increases. (Demand Curve goes down)

What causes a "change in quantity demanded"? (∆ QD)
∆ in Price

What causes a "change in demand"? (∆ D)

1. ∆ in buyer's taste (advertising)
2. ∆ in number of buyers (population)
3. ∆ in income
• Normal Goods: goods that buyers buy more of when their income rises
• Inferior Goods: goods that buyers buy less of when their income rises
4. ∆ in price of related goods
• Substitute Goods: goods that serve roughly the same purpose to buyers. ex. coke & pepsi
• Complimentary Goods: goods that are often consumed together. ex. care & gas, fries & ketchup
5. ∆ in expectations (thinking of the future)

Elasticity of Demand: tells how drastically buyers will cut back or increase their demand for a good when the price rises or falls

• Elastic Demand: demand will change greatly given a small change in price (wants)
• E > 1
• Ex. movie tickets, steak, fur coats
• Inelastic Demand: demand for a product will not change regardless of price (needs)
• E < 1
• Ex. milk, gasoline, medicine
• Unit Elastic: E = 1

How to Calculate Price Elasticity of Demand (PED)

1. (New Quantity - Old Quantity) ÷ Old Quantity
2. (New Price - Old Price) ÷ Old Price
3. abs(% ∆ in Quantity) ÷ abs(% ∆ in Price)

Supply

Supply: the quantities that producers or sellers are willing and able to produce or sell at various prices

The Law of Supply: There is a direct relationship between price and quantity supplied. As price increases, quantity increases. As price decreases, quantity decreases. (Supply curve goes up)

What causes a "change in quantity supplied"? (∆ QS)

∆ in Price

What causes a "change in supply"? (∆ S)

1. ∆ in weather
2. ∆ in technology
3. ∆ in taxes or subsidies (money the government gives you)
4. ∆ in cost of production
5. ∆ in number of sellers
6. ∆ in expectations

Equilibrium: a point at which the supply curve and the demand curve intersect (economy is using their resources efficiently)

• Price Ceiling: Government imposed limit on how high you can be charged for a product or service
• Below the equilibrium point
• Ex. Rent Control
• Price Floor: Government imposed minimum on how low a price can be charged on a product or service
• Above the equilibrium point
• Ex. Minimum Wage

Marginal Revenue: the additional income from selling one more unit of a good

Fixed Cost (TFC): a cost that does not change no matter how much is produced

Variable Cost: a cost that fluctuates

Total Cost = TFC + TVC

Marginal Cost = New TC - Old TC

Average Fixed Cost = TFC ÷ Quantity

Average Variable Cost = TVC ÷ Quantity

Average Total Cost = AFC + AVC or TC ÷ Quantity

Shortage: QD > QS

Surplus: QS > QD