Unit 1 Economics

Economics: Unit 1

Jan. 5, 2016

Macroeconomics	Microeconomics
The study of the economy as a whole “looking at the big picture” Ex. Inflation, international trade, wages	The study of the individual or specific units of the economy “looking at it individually” Ex. Supply & demand, market structures, business organizations
Positive Economics	Normative Economics
It attempts to describe the world as is -very descriptive -tends to thrive on the “what is” -collects and presents facts	An attempt to prescribe how the world should be “ought to be” “should be” -opinion base
Needs	Wants
Basic requirements for survival ·         water ·         food ·         shelter ·         clothing	Desires of citizens ·         cellphones ·         cars ·         tablets
Goods	Services
Tangible commodities 1.    Capital Goods: items used in the creation of other goods 2.    Consumer Goods: goods that are intended for final use by the consumer	Work that is performed for someone
Scarcity	Shortage
The most fundamental economic problem that all societies face -how to satisfy unlimited wants with limited resources	Quantity demanded is greater than quantity supply
Factors of Production
§  Resources to produce goods & services 1.    Land (natural resources) 2.    Labor (work force) 3.    Capital (human capital/physical capital) 4.    Entrepreneurship (innovative/risk taker)

Jan. 6. 2016

Human Capital	Physical Capital
Knowledge, skills, abilities & talent that are gained through education & work experience	Composed of tools, machines & robots

Tradeoffs- alternatives that we give up when we choose one course of action over another

Opportunity cost- next best alternative, settling for what wasn’t your first choice

Production Possibilities Graph (PPG)- shows alternative ways to use an economy’s resources AKA (PPC-Curve) (PPF-Frontier)

4 Assumptions of a PPG

1. Two Goods
2. Fixed Resources (land, labor, capital & entrepreneurship)
3. Fixed Technology
4. Full Employment of Resources

Efficiency: using resources in such a way as to maximize the production of goods & services

Allocative Efficiency: products being produced are the ones most desired by society

Productive Efficiency: products are being produced in the least costly way & this means any point on (PPC)

Underutilization: using fewer resources than an economy is capable of using

v  A -inside the curve

What’s happening? You are unattainable but inefficient: underutilization

v  B & C -on the curve

What’s happening? You are attainable & efficient: it is producing

v  D -outside of the curve

What’s happening? Unattainable

Jan. 7, 2016

What causes the PPC/PPG to shift?

1.    Technological Changes

2.    Economic Growth

3.    Change in Resources

4.    Change in Labor Force

5.    Natural Disasters, War, Famine

6.    More education & training (human capital)

∆ (delta sign) -change

Jan. 11, 2016

Jan. 14, 2016

Elasticity of Demand

-It is a measure of how consumers react to a ∆ in price

1.    Elastic Demand

-       demand that is very sensitive to a change in price

*always greater than 1*

a)    Product is NOT a necessity

b)    There are available substitutes

2.    Inelastic Demand

-       Demand that is NOT sensitive to change in price

*always less than 1*

a)    Product is a necessity

b)    Few or no substitutes

c)    People will buy no matter what

3.    Unitary Demand

*ALWAYS equal to 1*

Examples of Elastic	Examples of Inelastic
·         Soda ·         Steaks ·         Candy ·         Fur Coats	·         Gas ·         Salt ·         Milk ·         Insulin ·         Medicine ·         Toothpaste

Price Elasticity of Demand (PED)

1.    Quantity

(New quantity – Old quantity)

Old quantity

2.    Price

(New price – Old Price)

Old Price

3.    PED

Percentage ∆ in Quantity demanded

Percentage ∆ in Price

Total Revenue- the total amount of money a firm receives from selling goods & services P×Q= TR (price × quantity=total revenue)

Fixed Cost- a cost that does not change no matter how much is produced Ex. Rent, mortgage, insurance, salary

Variable Cost- a cost that rises and falls depending upon how much is produced Ex. Electricity

Marginal Cost- the cost of producing one more unit of a good

Jan. 17, 2016

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.

-       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. 

-       creates a surplus. 

-       are used by the government to prevent prices from being too low. The most common price floor is the minimum wage.

 

Business Cycles

Peak: the highest point of the real GDP

-       greatest amount of spending & lowest amount of unemployment

-       in this phase inflation becomes a problem

Expansion: “recovery phase”

-       real GDP is increasing due to an inflation of spending & a decrease in unemployment

Contraction: real GDP declines for 6 months due to a reduction in spending & increasing unemployment

Trough: lowest point of real GDP

-       least amount of spending & highest unemployment

Video Links:

Demand and Supply Explained

PPC Explained