Unit 1 Basic Economic Concepts

Output Question

Length of time is constant

Input questions

The product or service is the constant

Absolute advantage

the ability to produce a good using fewer inputs than another producer

Comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

PPC (Production Possibilities Curve)

a model that shows alternative ways that an economy can use its scarce resources

What is economics?

Science of scarcity, Study of choices

Microeconomics

the study of the economic behavior and decision making of small units, such as individuals, families, and businesses

Macroeconomics

The study of the economy as a whole

Theoretical Economics

economists use the scientific method to make generalizations and abstractions to develop theories

Policy Economics

Theories are applied to fix problems or meet economic goals

Price

The amount of money exchanged for a good or service

Cost

Amount a seller pays to produce a good

Investment

spending on capital equipment, inventories, and structures, including household purchases of new housing

Capital goods

Consumer Goods

Trade offs

Alternatives that must be given up when one is chosen rather than another

Opportunity cost

the most desirable alternative given up as the result of a decision

Marginal benefit

the gain from doing something one more time

marginal cost

The cost of doing something one more time

Marginal Analysis

(aka: thinking on the margin) making decisions based on increments

Demand

Different quantities of goods that consumers are wiling and able to buy at different prices

What does a demand curve represent?

The inverse relationship between price and quantity demanded.

What is the shape of a demand curve?

Downward sloping.

What do the axes of a demand curve represent?

Price on the y-axis and quantity demanded on the x-axis.

What assumption is made when analyzing a demand curve?

All factors are constant.

What happens if there is an external factor on the demand curve?

The entire curve shifts.

What happens if there a lesser demandon a demand curve?

Shifts left

What happens if there a greater demand on a demand curve?

Shifts right

5 Shifters of Demand:

1. Tastes and preferences

2. Number of consumers

3. Price of Related goods

4. Income

5. Future experctations

Tastes and Preferences

the feelings of consumers about the desirability of different goods

E.g more popular = more demand

number of consumers

can change the market demand for a product

What happens to the demand for a product if the price of a substitute good increases?

The demand for the product increases.

What happens to the demand for a product if the price of a complementary good increases?

The demand for the product decreases.

Income (demand curve shifter)

The incomes of consumer changes the demand, but how demands on type of good.

What happens to demand if consumers expect the price to rise in the future?

The demand will increase today.

What happens to demand if consumers expect the price to fall in the future?

The demand will decrease today.

Normal good

a good that consumers demand more of when their incomes increase

Inferior Good

a good that consumers demand less of when their incomes increase

Quantity Demand

the amount of a good that buyers are willing and able to purchase

Supply

The quantity of something that producers have available for sale

Law of supply

Direct relationship between price and quantity supplied

Shifters of Supply

1. A change in resource price (availability of inputs)

2. Numbers of sellers

(more sellers = more supply)

(Less sellers = less supply)

3. Technology (increase efficiency or decreases cost of production)

4. Changes in taxes (tax decrease supply) ( Increases in subsidies = increase in supply)

5. Expectations of future profit

Equilibrium price

the point at which the quality demanded and the quantity supplied meet

Equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price

Why do all sales and purchases in a market take place at the same price?

a seller would not be willing to sell for significantly less than the amount he knew most buyers were paying

Why does the market price fall if it is above the equilibrium price?

A surplus exists when the price is above equilibrium, which encourages sellers to lower their prices to eliminate the surplus.

Surplus

Excess Supply

Shortage

A situation in which quantity demanded is greater than quantity supplied

What does the law of demand state about consumer behavior when prices decrease?

Consumers buy more of a good when its price decreases.

What does the law of demand state about consumer behavior when prices increase?

Consumers buy less of a good when its price increases.

Which of the following describes the relationship between price and quantity demanded according to the law of demand?

Negative relationship, illustrated by a downward-sloping curve

Which of the following describes the relationship between price and quantity demanded according to the law of supply?

Positive relationship with a upward-sloping supply curve