Economics: Micro and Macro Principles, Demand & Supply, and Market Equilibrium

Economics

The study of how people allocate their limited resources to satisfy their unlimited wants.

Microeconomics

The study of decision making undertaken by individuals (or households) and by firms.

Macroeconomics

The study of the behavior of the economy as a whole.

Different economic systems

Centralized Command and Control (central planning) and Price system (market system)

Centralized command and control (central planning)

authority makes all economic decisions

Price system (market system)

Decentralized decision-making process where prices are used as signals to make all economic decisions

Rationality assumption

The assumption that people do not intentionally make decisions that would leave them worse off.

Self-interest

The pursuit of one's goals (prestige, friendship, love, power, helping others, creating works of art) - does not always mean increasing one's wealth.

Ceteris paribus

Nothing changes except the factor or factors being studied. 'Other things constant, other things equal.'

Positive economics

Strictly limited to making purely descriptive statements or scientific predictions, such as 'if A, then B'. A statement of what is.

Normative economics

Analysis involving value judgements; relates to whether outcomes are good or bad. A statement of what ought to be.

Scarcity

resources are limited, but wants are unlimited; there are not enough resources to satisfy everyone

Resources (Factors of production)

Inputs that are used to produce things that people want.

4 Factors of Production

Land - natural resources

Labor - human resources

Physical capital - manufactured resources

Entrepreneurship - Human labor

Opportunity cost

The highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want.

Production Possibilities Curve (PPC)

Represents all possible combinations of maximum outputs that could be produced, assuming a fixed amount of productive resources of a given quality.

On the production curve

Where we want to be. That means we are making the best amount.

Inside of the PPC curve

Described as inefficient because an economy isn’t producing as much as it could.

Outside of the PPC curve

described as unattainable because there isn’t enough resources

Economic growth & the PPC

Economic growth means the PPC will shift outward to the right.

Specialization

Organization of economic activity among different individuals and regions.

Division of labor

The segregation of resources into different specific tasks.

Demand curve

Shift to the left is a decrease in demand, shift to the right is an increase in demand.

Law of demand

A negative, or inverse, relationship between the price of any good or service and the quantity demanded, holding other factors constant.

5 determinants/factors of demand

Consumer income, Tastes and preferences, Prices of related goods, Expectations, Market size

Normal goods

Goods for which demand rises as income rises.

Inferior goods

Goods for which demand falls as income rises.

Substitutes

When a change in the price of one causes a shift in demand for the other in the same direction as the price change.

Complements

When a change in the price of one causes a shift in demand for the other in the opposite direction as the price changes.

Supply curve

Shift to the left is a decrease in supply, shift to the right is an increase in supply.

Law of supply

The higher the price of a good, the more of that good sellers will make available over a specified time period, other things being equal.

5 determinants/factors of supply

Prices of materials (inputs), Technology and productivity, Taxes and subsidies, Producer price expectations, Number of firms in industry

Equilibrium (market clearing price)

A situation in which quantity supplied equals quantity demanded at a particular price.

Shortage

A situation in which quantity demanded is greater than quantity supplied.

Surplus

A situation in which quantity supplied is greater than quantity demanded.

Shortage & Equilibrium

The price is below the equilibrium

Surplus & Equilibrium

The price is above the equilibrium

Substitution effect

We will look for the cheaper substitute.

Real income effect

Changes in prices alter a consumer's purchasing power, affecting the quantity of goods and services they can buy without changing their nominal income.