Economics: Key Concepts, Market Dynamics, and Decision-Making

What is the economic problem

Human wants are unlimited, but resources are scarce. So choices gotta be made

Whats scarcity

Resources limited relative to peoples wants

whats opportunity costs

the value of the next best alternative you give up when making a choice

Whats a trade off

giving up one thing to get something else

What's the diff between scarcity & opportunity cost

scarcity forces choices and opportunity cost is what you give up due to a choice

What are the three fundamental economic questions

1. What to produce

2. How to produce

3. For who to produce

What are productive resources

resources that produces goods and services

what are the three types of productive resources

1. natural, nature, water, mineral... used to make goods

2. capital, man made tools, machines... used to make other goods and services

3. human, physical/mental effort, skills and labour of people at work

Positive Statment

Factual statements that can be tested W/ evidence

Normative Statment

what should happen based on values/opinions

how to identify a normative statement

look for value judgement like, should, ought, fair, unfair...

can a positive statement be wrong

yes, can be tested and proved false

can normative estaminet be proven true/false using facts

no, based on values

traditional economy

guided by customs, culture, and traditions

command Economy

central authority/gov makes major economic decisions

-quickly direct resources to large projects & pursue specific goals

-planning difficulties, poor incentives, less economic freedom

Market economy

consumer and firms make decisions through market/prices

-encourages innovation/responsiveness to consumer demand

disadvantage: inequality and economic instability

basic idea for economic model

simplifies reality for economists can analyze relations & make predictions

Marginal

one more or additional

marginal analysis

compare added benefit W/ added cost

-use when the marginal benefit is greater than the cost

Marginal benefit

benefit from an additional/action

Marginal cost

opportunity cost of producing/doing one additional unit/action

Production Possibilites Frontier (PPF)

model showing max combos of 2 goods that can be produced W/ available resources/tech

Points on PPF

on curve-being used efficiently

inside curve-being used inefficiently

outside curve- unattainable without change

Movement on PPF

trade-off, producing more of 1 good means producing less of another

Shifts on PPF

Outward-economic growth, better tech, increase in resources

inward- decrease in resources or inefficient

Bowed out of PPF

increasing opportunity cost

-increases when resources not = suited to produce every good

specialization

focuses on producing specific good/service or perform specific task

Positives: people/firms become better & more efficient in the specialty

Roles of market

coordinate decision between buyers & sellers

why are property rights important

gives people control over resources/creates incentive to be efficient

to demand something

you want it, can afford it, made definite plan to buy it

Quantity Demanded

amount consumers plan to buy at specific price during specific period

Demand

relation between price and quantity demanded

Demand Curve

shows relation between price and quantity demanded, W/ other influences constant

-slopes down due to income effect & substitution effect

Law of demand

price rises, quantity demanded falls, all else =

Substitution effect

when good becomes more expensive, consumers look for subs

income effect

higher price reduces peoples purchasing power, can't afford as much

Price of good itself changes

moves along demand curve

something other than goods own price changes

demand curve shifts

demand increases

shifts right

demand decreases

shifts left

major determinant that shift demand

-preference

-income

-$ of related goods

-expectations

-population/demographic

substitute

good that can be used in place of another good

complement

good used W/ other good

if $ of sub rises, demand for original good?

demand increases

if $ for complement rises, demand for original good?

demand decreases

if people expect future price for product to increase, current demand?

current demand increases, buy more now cheaper then later

if population increases then demand?

demand increases

Market demand

total quantity demanded by all consumers at each price

to find market demanded from individual demand curves?

horizontally add individual quantities demanded at each $

to supply something?

firm has resources/tech, can profit from producing it, had made definite plan to produce/sell it

quantity supplied

amount producers plan to sell at specific $ and period

law of supply and demand

as price increase, quantity supplied rises, all else =

supply curve slops upwards why?

higher prices mean more profit incentive, marginal costs rise as production increases

products own price changes?

movement along supply curve

something than producers own price changes

supply curves shifts

supply increases it shifts

shifts right

supply decreases

shifts left

major determinants of supply

-$ of factors of production

-tech

-state of nature (floods, drought, hurricane)

-$ of related goods produced

-future prices (expected)

-# of suppliers

if cost of labour increases supply?

supply decreases- shifts left

tech improves supply?

supply increases- shifts right

natural disaster hurts production supply?

supply decrease- shifts left

# of suppliers increase supply?

supply increases-shifts right

producers expect price to rise in future current supply?

supply decreases, producers save good to sell at higher $

Market equilibrium

point where quantity demanded = quantity supplied

equilibrium price

price where quantity demanded = quantity supplied

equilibrium quantity

quantity bought/sold at equilibrium price

surplus

quantity supplied > quantity demanded

-caused when $ above equilibrium

-price tends to fall W/ a surplus

Shortage

quantity demanded > quantity supplied

-caused when below equilibrium

-price tends to rise W/ a shortage

rights shift in demand, equilibrium price?

price rises

right shift in demanded, equilibrium quantity?

quantity rises

left shift in demand, equilibrium price?

price decreases

left shift in demand, equilibrium quantity

quantity decreases

right shift in supply, equilibrium price?

price decreases

right shift in supply, equilibrium quantity?

quantity increase

left shift in supply, equilibrium price?

price rises

left shift in supply, equilibrium quantity?

quantity decreases

demand and supply increase then?

equilibrium quantity rise, but price unknown

demand increases and supply decreases then?

equilibrium quantity decreases, but price uncertain

demanded decreases and supply decreases then?

equilibrium quantity decreases but price uncertain

demand decreases and supply increases

equilibrium price decreases but quantity uncertain

demand increases and supply increases

equilibrium price rises but quantity uncertain

elasticity

measure of how strongly buyers/sellers respond to change in $

why slop isn't enough to measure responsiveness

slope depends on units used, elasticity is unit free

price elasticity of quantity demanded measure?

how responsive quantity demanded is to a change in price

why's price elasticity of demand negative

price and quantity demanded move in opposite directions

to decide wether demanded is elastic or inelastic you?

use price elasticity of demand (PEF) formula:

%change in quantity demanded / % change in price

-if more than 1 = elastic- Q response strong

-if less than 1 = inelastic- Q response weak

-if 1 = elastic (unitary elastic) means Q and P same

perfectly inelastic demand

elasticity = 0, quantity doesn't respond to price

-vertical on demand curve graph

perfectly elastic demanded

elasticity = infinity

-horizontal on graph

3 major factors affecting demanded elasticity

1. closeness of substitutes

2. proportion of income spent

3. time elapsed since price change

more subs, elasticity?

becomes more elastic

few/no subs, elasticity

more inelastic

necessity, elasticity?

inelastic

luxury elasticity?

elastic

large % of income spent on good, elasticity?

more elastic

small % of income spent on good, elasticity?

more inelastic

short run

period where at least one factor of production is fixed

long run

period where all factors of production are completely variable

short run vs. long run which is more elastic

long run is more elastic

why is demand usually more elastic in the long run

consumers have more time to find substitutes and change behaviour

along a straight demand curve, where is demand elastic

its elastic above the mid point