economic unit 1

econom

economics

the science of scarcity; study of choices

scarcity

unlimited wants but limited resources

theoretical economics

scientific method to develop theories

policy economics

theories applied to fix problems or economic goals

positive statement

based on facts, avoids value judgement

normative statements

includes value judgement

5 Key Economic Assumptions

1. Scarcity
2. Tradeoffs must exist
3. Everyone acts in self-interest
4. Decisions are made by comparing marginals costs and marginal benefits
5. Real-life situations can be explained and analyzed through simplified models and graphs

Marginal

additional

opportunity cost

most desirable alternative given up when you make a choice

utility

satisfaction

allocate

distribute

4 Factors of Production

1. Land (all natural resources)
2. Labor (paid work)
3. Capital (man-made tools/resources)
4. Entrepreneurship (ambitious leaders)

Productivity

measure of efficiency that shows the number of outputs per input

Production Possibilities Curve

Shows alternative ways that an economy can use its resources

4 Key Assumptions (PPC)

1. Only two goods are produces
2. Full employment of resources
3. Fixed Resources
4. Fixed technology

Constant Opportunity Cost

Resources are easily adaptable for producing either good

Law of Increasing Opportunity Cost

As you produce more of any good, the opportunity cost will increase bc resources are not easily adaptable. Result is concave or bowed out PPC

Changes in PPC

1. Change in resource quantity of quality
2. Change in technology
3. Change in Trade

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Greater production of capital goods will have more growth in the future.

Demand

Different quantities of goods that consumers are willing and able to buy (at different prices)

Law of Demand

There is an inverse relationship between the price and quantity demanded

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1. Substitution Effect- if price increases, consumers buy less and more of a substitute
2. Income Effect- if price goes down for a product, purchasing power increases, creating more incentive
3. Law of Diminishing Marginal Utility- As you consume anything, the additional satisfaction gained will eventually start to decrease

Quantity Demand

amount purchased

Ceteris Paribus

All other things held constant

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If not true, movement does not occur along the curve, but rather the whole curve shifts

Shift

At the same price, more ppl are willing and able to purchase than before

5 Shifters of Demand (BITER)

1. Buyers (change in demographic/population)
2. Income
3. Taste/Preference
4. Expectations of Future Price
5. Related Goods (substitutes and complements)

Substitute

good used in place of another

Complement

good use along with another (peanut butter+jelly)

Income Effect

1. Normal Goods (income up, demand up)
2. Inferior Goods (income up, demand down)

Supply

Different quantities of a good that sellers are willing and able to sell at different prices

Law of Supply

Direct/positive relationship between price and quantity supplied

5 Shifters of Supply (ROTTEN)

1. Resources (prices/availability of inputs)
2. Other goods (price of other sold goods)
3. Technology
4. Taxes and Subsidies
5. Expectations of Future Profit
6. Number of Sellers

Price Ceiling

maximum legal price a producer can sell at