Economics 101

Utility

How useful a product is. For example, a bunch of pizzas will be more useful than caviar if your friends come over to help you move.

Equality Standard of Resource Allocation

Split resources evenly, no matter what

Resource Allocation Standards

• Needs standards

• Equality standard

• Contributive standard

Profit Maximization

How much to produce and what price to charge to make the highest possible profit

Labor Productivity

How much a worker produces in a certain time

Oligopoly

A few firms dominate a market. Ie: Airlines and oil companies

Needs Standard of Resource Allocation

Give resources to people who need them most

Marginal Impact

The effect or cost of producing one more unit

Monopoly

One firm controls the entire market

Perfect Competition (1)

Many businesses sell similar products, with free entry, and good price information (1)

Comparative Advantage

You make something at a lower opportunity cost than others

Contributive Standard of Resource Allocation

Give resources based on what people contribute (capitalism)

Physical Capital

Tools, equipment, or buildings used to make goods

Efficiency in Macroeconomics

Using resources well; avoiding waste

Factors to consider when thinking about moving manufacturing job overseas

• Labor costs

• Capability to produce units per hour

Macroeconomics

Looks at the economy as a whole (growth, unemployment, inflation)

Natural Resources

Resources that exist naturally: water, trees, oil

Microeconomics

Focuses on decision by individuals, families, or businesses

Actions taken by businesses that understand scarcity

Businesses will make careful choices about resources, including labor, to use them efficiently and meet their needs

Absolute Advantage

You can make more of something than anyone else with the same resources

Scaracity

There isn’t an infinite supply of anything, Everything is limited.

Subsidies

Payments from the government to producers to encourage production or help compete with imports

Price Ceilings

A maximum price set by the government to keep goods afforable

Supply Curve

Shows how much producers will sell at different prices (slopes up)

Reasons demand curves shift left

Less interest from consumers at the same price

Banning Products

Making it illegal to buy or sell certain goods

Law of Supply

Higher price —> producers want to supply more

Deadweight Loss

Waste caused by price ceilings or floors

Reasons supply curves shift to the left

Producers make less because it’s harder or less profitable. Ex: If a software company loses money because people pirate their programs, they might make fewer copies

Cartel

A group of producers working together to limit supply and raise prices

Reasons demand curves shift to the right

More interest from consumers, like good advertising

Reasons supply curves shift to the right

Producers make more goods, maybe due to lower costs or higher demand

Market Equilibrium

Point where supply = demand; no shortages or surpluses

Effects of Excess Supply

Too much supply —> prices fall

How can businesses move the supply curve on the supply-side?

Lowering prices can encourage production or increase sales

Effects of excess demand

Too much demand —> prices rise

Wage Floor

Minimum wage.

Factors that can shift the supply curve and change equilibrium

• Material costs

• Technological advance

• taxes

• weather

• future expectations

Technological advances

Shifts in the weather, future expectations or taxes

Supply

Amount of goods producers are willing to sell at different prices

Price Floors

Minimum price set by the government to prevent prices from falling too low

Market Forces

How buyers and seller naturally change prices without government help

Layout of supply curve

Price vs Quantity supplied: Price on vertical axis and quantity on horizontal

Disposable Income

Money left after taxes

Factor that can shift the demand curve and change equilibrium

• Prices of goods

• Tastes or preferences

• Income

Demand Curve

Shows how much consumers buy at different prices (slopes down)

Shortages

When demand exceeds supply; economy isn’t efficient

Cross Price Elasticity of Demand

Measures how demand from one product changes when price of another product changes

Unitary Elasticity

Demand changes exactly as price changes, so total revenue statys the same

Normal Goods

Goods people buy about the same or a bit more as income rises

Elastic Supply

Supply that responds a lot to price changes (quantity changes more than price)

Cross Price Elasticity of Demand Formula

% change in quantity demanded of Product A / % change in price of product B

Inelastic Demand

Demand hardly changes when price changes

Method for classifying goods in economics

Economist look at how demand changes with income to classify goods as inferior, normal, or superior

Derived Demand

Demand for a good comes from the demand for another related good

Income Elasticity of Demand

Measures how demand changes when income changes

Price Elasticity of Demand

Measures how much quantity demanded changes when price changes

Superior Goods

Luxury goods.

Inferior Goods

People buy less of as income increase

Categories of Goods

• Inferior

• Normal

• Superior (luxury)

Purpose of Embargoes

Use when a country believes trading brings no benefit or causes harm

Purpose of Quotas

To limit supply, keep prices from falling , and protect domestic producers

Smuggling

Illegal trade that breaks government rules often caused by strict trade barriers or embargoes

Trade Barriers

Government rules that limit or control trade between countries

Embargo

A government ban on trade, either on a specific product or an entire country

Trading Empires in Europe in the 16th and 17th centuries

Countries like England, France, Spain, and Holland became powerful by expanding trade and global route

Laws that create trade barriers

Passed to protect jobs and local businesses

Mercantilism

A system in 16th-17th centuries where countries hoarded wealth by controlling trade and colonies. For example: country A has colony X - Colony X can only sell gold and can only buy stuff stuff from A. Country B wants gold from X but A can block them

Tariff

A tax on imported goods.

How importing companies adjust to tariffs

Foreign companies may move production into the country to avoid the tax

Protectionism

Using trade barriers to protect domestic businesses

Quota

A government limit on how much a good can be imported

License (in trade)

Government permission to import or sell goods

Post Hoc Ergo Propter Hoc

The mistake of thinking one thing caused another just because it happened first

Economics

The study of how people and societies use limited resources to meet their needs and wants

Inflation

A general increase in prices across the enconomy over time

Producer

Someone who make goods or service to sell

Consumer

Anyone who uses or buys goods and services

Applications of the law of supply and demand

Used to predict price changes based on shortages or surpluses

The Law of Supply and Demand

Prices rise when demand is high and supply is low, and prices fall when supply is high and demand is low

The Fallacy of Composition

The false idea that what’s true for one part must be true for the whole

Economic Assumptions about Utility

Consumers usually buy what gives them the most satisfaction or usefulness

Positive Economic Statement

A statement that can be tested or proven with facts

Economic Growth

An increase in how much an economy can produce goods and services

Example of Correlation

People wear shorts and eat more ice cream in the summer, but shorts don’t cause ice cream eating

Normative Economic Statement

A statement based on opinions or values, not facts

Economic Systems

Ways societies organize production and trade (market, command, mixed)

How does the ‘invisible hand’ guide the economy?

When people act in their own self-interest, markets naturally set fair prices

Economic Models

Simplified versions of the economy used to study and predict behavior

Macroeconomic reasons that governments benefit from knowing what consumers buy

• Plan infrastructure

• Encourage economic growth

• Prepare for future demand

Potential limits on economic growth

• Technological improvements may reach an end

• Resources are finite

Correlation

When two things change together, but one doesn’t necessarily cause the other

How producers use the marginal rate of substitution?

Shows how much one good a consumer will give up to get more of another

Marginal Rate of Substitution

Shows how much of one good a consumer will give up to get more of another.

Indifference Curve Model

A graph showing different combinations of goods that give the same level of satisfaction

Complementary Good

Goods that are used together like hot dogs and buns

Perfect Substitutes

Products that are identical except for price

Substitute Good

A product people are willing to buy instead of another

Rate of Transformation

Shows how easily one good can be exchanged for another

Budget Constraints

Limits on spending based on how much money someone has