Unit 1 - Basic Economic Principles

economics

science of scarcity

scarcity

unlimited wants but limited resources

microeconomics

study of small economic units such as individuals, firms, and markets

macroeconomics

study of the large economy as a whole or economic aggregates (ie. economic growth)

positive statements

based on facts; avoids value judgements (what is)

normative statements

includes value judgements (what ought to be)

trade-offs

all alternatives that we give up when we make a choice

opportunity cost

most desirable alternative given up when you make a choice

utility

satisfaction/enjoyment

marginal

additional

allocate

distribute

price

amount buyer pays

cost

amount seller pays to produce a good

investment

the money spent by businesses to improve their production (ie. new factory)

consumer goods

created for direct consumption (ie. pizza)

capital goods

created for indirect consumption (ie. oven)

4 factors of production

land, labor, capital, entrepreneurship

land

natural resources used to produce goods and services

labor

any effort a person devotes to a task for payment

capital

physical and human

physical capital

machines and tools

human capital

knowledge and skills

entrepreneurship

leaders that combine resources and make things (goal: maximize profits)

productivity

measure of efficiency that shows the number of outputs per unit of input

ceteris paribus

all other things constant

constant opportunity cost

resources are easily adaptable for producing either good (straight line PPC)

law of increasing opportunity cost

as you produce more of any good, the opportunity cost will increase (bowed out PPC)

productive efficiency

products produced in least costly way (any point of PPC)

allocative efficiency

products being produced are most desired by society (optimal point on PPC)

PPC

graph

inefficient

point 1

efficient

points 3 & 4

impossible/unattainable

point 2

3 shifters of the PPC

1. change in quantity/quality of resources

2. change in technology

3. change in trade (consumption)

per unit opportunity cost (formula)

opportunity cost/units gained

absolute advantage

producer that produces most output OR requires least amount of inputs (resources)

comparative advantage

producer with lowest (per unit) opportunity cost

terms of trade

the agreed upon conditions that would benefit both countries

demand

the different quantities of goods that consumers are willing and able to buy at different prices

law of demand

there is an inverse relationship between price and quantity demanded

why does law of demand occur (2 reasons)

1. the substitution effect

2. the income effect

substitution effect

if price increases for a product, consumers will buy less of it and more of another substitute product

income effect

if price decreases for a product, the purchasing power increases for consumers (allowing them to purchase more)

law of diminishing marginal utility

as you consume more units of any good, the additional satisfaction from each added unit will start to decrease (less satisfaction)

shift

change in demand (same prices)

movement

change in quantity demanded

5 shifters of demand

1. tastes and preferences

2. number of consumers

3. price of related goods

4. income

5. future expectations

price of related goods

one good can be affected by a change in the price of another related good (substitutes & complements)

income

changes demand, but depends on type of good (normal and inferior)

normal goods

directly related (income increases, demand increases)

inferior goods

indirectly related (income increases, demand decreases)

future expectations

if you think the price will decrease in the future, the demand decreases

subsidy

government payment that supports a business or market (causes supply of a good to increase)

6 shifters of supply

1. prices/availability of resources

2. number of sellers

3. technology

4. government action (taxes/subsidies)

5. price of related goods

6. expectations of future profit

supply

different quantities of a good that sellers are willing and able to sell (produce) at different prices

law of supply

there is a direct relationship between price and quantity supplied

equilibrium

point where supply and demand are balanced

price ceiling

maximum legal price a seller can charge for a product (causes shortage)

price floor

minimum legal price a seller can sell a product; must be above equilibrium to have an effect (causes surplus)

double shift rule

if two curves shift at the same time, either price or quantity will be indeterminate