Intro to Economics (Exam 1)

Economics

the social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity.

Scarcity

the condition whereby the resources we use to produce goods and services are limited relative to our wants for them.

Scarce Goods

good for which you can not get all you want at zero cost. (mail, free samples)

Free Goods

you can get all you want at zero cost (air)

Price

signal that tells producers what and how much to produce; in a standard market transaction it is paid by the consumer.

Cost

the sacrifice associated with making a choice; in a standard market transaction it is paid by the producer.

Types of Costs

• explicit costs

• opportunity cost

• economic cost

Explicit Costs

out-of-pocket, monetary payments

Opportunity Costs

most valued option forgone

Economic Cost

explicit + opportunity cost

Resources

the inputs or factors used in the production of outputs/products/goods.

Types of Resources

• natural

• labor

• capital

• entrepreneurship

Natural

land, oil, lumber

Labor

physical, and mental talents used in production

Capital

all manufactured goods used in production

Entrepreneurship

the ability to combine other resources into valuable outputs.

How to make choices?

• try to maximize our utility by using marginal decision making.

Utility

the satisfaction a consumer obtains from the consumption of a good

Marginal

the change that results from an additional unit.

Note

utility maximization by producers and consumers usually maximizes social welfare.

Economic Principles

relationships between variables

Model

a simplified, graphical representation of relationships between variables

Market

any institution that brings together consumers and producers of a particular goods or services.

Product Market

households demand goods and services which are supplied by firms in exchange for money.

Resource Market

firms demand resources which are supplied by households for money.

Demand Schedule

a table that shows how much of a good or service consumers will want to buy at certain prices.

Law of Demand

the price of a good and the quantity demanded are inversely related

Demand Curve

a line that shows the maximum that consumers are willing to pay for any quantity

Demand

The relationship between P and Qd for all possible prices

Quantity Demanded (Qd)

the number of units consumers are willing to buy at a specific price

Change in Qd

a change in the amount purchased caused by a change in the price; a movement along the curve.

Change in Demand

a shift of the entire curve to the left (decrease) or right (increase)

Factors that Change Demand Curve

1. Income

   • Normal Goods

   • Inferior Goods

2. Price of Related Goods

   • Substitutes

   • Complements

3. Expectations of Future Prices

   • expected future price changes and current demand move together

4. Number of buyers

   • as the number of boomers age, demand increases for coffins.

5. Tastes and Preferences

   • People prefer to go to games with teams that win.

Supply Schedule

a table that shows how much of a good or service producers will offer for sale at various prices.

Law of Supply

the price of a good and the quantity supplied are directly related.

Supply Curve

a line that shows the minimum that producers are willing to accept as payment for any quantity.

Supply

the relationship between P and Qs for all possible prices

Quantity Supplied (Qs)

the # of units producers are willing to offer for sale at a specific price.

Change in Qs

a change in the amount offered for sale caused by a change in the price

Change in Supply

a shift of the entire curve to the left or right

Factors that Shift the Supply Curve

1. Input/Resource Prices

   • input prices and supply move opposite

2. Technology

   • the production process of changing resources into goods and services; when technology improves, supply increases.

3. Taxes

   • taxation and supply move opposite

4. Expectation of Future Prices

   • expected future price changes and current supply move opposite

5. Number of Sellers

   • usually the number of sellers in a market changes as the profit changes; firms will enter when profit is high