Basic Economics

scarcity

refers to a basic economic problem - the gap between limited resources and theoretically limitless wants

* requires people to make decisions about how to allocate resources efficiently

trade offs

each of the alternative decisions given up when making a decision

opportunity cost

the loss of value or benefit that would be incurred by engaging in an activity, relative to engaging in an alternative activity offering a higher return value or benefit

* every economic has many trade-offs, but only one opportunity cost

production possibilities curve

measures the maximum output of two goods using a fixed amount of input

* the input is any combination of the four factors of production

four factors of production

natural resources, labor, capital goods, entrepreneurship

law of supply

when the price of good or service increases, the producer will want to make more of that good

price of inputs

when the price of production increases, the supply decreases

when the price of production decreases, the supply increases

SUPPLY CURVE SHIFTER

number of producers

more producers = more supply

more producers = more competition = lower prices

SUPPLY CURVE SHIFTER

new technology

technological advances that improve efficiency and lower production cost will increase supply

SUPPLY CURVE SHIFTER

government taxes and subsides

taxes increase the cost of production and supply decreases

subsidies decrease the cost of production and supply increases

SUPPLY CURVE SHIFTER

future expectations

if suppliers expect prices to rise in the future, they will decrease their supply today to sell more in the future

SUPPLY CURVE SHIFTER

demand

an economic principle referring to consumer’s desire to purchase goods and services and willingness to pay a specific price for a specific good or service

law of demand

an increase in price of a good or service will decrease the quantity demanded, and vise versa

market demand

the total quantity demanded across all consumers in a market for a given good

aggregate demand

the total demand for all goods and services in an economy

demand curve shifters

tastes and preferences

number of consumers

price of related goods

income of consumers

future expectations

normal goods

increased consumer income results in increased demand of certain goods

i.e. food, clothing, private transportation

inferior goods

increase consumer incomes results in decreased demand of certain goods

i.e. canned foods, public transit

law of supply and demand

* the law of demand says that at higher prices, buyers will demand less of an economic good
* the law of supply says that at higher prices, sellers will supply more of an economic good
* the two laws interact to determine market prices and volume of goods that are exchanged in a market

substitute goods

a good that can take the place of another good

if the price of one increases, the demand for a substitute will increase and the demand for the other will decrease

complementary goods

goods that are typically used together

if the demand for one decreases, the demand for the other will also decrease, and the same goes for increase.

market equilibrium

the situation where supply and demand are balanced and in the absence of external influences the values of economic variables will not change

price controls

restrictions set in place and enforced by the government on the prices that can be charged for goods and services in a market

price floor

a government imposed price control on the minimum price that can be charged for a product, good, commodity, or service.

Must be higher than the equilibrium price to be effective

supports suppliers

price ceiling

a government imposed price control or limit on the maximum price that can be charged for a product, commodity, or service.

must be lower than the equilibrium price to be effective

supports consumers

surplus

consumer surplus: the price for a product or service of lower than the highest price a consumer is willing to pay

producer surplus: goods are sold at a price that is higher than the lowest price the producer was willing to sell for

shortage

the quantity demanded is greater than the quantity supplied at the market price

three causes:

increase in demand

decrease in supply

government intervention

change in demand

caused by any of the demand curve shifters

when the demand curve shifts, the quantity demanded is either greater or lower at every price compared to the market equilibrium

change in quantity demanded

a shift along the demand curve

as prices fluctuate, the quantity of goods demanded fluctuates with it but inversely.

problems of price ceilings

a shortage so some consumers can’t get what they want

lower quality goods/services

a thriving black market

a decrease in supply as sellers leave markets due to low profits

rent control

government-imposed maximum on how much landlords can charge for rent

problems of price floors

a surplus, too much quantity supplied

artificially high quality goods/services

more waste

minimum wage

government-imposed minimum of the amount employers can pay employees at an hourly rate