Unit 1: Basic Economic Concepts

Change in quantity demanded/supply=affected by price (move dot on curve); change in demand or supply (change in certain factors)=shift whole curve L or R

What do economists believe are the 3 basic needs of life?

shelter, food/water, clothing

Assumption that economists make

people have unlimited wants; all resources are limited/finite

Resource

Anything that people can use to make or obtain what they need or want

Factors of Production

things used to produce goods and services (also known as resources)

Types of resources and their type of payment

Land-rent; labor-wages; capital-interest; entrepreneurship-profit

Capital

things that can help produce other things

• physical: manufactured items that people use to make other goods and/or services

• human: skills, intellect, and ability of labor (improved w/ training and education)

• financial: money

Entrepreneurship

making decisions on what to do with the land, labor, and capital

Scarcity

people do not and cannot have enough income, time, or resources to satisfy their every desire and so we have to make decisions

Economics

study of how people and nations make choices about how to use scarce resources to fill their needs and wants

trade-offs

all the things that had to be given up when a decision was made

opportunity cost

the hardest choice to give up when a decision is made

Opportunity benefit

what is gained by making a particular choice

Efficient

performing/functioning in the best possible manner with no waste of time, effort, and resources

What does the line on a PPF or PPC graph represent

the outermost limits of what could be produced in peak conditions

On a PPF or PPC graph, what does a point/dot represent

the actual production

Explain the three regions of a PPF

• point on the PPF=most efficient

• point inside the PPF=inefficient

• point outside the PPF=not possible

3 causes for economic growth

increase in the quantity of resources, increase in quality of resources, technological advancements

Difference between straight line PPFs and Curved PPFs

straight=constant opportunity cost; curved=increasing opportunity cost

absolute advantage

advantage realized by the producer able to generate greater output with a given amount of time or resources

Comparative advantage

When one individual or nation can produce something at a lower opportunity cost than another; what product can you produce best in regards to opportunity cost

Output Problem

The numbers that are varying represent what can be produced in a given period of time

Input Problem

The numbers that are varying represent how much goes IN to produce an equal number of output; you want the lower numbers

Terms of trade

an agreed upon exchange rate of two goods between two producers (often nations)

Mutually beneficial terms of trade

fall between the opportunity costs of the two producers involved

What will a price change for a good or service change?

A change in price for that good or service will lead to a change in the quantity demanded

What do you do on a demand graph to show a change in quantity demanded?

Move from one point on a demand line to some other point on the demand line

What do you do on a demand graph to show an increase in demand?

An arrow to the right

What do you do on a demand graph to show a decrease in demand?

An arrow to the left

Explain what a normal good is

Income and demand go in the same direction

Higher Income→Higher Demand

Lower Income→Lower Demand

Explain what an inferior good is

Income and Demand go in opposite directions Ex. cup of noodles

Higher Income →Less Demand (for cup noodles)

Lower Income → Higher Demand

Explain Complementary Goods

Products that are used together. If you buy one, you’re likely to buy the other;

If the price of toothbrush goes up, the quantity demanded (single point on demand curve) for this good will go down and the demand (entire demand curve) for toothpaste will go down.

Explain Substitute Goods

Products similar enough they can replace the other; If the price of coffee goes up, the quantity demanded for this good or service will go down and the demand for tea will go up

Change in Expectations For Future Income

When consumers are pessimistic about their future incomes, the overall level of demand for goods and services in the economy decreases. The opposite is true

Change in Expectations For Future Price Change

When people expect a G or S to drop in price in the future; When people expect a G or S to increase in price in the future.

-Less willing to buy a computer before the Black Friday sale

What Causes Changes in Demand? In /Times Past /Really Good /White /Beans /Existed

1. Income

2. Tastes and Preferences

3. Related Goods

   • Complementary

   • Substitute

4. Weather

5. # of Buyers

6. Expectations

   • Future Income

   • Future Price Change

Who does demand focus on?

Consumer

Supply

The quantity of a good or service a business is willing and able to produce at different prices

Individual Supply

quantity of a good or service that 1 business will produce at various prices

Market Supply

total quantity of a good or service that all firms in a market will make available for sale at various prices

Demand

Quantity of goods and services that a consumer is willing and able to purchase at various prices

Equation for Profit

Profit=(Quantity Sold X Price)-Costs of Production

Law of Supply

As the price goes up, producers will be more motivated to increase their quantity supplied. As the price goes down producers will be less motivated to produce the quantity supplied

What causes a change in quantity supplied?

Change in Price for that good or service

How do you show this on a supply graph?

One point on the supply line to another point on the supply line

What do you do on a supply graph to show an increase in supply?

Line shifts to the right

What do you do on a supply graph to show a decrease in supply?

Line shifts to the left

Change in Input (Factor) prices

If the price of a factor of production goes up, producers may not be able to afford to produce as much as they used to.

Change in Business Taxes

Increases in tax rates placed upon businesses often prompt some businesses to lower their production. Opposite is true

Subsidy

Any form of government support--financial or otherwise--provided to producers or (occasionally) consumers; If people get financial support from the government for producing a certain thing, they will be more motivated to keep on producing that product.

Price Equilibrium

If they charge too high of a price there will be a surplus and they’ll be tempted to lower the price; If they charge too low of a price, there will be a shortage and they’ll be tempted to raise the price

Surplus

How much the quantity supplied is greater than the quantity demanded;

• lessen the surplus: decrease the price —> qty demanded increases, qty supply decreases

Shortage

how much the quantity demanded exceeds the quantity supplied

• lessen the shortage: increase the price —> qty demanded decreases, qty supply increases

What must you remember when supply and demand both shift?

One of either peq or queq cannot be determined for certain. The other one most certainly will increase or decrease.

Price increases, Quantity increases

demand increases, supply stays the same

Price decreases, Quantity decreases

Demand decreases, supply stays the same

Price decreases, Quantity increases

Demand stays the same, Supply increases

Price increases, Quantity decreases

Demand stays the same, supply decreases