unit 1: basic economic concepts

scarcity

scarcity

• inability of limited resources to satisfy unlimited wants

• forces us to make choices on time, activities, purchases, production

factors of production

• land (natural resources)

• labor (manpower)

• capital (machinery, used to produce goods/services)

• entrepreneurship (business owners)

trade-offs

• allocating of scarce resources

• choose between two alternatives; one given up for the other

margin

• current level of activity

  • choice at margin: do more or less of activity

• marginal analysis

  • marginal benefit > marginal cost?

production possibilities curve

• all combinations of two goods/categories that can be produced with fixed resources

• resources used efficiently

  • point inside curve: unemployment/recession

  • point outside curve: unattainable

• x - cap. goods, y - con. goods

types of efficiency

• productive efficiency

  • produced in least costly way

  • any point on PPC

• allocative efficiency

  • produce products most desired by society

shifts in PPC

• change in quality/quantity of resources

• want more of one good → shift along PPC

• increase production of one good → good kicks outward

• capital goods → econ. growth

opportunity cost

• second best alternative that is given up to pursue a decision

  • concave/bowed out PPC: increasing opp. cost (resources unadaptable)

  • straight PPC: constant opp. cost (resources adaptable)

absolute advantage

• who’s better at producing a good

• ability to:

  • produce more with fixed resources

  • same amount with less resources

comparative advantage

• ability to produce at a lower opp. cost

  • output: other-over

  • input: it-over

terms of trade

• if both countries specialize → trade based on opp. cost (mutually beneficial range)

law of demand

• consumers buy more at low prices and less at high prices

• inverse relationship between price and quantity demanded

• downward slope

demand vs. quantity demanded

• demand shift - entire curve/table

• change in quantity demanded - change in quantity for one price (along curve)

  • price change → change in quantity demanded (not demand)

shifts in demand

• tastes and preferences

• # of consumers

• price of related goods

  • substitutes - direct relationship (↑p → d for other ↑, vv.)

  • complements - inverse relationship (↑p → d for other ↓, vv.)

• income

  • normal goods - direct relationship (↑ income, d ↑)

  • inferior goods - inverse relationship (↑ income, d ↓)

• future expectations

law of supply

• producers sell more at high prices and less at low prices

• direct relationship between price and quantity supplied

• upward slope

supply vs. quantity supplied

• supply shift - entire curve/table

• change in quantity supplied - change in quantity for one price (along curve)

  • price change → change in quantity supplied (not supply)

shifts in supply

• input prices

• # of sellers

• technology

• gov. action (taxes - supply ↓, subsidies - supply ↑)

• change in opp. cost of alt. production

  • alt. price ↑ supply shift left

  • alt. price ↓ supply shift right

• expectations of future profit

market equilibrium

• Qs = Qd

• x - quantity, y - price

• supply - upward curve, demand - downward curve

surplus

• Qd < Qs

• price floor; above equilibrium

• surplus = ½(b)(h)

shortage

• Qd > Qs

• price ceiling; below equilibrium

• shortage = ½(b)(h)

double shift

• both supply and demand shift

• price or quantity will be indeterminate

  • graph agrees (p↑q↑ or p↓q↓) - determinate

  • graph disagrees (p↑q↓ or p↓q↑) - indeterminate