Unit 1: Basics of Economics

Macro economics

Scarcity

The idea that we have unlimited wants but limited resources, which means we are forced to make decisions

Unlimited wants—limited means

Microeconomics

It is the study of small economic units that examine the decisions of individuals and firms, such as the cost of production in different kinds of markets.

Macroeconomics

Is the study of the collective decisions of everyone, the entire economy. Looks at things like growth, unemployment, inflation, and different policies to speed up or slow down the economy

Opportunity cost

Is the cost of the next best alternative. The thing that you would have done if you didn’t make that choice

next best option

Production Possibilites Curve (PPC)

It’s a model that shows the alternative ways we can use our scare resources to produce only 2 goods

Opportunity cost equation for output question (chart shows the number produces each day given the same number of resources)

units lost/units gained

Opportunity cost equation for input question (the chart shows the number of hours it takes each country to produce 1 thing or another)

units gained/unit lost

Demand

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

Consumers’ willingness and ability to buy at given prices

Law of Demand

there is an inverse relationship between the price and the quantity demand

P increases → Qd decreases

P decreases → Qd increases

5 shifter (determinants) of demand (on a supply and demand graph)

1) taste and preferences

2) Number of consumers

-Population

3) Price of related goods

-substitutes

-complements

4) Income

5) Future expectation

Supply

the different quantities that producers are willing and able to sell at different prices

Producers/sellers willingness and ability to sell at given prices

Law of supply

there is a positive relationship between the price and the quantity supplied

P increases → Qs increases

P decreases → Qs decreases

6 shifter (determinants) of supply (on a supply and demand graph)

1) Prices of resources/ Input prices (FOPs)

2) Number of producers

3) Technology

4) Government intervention/Government Action

5) Future expectations

6) Price of related Goods

Double shift rule (on supply and demand graph)

When 2 curves shift at the same time either price or quantity will be indeterminate (could go up or down)

Benefit (perceived)> cost

ppl will do it

Cost> Benefit (perceived)

ppl won’t do it

What does productivity/labor productivity refer to?

refers to the measure of output produced by a worker or group of workers in a given amount of time. It reflects the efficiency of labor in generating goods and services.

What are the sources of long run growth?

Sources of long run growth include increases in physical capital, human capital, and technological advancement, which enhance productive capacity.

Resources

anything that can be used to produce something else.

often referred to as Factors of Production (FOP’s)

Factors of Production (FOPs)

The inputs used to produce goods and services

1)Land resources: anything from Mother Nature

2) Labor resources: work that humans do, quantity of work, effort of workers. Human capital, how skilled the workers are/ is the knowledge and experience, and training that make workers more productive.

3) Capital: physical capital, things like tools, machinery, and factories used to produce stuff

4) Entrepreneurship: the ability to combine resources to create new goods or services, taking risks to innovate and drive economic growth. The person that brings together all the other resources and starts the business and takes the risks

Difference between human capital and physical capital

Both are FOPs, but

-Human Capital falls under labor. It’s how skilled workers are such as their knowledge and experience, and training that makes workers more productive

-Physical capital falls under capital, and it is machinery and tools used to produce stuff.

Economic system

organized way of providing for the wants/needs of ppl

Each must determine

-WHAT to produce

-HOW to produce

-For WHOM to produce

Three General Types of economics

Traditional, command, and market economies

Command Economies

-Industry is publicly owned, and there is a central authority making production and consumption decisions

-One central authority (government usually) decides the WHAT, HOW, WHOM

-Examples: communism, socialism, etc

Market Economies

-The decisions of individual producers and consumers largely determine what, how, and for whom to produce, with little government involvement in the decisions

-Ex: US, Canada, etc

Traditional Economies

-Economic systems that rely on customs, history, and time-honored beliefs to make production and consumption decisions.

8 Characteristics of the US system

-The US has a free-enterprise or Capitalist economy

Characteristics

1) Economic Freedom

2) Competition

3) Voluntary Exchange

4) Equal Opportunity

5) Binding Contracts

6) Property Rights

7) Profit Motive

8) Limited government

Invisible Hand

The concept, coined by Adam Smith, that describes the self-regulating nature of the marketplace where individuals' pursuit of their own interests inadvertently benefits society as a whole.

Absolute Advantage

The ability to produce something using fewer resources than other producers

Comparative Advantage

The ability to produce something at a lower opportunity cost/relative cost than other producers

Law of comparative advantage

An individual, firm, region or country with the lowest opportunity cost of producing a good should specialize in that good

What is postivie economics

the branch of economic analysis that describes the way the economy actually works

What is normative economics

the branch of economic theory that deals with what ought to be or what should be done in the economy.

Normal good vs. Inferior good

Normal goods are those whose demand increases as consumer income rises, while inferior goods see a decrease in demand as income increases.

Price ceiling vs. price floor

Price ceiling is a maximum price set by the government for a particular good, while price floor is a minimum price set to prevent prices from falling below a certain level.

PPC shifters

In permanent change in FOPs

On the PPC graph a surplus is when

Qd<Qs

On the PPC graph a shortage is when

Qd>Qs