Principles of Economics

Opportunity Cost and Production

When increasing production of a certain product, such as mountain bikes, from zero to 1,000, a trade-off occurs where a certain amount of another product, like beer, must be sacrificed.
- Example: Increasing from zero to 1,000 products results in a trade-off of giving up 20 units of beer.
Increasing production further, from 1,000 to 2,000, will yield a similar sacrifice of approximately 20 units of beer again if the curve is a straight line.
- This indicates a constant opportunity cost with linear relationships.
Reality depicts a curve rather than a straight line due to the differing skills of workers in production.

Initial production primarily of one good (beer) requires reallocating workers when diversifying production (mountain bikes).
- Workers with lower skills or aptitude in beer production will be prioritized for transition to bike production to minimize sacrifices.
However, as production scales increase, even skilled workers in beer must be used for bike production, leading to greater sacrifices in beer output.
This models the concept of the production possibilities frontier (PPF), which illustrates varying opportunity costs due to differences in skills.

Microeconomics: Focus on the interactions between households and firms within markets.
Macroeconomics: Study of the economy as a whole, including factors such as GDP, unemployment, and inflation.

Positive Statements: Objective statements based on analysis, devoid of value judgments.
- Example: "Federal minimum wage laws cause unemployment."
Normative Statements: Subjective statements that involve opinions about what ought to be.
- Example: "The government should raise the minimum wage."
Economists strive to provide positive statements while political discourse often includes normative claims.

Federal minimum wage is set at $7.25 and is considered non-binding as most wages exceed this.
Analysis of minimum wage impacts often leads to positive statements that can be supported or refuted by empirical evidence.

Differences in economic modeling, data interpretation, and values contribute to disagreements among economists.
- Example: Disputes exist surrounding tariffs and their effects on prices, where one economist may oppose tariffs while another supports them.

Pursuing a degree in economics requires a strong foundation in mathematics and data analysis skills.
Students who favor quantitative analysis tend to excel in economics.

The interaction of supply and demand serves as the framework for economic analysis;
- Markets consist of buyers, sellers, prices, and transaction objects.
Demand: Willingness and ability to purchase goods and services.
- Example: Window shopping indicates a lack of demand as customers show interest but lack purchasing power.

Demand is inversely related to price; as prices increase, quantity demanded tends to decrease—this is referred to as the law of demand.
- Graphical representation shows a downward slope because higher prices decrease purchasing power.

Shift in demand can occur due to non-price factors, including:
- Changes in consumer income.
- Changes in consumer preferences or tastes.
- Emergence of substitutes and complements.

Change in Quantity Demanded: Caused solely by price changes; results in movements along the original demand curve.
Change in Demand: Caused by non-price factors; results in shifting the entire demand curve to the right (increase) or left (decrease).

Substitute goods: When the price of one good rises, demand for its substitute increases.
- Example: Increase in pizza prices leads to greater demand for hamburgers.
Complementary goods: When the price of one good rises, demand for its complement decreases.
- Example: Increase in cookie prices results in lower demand for milk.

Market Response to Natural Events: If severe weather is anticipated, consumers may stockpile resources, shifting the demand curve even if prices remain unchanged.
Expectation of Future Prices: Anticipating future price increases leads to higher current demand. Conversely, expecting price drops leads consumers to delay purchases, decreasing current demand, often leading to economic downturns.

Understanding the distinction between changes in quantity demanded and changes in demand is crucial for economic analysis.
A holistic view of both supply and demand, and their interactions through various factors, reinforces the foundational aspects of economic theory and practice.