Economics

Construction of a Graph

  • Graph - A visual representation of the relationship between two variables; Horizontal Axis, Vertical Axis, Independent Variable, Dependent Variable, and Ceteris Paribus

  • Direct Relationship: Both Variables move in the same direction

  • Upward sloping to the right is always going to be a positive

  • Intercept - A point where an axis is touched

  • Scatter Graph - Just points

  • Any line on a graph is classified as a curve

  • Inverse Relationship - Usually downward sloping curves, also usually negative

Slope

  • Slopes and measurement units

  • Slopes and Marginal Analysis

  • Infinite and zero Slopes

  • Slope = Rise/Run (your rise is the vertical change, the run is horizontal)

  • The slope between any two points on a straight line is always the same

  • Downward-sloping curves will always have to be negative

Wealth of Nations 1776 - Adam Smith

The Economic Perspective

  • Economics is a social science concerned with making optimal choices under conditions of scarcity

    • Economic wants exceed society’s productive capacity

  • A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal cost

    • Considers; Scarcity and choice, opportunity cost, purposeful behavior to increase utility, and marginal analysis

      • Opportunity cost: is the next best decision

      • Rational Self Interest, Individuals, and Utility

      • Firms and profit

      • Desired outcome

  • Marginal Analysis

    • The comparison of marginal benefits and marginal costs, usually for decision-making

      • Marginal means “extra” or “Additional”

  • The Scientific method is the procedure for the systematic pursuit of knowledge involving the observation of facts and the formulation of testing hypotheses to obtain theories, principles, and laws.

    • Consists of Observation, formulation of a hypothesis, testing, acceptance/rejection/modification of hypothesis, and the continuation of tests if necessary

  • Generalizations

    • Other-things-equal assumptions: the assumption that factors other than those being considered did not change (also called the “ceteris paribus assumption”)

    • Graphical expression

  • Microeconomics - The study of individual consumer, firm, or market

  • Macroeconomics - The study of the entire economy or a major aggregate of the economy

  • Positive economics - Economic statements that are factual

  • Normative Economics - Economic statements that involve a value judgment

The Economizing Problem

  • The economizing problem - limited income, unlimited wants

  • The Budget Line

    • Attainable and unattainable combinations

    • Trade-offs and opportunity costs

  • Four categories of economic resources:

    • Land - All natural resources used in the production process

    • Labor - Physical actions and mental activities that people contribute to production

    • Capital (investment) - All manufactured aids used in production

    • Entrepreneurial Ability - Special human resource distinct from labor

  • Functions of Entrepreneurs

    • Take initiative

    • Make strategic business decisions

    • Innovate

    • Take risk

Production Possibilities Model: Overview

  • An economic model that shows different combinations of two goods that an economy can produce

    • Assumptions:

      • Full employment

      • Fixed resources

      • Fixed technology

      • Two goods

        • Consumer Goods

        • Capital Goods

  • Law Of increasing opportunity Cost - As more of a particular good is produced, its marginal opportunity cost increases

    • Production Possibilities curve

      • Conclave shape

      • Economic rationale

    • Optimal Output: Marginal Benefit = Marginal Cost

Demand, Supply, and Market Equilibrium - Chapter 3

  • Interaction between buyers and sellers

    • Markets may be local, national, or international

    • Price is discovered in the interactions between buyers and sellers

  • A schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during specified periods

    • Demand schedule (table) or demand curve (graph)

    • Amount consumers are willing and able to purchase at a given price assuming the following is Market Demand

      • Other things are equal

      • Individual demand

  • Law of Demand - Other things equal, as the price falls, the quantity demanded rises, and as the price rises, the quantity demanded falls (inverse relationship)

    • Price acts as an obstacle to buyers

    • Law of diminishing marginal utility (how valuable is it?)

    • Income effect and substitution effect

  • Determinants of Demand

    • Change in consumer tastes and preferences

    • Change in the number of Buyers

    • Change in income (Normal and inferior goods)

    • Price = (taste/Preferance)(number of buyers)(changes in income)(price related goods)(consumer expectations)

    • Changes in price of related goods

  • Supply

    • A schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of series of possible prices during a specified period of time

      • Supply Schedule or a Supply Curve

      • Amount producers are willing and able to sell at a given price

      • Individual supply

      • Market Supply

  • Law of Supply

    • Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls

      • Price acts as an incentive to producers

      • At some point, costs will rise

  • Determinants of Supply

    • Change is resource prices

    • change in technology

    • change in the number of sellers

    • change in taxes and subsidies

    • change in prices of other goods

    • change in producer expectations

    • PAGE 54 STUDY CHART

  • Market Equilibrium

    • Equilibrium occurs when the demand curve and supply curve intersect

    • Equilibrium price and equilibrium quantity

    • Surplus and shortage

    • Rationing function of Prices

      • The ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent.

    • Efficient allocation

      • Productive Efficiency

        • Producing goods in the least costly way

        • Using the best technology

        • Using the right mix of resources

      • Allocative efficiency

        • Producing the right mix of goods

        • the combination of goods most highly valued by society

  • Price Ceiling

    • Set below the equilibrium price

    • Rationing problem

    • Black markets

      • I.E. Rent Control

  • Price Floor

    • Prices are set above the market price

    • Chronic Surpluses

      • I.E. Minimum Wage

Elasticity

  • Price Elasticity of Demand

    • Measures Buyers’ responsiveness to price changes

      • Elastic demand - Sensitive to price changes, large changes in quantity demanded

      • Inelastic Demand - Insesntitive to price changes, small changes in quantity demanded

  • Price Elasticity Coefficient

    • E^d = Percent change in quantity demanded of product X OVER Percent change in price of product X

  • Midpoint Formula

    • E^d = Change in quantity OVER sum of quantities/2

  • Interpretation of Elasticity of Demand

    • E^d > 1 demand is Elastic

    • E^d = 1 demand is unit elastic

    • E^d < 1 demand is inelastic

      • EXTREME CASES:

        • E^d = 0 Demand is perfectly inelastic

        • E^d = Infinity … demand is perfectly elastic

  • Total Revenue Test Overview

    • Total Revenue = Price x Quantity

    • Total Revenue Test

      • Inelastic Demand: Price and Total Revenue move in the same direction

      • Elastic Demand: Price and Total Revenue move in opposite directions

  • Total Revenue Test with Elastic Demand

    • Lower Price and Elastic Demand

    • Gain exceeds loss

Money

  • Money is anything that serves as a medium of exchange

    • a medium of exchange is anything that is widely accepted as a means of payment

    • barter - direct exchange of goods for other goods

    • Unit of Account - Is a consistent men’s of measuring the value of things

    • Store of value - an item that holds value overtime