unit 1 econ

1.1 scarcity

What is economics?

• Economics is the science of scarcity

• Scarcity - we have unlimited wants but limited resources

• Since we are unable to have everything we desire, we are unable to have everything we desire, we must make choices on how we will use our resources. 

Economics is the study of choices

Micro vs. macro 

MICROeconomics - 

Study of small economic units such as individuals, firms and markets

MACROeconomics-

 study of the large economy as a whole or economic aggregates 

How is economics used?

• Economists use the scientific method to make generalizations and abstractions to develop theories. This is called theoretical economics 

• These theories are then applied to fix problems or meaty economic goals. This is called policy economics 

Positive vs normative 

Positive statements - based on facts. Avoids value judgements (what is)

Normative statements - includes value judgements  (what ought to be)

Positive or normative?

1. The rising price of crude oil on world markets will lead to an increase in gas prices 

Positive

2. A rise in average temperatures will likely increase the demand for sunscreen products

Positive 

3. Pollution is the most serious economic problem 

Normative 

4. The government should ban smoking in public places

Normative 

5. Unemployment is more harmful than inflation 

Normative 

5 key economic assumptions 

1. Society has unlimited wants and limited resources (scarcity)

2. Due to scarcity, choices must be made. Every choice has a cost (a trade- off)

3. Everyone's goal is to make choices that maximize their satisfaction. Everyone acts in their own “self interest” 

4. Everyone makes decision by comparing the marginal costs and marginal benefits of every choice 

5. Real life situations can be explained and analyzed through simplified models and graphs 

MARGINAL ANALYSIS 

In economics the term marginal = additional 

Marginal analysis (aka: thinking on the margin) making decision based on increments 

Trade-offs vs. opportunity cost 

All decision involve trade-offs

Trades- off - ALL the alternatives that we give up when we make a choice 

Opportunity cost- The most desirable alternative given up when you make a choice 

Economic Terminology 

Utility = Satisfaction

Marginal = additional

Allocate= distribute 

Price vs cost 

What's the price? Vs how much does that cost?

Price= amount buyer (or consumer) pays

Cost= amount seller pays to produce a good

Investment 

Investment = the money spent by businesses to improve their productions

• Consumer goods- created for direct consumption 

• Capital goods - created for indirect consumption 

  • Goods used to make consumer goods 

The 4 factor of production 

All resources can be classified as one of the follow four factors of productions 

1. Land - all natural resources that are used to produce goods and services. 

2. Labor - any effort a person devotes to aa task for which that person is paid 

3. Capital -

•  Physical capital - any human-made resource that is used to create other goods and services

• Human capital - any skills or knowledge gained by worker through educations and experience 

4. Entrepreneurship - ambitious leaders that combine the other factors of productions to create goods and services 

Productivity

Productivity=  a measure of efficiency that shows the number of outputs per unit of input

Why do businesses and countries want to improve their productivity 

Since all resources are scarce,improving productivity allows us to produce more stuff with fewer resources 

1.2  Opportunity cost and the production possibilities curve 

The production possibilities curve 

Using economic models 

Step 1: explain the concept in words

Step 2: use numbers as examples

Step 3: generate graphs from numbers

Step 4: make generalizations using graph 

What is the production possibilities curve 

• A production possibilities curve (or frontier) is a model that showers alternative ways that an economy can use its scarce resources 

• This model graphically demonstrates scarcity trade-offs, opportunity costs, and efficiency 

4 key assumptions 

• Only two goods can be produced 

• Full employment of resources 

• Fixed resources ( ceteris paribus) 

• Fixed technology 

• Law of increasing opportunity cost- 

  • As you produce more of any good, the opportunity cost (forgone productions of another good) will increase 

  • Why? Resources are NOT easily adaptable to producing both goods 

Shifting the production possibilities curve 

Productions possibilities 

4 key assumptions revisited 

• Only two goods can be produced 

• Full employment of resources 

• Fixed resources (4 factors)

• Fixed technology 

What if there is a change?

3 shifters of the PPC 

1. Change in resource quantity 

2. Change in technology 

3. Change in trade 

1.3 Basic economic concept 

Topic 1.3- comparative advantage and gains from trade 

Specialization and trade

1. Assume people didn’t trade. What things would you have to go without 

The point: everyone specializes in the productions of goods and services and trades with others 

2. What would life be like if people in cities couldn’t trade with people in other states 

The point: more access to trade means more choices and a higher standard of living 

Absolute and comparative advantage 

Absolute and comparative advantage 

Absolute advantage 

• The producer that can produce the most output OR requires the least amount of inputs (resources)

Comparative advantage 

• The producer with the lowest opportunity cost 

Countries should trade if they  have a relatively lower opportunity cost 

They should specialize in the good that is “cheaper” for them to produce (the one they have a comparative adv)

Output questions vs. input questions 

Output questions 

• The amount of inputs like time,workers or other resources are the same for both countries. Only the output of each country is different 

Input questions 

• The amount of output, like cars,planes or corn are the same for both countries only the INPUTS for each country are different 

Terms of trade

Both countries can benefit from trade if they each have relatively lower opportunity costs

Terms of trade - the agreed-upon conditions that would benefit both countries 

Unit 1.4 - basic economic concepts 

Topic 1.4 demand

Demand defined

What is demand?

Demand is the different quantities of goods that consumers are willing and able to buy at different prices 

What is the law of demand 

There is an inverse relationship between price and quantity demanded 

Why does the law of demand occur?

The law of demand is the result of three separate behavior patterns that overlap

1. The substitution effect

2. The income effect

3. The law of diminishing marginal utility 

Why does the law of demand occur?

1. The substitution effect

• If the price goes up for a product, consumer buy less of that product and more of another substitute product ( and vice versa)

2. The income effect

• If the price goes down for a product, the purchasing power increases for consumer - allowing them to purchase more

Why does the law of demand occur?

3. Law of diminishing marginal utility 

• Utility = satisfaction 

• We buy goods because we get utility from them

• The law of diminishing marginal utility states that as you consume anything, the additional satisfaction that you will receive will eventually start to decrease

• In other words the more you buy of any good the less satisfaction you get from each new unit consumed 

The demand curve

• A demand curve is a graphical representation of a demand schedule

• The demand curve is downward sloping showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis)

• When reading a demand curve, assume all outside factors, susch as income are held constant

• A shift means that at the same prices, more people are willing and able to purchase that good 

This is a change in demand not a change in quantity demanded 

PRICE DOESN’T SHIFT THE CURVE

What causes a shift in demand 

5 shifters (determinats) of demand

1. Tastes and preferences

2. Number of consumers

3. Price of related goods

4. Income

5. Future expectations 

A change in price doesn’t shift the curve. It only causes movement along the curve

Prices of related goods

The demand curve for one good can be affected by a change in the price of another related good.

1. Substitutes are goods used in place of one another

• If the price of one increased, the demand for the other will increase (or vice versa)

2. Complements are two goods that are brought and used together 

• If the price of one increase, the demand for the other will fall ( or vice versa)

Income 

The income of consumer change the demand, but how depends on the type of goods

1. Normal goods

As income increases, demand increases

As income fall demand falls

2. Inferior goods

As income increases, demand falls

As income falls demand increases

Unit 1.5 basic economic concept 

Supply defined 

What is supply? 

Supply is the different quantities of a good that sellers are willing and able to sell (produce) at different prices

What is the law of supply? 

There is a direct (or positive) relationship between price and quantity supplied

• As price increases, the quantity producers make increases

• As price falls, the quantity producers make increases 

Why? Because profit-seeking firms have an incentive to produce more at higher prices.  

5 shifters (determinants) of supply 

1. Prices/availability

2. Number of sellers

3. Technology

4. Government actions: Taxes & subsidies

Subsidies

A subsidy is a government payment to a business or market. Subsidies cause the supply of a good to increase 

5. Expectations of future profit

A change in price doesn’t shift the curve. It only causes a movement along the curve

Topic 1.6 market equilibrium, disequilibrium, and changes in equilibrium 

Price signals 

Economist use the term “price signals” to describe how prives convey information and help society use scarce resources more efficiently 

Double shifts 

Suppose the demand for milk increased at the same time as production technology improved.

Double shift rule 

If two curves shift at the same time, either price or quantity will be indeterminate (ambiguous)