Chapter 3 Lecture Notes

Production Possibility Frontiers (PPF)
- Definition: Graphical representation that shows the maximum output possibilities of two goods that a society can produce given available resources and technology.
- Description of combinations of goods that can be produced.
- Production Efficiency:
  - Points along the PPF are efficient.
  - Cannot produce more of one good without producing less of another.
- Marginal Cost (MC) vs. Marginal Benefit (MB) and how to draw them.
- Gains from Trade:
  - Occurs when entities specialize in producing goods for which they have a comparative advantage and then trade.
- Specialization:
  - The process of focusing resources on producing a limited range of goods to gain efficiency.
- Economic Growth:
  - Increase in the capacity to produce goods and services over time.

All points along the PPF indicate productive efficiency.
To determine the appropriate quantities to produce, costs and benefits must be compared.
Opportunity Cost:
- Defined by the PPF; the marginal cost of a good or service equals the opportunity cost of producing one more unit.

Increasing Opportunity Cost of Pizza:
- As more units of pizza are produced, more cola must be sacrificed, illustrating rising marginal costs.
Marginal Cost of Pizza Consumption:
- As the number of pizzas produced increases, the cost (in terms of cans of cola) also increases.

Leisure Island's Production Possibilities:
- Labor (hours): 0, 10, 20, 30, 40, 50
- Entertainment (shows per week): 0, 2, 4, 6, 8, 10
- Good food (meals per week): 0, 5, 9, 12, 14, 15

To achieve gains from trade, individual decisions must be coordinated.
Firm:
- An economic unit that hires factors of production and organizes them to produce goods and services.
Market:
- Any arrangement that enables buyers and sellers to communicate and transact.
Property Rights:
- Social arrangements governing ownership and use of resources and goods.
Money:
- A widely accepted medium of exchange usable for transactions.

Households and firms interact within the market economy, with factors of production and goods/services flowing in one direction while money flows in the opposite.
Markets Coordinate Decisions:
- Prices adjust to mediate individual decisions.

Definition of Demand:
- 1. Want it,
- 2. Can afford it,
- 3. Have made a definite plan to buy it.
Scarcity indicates demand reflects a decision about which wants to satisfy.
Quantity demanded is the amount consumers plan to purchase at a specific time and price.

Law of Demand:
- Ceteris Paribus: If the price of a good increases, the quantity demanded decreases; if the price decreases, the quantity demanded increases.
Reasons for Changes in Quantity Demanded:
- Substitution Effect: Higher prices lead consumers to seek substitutes, reducing the quantity demanded.
- Income Effect: As prices increase, consumer purchasing power diminishes, leading to a decrease in quantity demanded.

The demand curve illustrates the relationship between quantity demanded and price.
An increase in price leads to a decrease in quantity demanded (movement up the demand curve).
Decrease in price leads to an increase in quantity demanded (movement down the demand curve).
Willingness to Pay:
- Demand curve also functions as a willingness-and-ability-to-pay curve.

A change in factors other than price results in a change in demand, shifting the demand curve.
Factors affecting demand include:
- Prices of Related Goods:
  - Substitutes: Goods that can replace each other.
  - Complements: Goods that are consumed together.
- Expected Future Prices:
  - Anticipating an increase in future prices can increase current demand.
- Income Changes:
  - Normal goods: Demand increases with rising income.
  - Inferior goods: Demand decreases with rising income.
- Population and Preferences:
  - Larger population increases demand, different preferences lead to varied demands at the same income levels.

Definition of Supply:
- Reflects the amount a firm is willing to sell, given its resources and technology.
Law of Supply:
- Ceteris Paribus: Higher prices result in greater quantities supplied, while lower prices result in decreased quantities supplied.
Supply Curve and Supply Schedule:
- Illustrates the relationship between quantity supplied and price.

Prices of Factors of Production:
- Rising costs of production factors increase supply prices and decrease supply.
Prices of Related Goods in Production:
- Changes in prices of substitutes or complements affect supply levels.
Expected Future Prices:
- Expectations of future price increases can lead to current supply decreases.
Number of Suppliers:
- Increasing the number of suppliers will increase available supply.
Technological Advancements:
- Innovations may increase supply through lower production costs.
Natural Conditions Impacting Supply:
- External natural factors (weather, disasters) can affect supply.

Equilibrium Definition:
- A balanced state where quantity demanded equals quantity supplied at a specific price.
Adjustments to Equilibrium:
- Surpluses force prices down; shortages force prices up.
Effects of Demand and Supply Changes on Equilibrium:
- Shifts in demand or supply affect the equilibrium price and quantity.

Address theory through practical scenarios related to demand and supply queries using provided data equations, ultimately reaching equilibrium price (P) and quantity (Q).