Unit 1

Economics- social science that examines how individuals, institutions, and society make optimal choices under conditions of scarcity. REMEMBER SCARCITY. Something is scarce if there's limited amount of it and it is valuable.

Macro vs Microeconomics:

• Macro looks at economy as a whole or major aggregates
• i.e. We might lump together all consumers in US economy and treat them as one unit called "consumers"
• Micro looks at specific economic units
• i.e. We might look at decision making of individual consumers, households, etc

Positive vs Normative Economics:

• Positive: focuses on facts and cause/effect relationships, deals with what economy is actually like
• Ex: Employment in France is higher than US
• Normative: incorporates value judgments on what economy should be like
• Ex: France ought to make labor market more flexible to reduce unemployment

Economizing problem

• Constant struggle between our unlimited wants and our limited resources
• Whenever unlimited wants chases limited resources, there will necessarily be a cost
• ***Cost doesn't have to be money.

Opportunity Cost

• Opportunity cost is the next best alternative
• Ex. If John can either watch a movie, party, or study. If he chooses to study, then his opportunity cost is next best thing which is a personal one because it might differ from person to person. The trade-off is everything aside from his choice which would be watching a movie and partying.

Resources: (Factors of Production)

1. Land (Natural resources)- water, air, raw materials which are scarce. We make products out of natural resources
2. Labor (Human resources/capital)- limited amount of people in labor force
3. Capital- man-made goods that produce goods for future consumption like equipment, machinery, etc. It does NOT mean money
4. Entrepreneurship- individual willing to take risk to start a business

Production Possibilities Curve- shows possible combinations of goods and services that can be produced

 

• Points on the frontier represent efficiency and full employment
• Points inside the frontier represent inefficiency, unemployment
• Points outside the frontier are currently unattainable
• An increase in productive resources will shift curve outward.

Absolute vs Comparative Advantage

• Absolute- a country can produce more of a commodity than another country
• Comparative- a country can produce a commodity at a lower opportunity cost than another country

Specialization- more efficiency: If a country can produce a commodity at a lower opportunity cost than it should produce it. If there isn't comparative advantage, then there is no incentive to trade.

Law of Demand- If price rises, then quantity demanded decreases and if price falls, then quantity demanded increases

Determinants of Demand: (Remember TIMER)

• Change in Taste/preferences
• Change in consumer Income
• If income goes up, demand for inferior goods go down
• Change in Market size
• Change in Expectations
• If we think future incomes will go up, then our demand goes up today
• If we expect future prices to go up, then we increase demand for goods today
• Change in Related goods
• Complementary goods- goods that purchased together like hamburgers and buns
• Substitute goods- goods that can substitute each other like Coke and Pepsi

Law of Supply- If price of goods rises, then quantity supplied increases and if price falls then quantity supplied decreases

Determinants of Supply: (Remember ITGONE)- Anything that increases cost of production decreases supply!

• Changes in prices of Inputs
• Changes in Technology
• Government tools
• taxes- if gov increase taxes on businesses, profits go down, so supply goes down
• subsidies- gov give money to lower production cost, profits go up, so supply goes up
• regulations- increases cost of production, so supply goes down
• Changes in the price of Other goods
• if you make more of one good, you're going to make less of another
• Changes in Number of suppliers
• if there are more suppliers, there will be more goods supplied
• Changes in producer Expectations
• future prices might cause a supplier to decrease or increase supply

Market Equilibrium- where demand equals supply

Surplus- quantity supplied is greater than quantity demanded

Shortage- quantity demanded is greater than quantity supplied

Government Regulations:

• Price floors- gov sets market price above the equilibrium price creating a surplus. Ex. min wage
• Price Ceilings- gov set price below the equilibrium price creating a shortage. Ex. rent control creates shortages because everyone wants them