UNIT 1:

Unit 1: Scarcity, Factors of Production, Production Possibilities Graphs, Supply and Demand, Business Cycle 

January 5, 2016

Unit #1 – Introduction to Economics

Economics:

• The study of how society manages its scarce resources.
• All about science

Macroeconomics:

1. Money
2. Trade
3. Budget

• Ex: International trade, supply: demand, minimum wage 

Microeconomics:

• The study of the economy as a whole or of individual or specific units of the economy.
• Ex: Market, Business organization

Positive Economics: (Fact)

• Attempt to describe the world as it is
• Very descriptive
• Collects + present facts

Normative Economics: (Opinion)

• Attempts to prescribe how the world should be
• “ought to be”
• “should be”
• Ex: Government should raise minimum wage

Needs:

• Basic requirements for survival.

1. Food
2. Water
3. Shelter
4. Clothing

Wants:

• Desires of citizens.

Goods:

• Tangible Commodities

     Capital Good: Items used in the creation of other goods

         Ex: Trucks, Machinery, Factories

     Consumer Good: Goods that are intended for final use by the consumer

Services:

• Work that is performed for someone
• Ex: Concerts, barbershop

Scarcity:

• The most fundamental economic problems that society faces.
• How to satisfy unlimited wants with limited resources
• Ex: Oil

Shortage:

• Quantity demanded is greater than quantity supplied.

January 6, 2016

Unit #1 – Production Possibility Graph

Factors of Production:

• Resources required to produce goods and services.

1. Land
2. Labor
3. Capital     Physical Capital: Tools, factories, machines. Human Capital: Skills, abilities, knowledge, talents
4. Entrepreneurship: Innovative, risk-taker  Human Capital: Skills, abilities, knowledge, talents

Tradeoffs:

• Alternatives that we give up whenever we choose over another.

Opportunity Cost:

• The next best alternative.
• The money, time, resources a person gives up to make a final decision.
• Ex: Cranberry juice -> Orange juice -> water

Production Possibility Curve    (PPC)

Production Possibility Frontier (PPF)

Production Possibility Graph    (PPG)

• To show alternative ways to use an economy’s resources.

4 Assumptions of a PPG:

1. Two goods/resources
2. Fixed Resources (Land, labor, capital, entrepreneurship)
3. Fixed technology
4. Full employment of resources

Efficiency:

• Using resources in such a way as to maximize the production of goods and services.

Allocative Efficiency:

• Where products being produced are the ones that are most desired by society.

Productive Efficiency:

• Products are being produced in the least costly way.

Underutilization:

• Using fewer resources than the economy is capable of using.

Point A: Inside of the curve:
  1.) Attainable but inefficient
  2.) Underutilization

Point B : On the curve: 
  1.) Attainable &
  2.) Efficient 

Point C: Outside of the curve:
  1.) Unattainable

3 Movements of the PPC:

1. Inside the PPC/ curve (Occurs when resources are unemployed or underemployed.)
2. Along the PPC 
3. Shifts of the PPC

What causes the PPC/PPF to shift?

1. Technological changes
2. Change in resources
3. Economic growth
4. National disasters/ war/ famine
5. Change in labor force
6. More education (Ex: Training (Human capital))

January 13, 2016

Unit #1: Elasticity & Demand 

Elasticity & Demand:

• It is a measure of how consumers react to a change in price.

   Elastic Demand:

• Demand that is very sensitive to a change in price.
• Always greater than 1 (E>1)
• Product is not a necessity
• Available substitutes

   Inelastic Demand:

• Demand that is not very sensitive to change in price.
• Always less than 1 (E<1)
• Product is a necessity
• Few to no substitutes
• People will buy no matter what

   Unit/Unitary Elastic:

• Always equal to 1 (E=1)

      Elastic Demand                Inelastic Demand   

 Soda -> water                           Insulin/Medicine

 Steaks -> chicken                              Gas

 Candy -> cookies                               Salt

 Fur coat -> feather                             Milk

  

Price Elasticity of Demand (PED) 

Step 1: Quantity              (New quantity – Old quantity)

                                                        Old quantity

Step 2: Price                         (New price – Old Price)

                                                         Old Price

Step 3: PED                      (% ∆ in Quantity demanded)  

                                                                                          = PED

                                                      % ∆ in Price

January 14, 2016

Unit #1:Costs of Production

Total Revenue: 

• The total amount of money a from receives form selling goods and services.
• PXQ= TR

Fixed Cost: 

• A cost that does not change no matter how much is produced.
• Ex: Rent, mortgage, insurance, salaries

Variable Cost: 

• A cost that rises or falls depending upon how much is being produced.
• Ex: Electricity bill

Marginal Cost: 

• The cost of producing 1 or more units of a good.

TC = TFC + TVC

ATC = AFC + AVC

AFC = TFC / Q

AVC = TVC/Q

ATC = TC/ Q

TFC = AFC* Q

MC = new TC - old TC

TVC = AVC*Q

January 20, 2016

Unit #1: Supply & Demand

Equilibrium:

• The point at which the supply curve and the demand curve intersect. 
• At this point, all resources are being efficiently used.

Excess Demand: 

• Occurs when the quantity demanded is greater than the quantity supplied. 
• This will result in shortages, where consumers cannot get the quantities of items that they desire.

Price ceiling creates a shortage.  A price ceiling occurs when the government puts a legal limit on how high the price of a product can be.  In order for a price ceiling to be effective, it must be set below equilibrium.

Ex: The government sets a price ceiling on flu shots and shots are sold for less than what they are worth; therefore creating a shortage of flu shots. 

Ex: Rent control (New York & San Francisco)

Excess supply:

• Occurs when the quantity supplied is greater than the quantity demanded. 
• This will result in a surplus, where producers have inventories they cannot get rid of.

Price floor: 

• The lowest legal price a commodity can be sold at.
•  A price floor creates a surplus. 
• Price floors are used by the government to prevent prices from being too low. 
• The most common price floor is the minimum wage.

January 21, 2016
Unit #1: Business Cycle Phases

Peak:

• The highest point of real GDP. 
• it exhibits the greatest amount of spending and the lowest amount of unemployment.
• in this phase, inflation becomes a problem. 

Expansion:

• Real GDP is increasing.
• As a result of spending increasing & unemployment decreasing. 

Contraction/ Recession:

• Where real GDP declines for 6 months.
• In this phase, you having increasing unemployment and a decreasing in spending. 

Trough:

• Lowest point of real GDP - which includes the highest amount of unemployment and the least amount of spending.