UNIT 1: Basic Concepts of Economics

Microeconomics v. Macroeconomics

• Macro: the study of the major components of the economy
• Ex: inflation, wage laws, international trade
• Micro: the study of how households and firms make decisions and how they interact in markets
• Ex: supply and demand, market structures

Positive v. Normative Economics

• Positive: attempts to describe the world as it is; descriptive
• ex: minimum wage causes unemployment
• Normative: how the world should be, prescriptive
• ex: the government should raise minimum wage

Needs v. Wants

• Needs: basic requirements for survival
• ex: food, water, clothes
• Wants:a desire
• ex: technology

                        versus                      

Scarcity v. Normative:

• Scarcity: the most fundamental problem facing all societies. Satisfying unlimited wants with limited resources. Wants are infinite
• ex: gas
• Shortage: situation in which quantity demanded is greater than quantity supplied
• ex: buying juice 

Goods v. Services

• Goods: a tangible commodity
• 2 types
• Capital: item used in the creation of other goods
• ex: factory machinery, trucks
• Consumer: goods intended for final use by consumer
• ex: hamburger
• Services: work performed for someone else

4 Factors of Production

1. Land: natural resource
2. Labor: the work force, how much work is exerted
3. Capital
1. Human: knowledge and skills a worker gains through education and expertise
2. Physical: human made objects used to create other goods and services
4. Entrepreneurship: risk taking, inventive, innovative

Production Possibility Graphs (PPGs)

• production possibilities graph: shows alternative ways to use resources
• PPC: production possibilities curve
• PPF: production possibilities frontier
• Opportunity cost: next best alternative; what you give up to get something else
• Ex. You normally order coke, but Taco Bell doesn't serve coke. Instead of coke, you order a pepsi.
• Productive efficiency: products are produced in least costly way
• any point on curve of PPC
• Allocative efficiency: products being produced are the ones that society most desires
• PPC shifting: 
• Left (inside PPC): permanent lost of productive capacity (war, taxes, government regulation, etc), decrease in labor force, work skills, education, unemployment, underemployed resources
• Right (outside PPC): technological advances, discover new resources, trade (comparative advantage), economic growth
• Along PPC
• centeris paribus: all things remain constant

* A and B represent shifting along the PPC curve (efficient)

*C represents shifting to the left (unefficient)

*D represents shifting to the right (unattainble)

• Law of increasing opportunity cost (Law of diminishing return): when switching production from 1 item to another, as you increase, a higher rate of cost will be necessary to continue increasing
• Graphs are concave (bowed out)
• 4 assumptions

1. fixed technology
2. fixed resources
3. full employment and productive efficiency
4. 2 products being considered

Demand and Supply

• Elasticity of demand: A measure of how consumers react to a change in price
• Elastic demand: demand that is very sensitive to a change in price
• Product is not a necessity, has several subsitutes
• E> 1
• Ex: Soda, Candy, Fur Coat, Steak
• Inelastic demand: Demand that isn't very sensitive to a change in price
• Product is a necessity, has few/no subsitutes
• E<1
• Ex: Salt, Milk, insulin
• Unitary demand
• E=1

Percent Change in Quantity

New quantity - Old quantity

__________________________

Old quantity

Percent Change in Price

New price - Old price

____________________

Old Price

Elasticity of Demand

| % change in quantity|

___________________

|% change in price|

• Total Revenue:  P * Q = TR (price * quantity)
• the total amount of money a firm receives from selling goods and services (Profits)

Production Cost

• Fixed cost: a cost that does not change no matter how much is produced
• ex: salaries, mortgage, car notes
• Variable cost: cost hat fluctuates or changes depending upon how much is produced
• ex: electricity bill, water bill
• Marginal cost: Cost of production 1 more additional unit of a good
• Ex: Making extra shirts for an additional price
• Total cost: Fixed cost + variable cost

Equations

• AFC= TFC/ Q
• AVC= TVC/ Q
• ATC= TC/Q or AFC+ AVC
• MC= New TC- Old TC

*Here is a video that demonstrates the process for calculating each variable in a Productions Cost Chart

• Price Ceiling: Set below equilibrium, sets maximum that can be paid for a product
• ex: rent control
• Price Floor: Set above equilibrium, sets minimum price that can be paid for a product

Business Cycle

• Average business cycle is 6 years
• Recession lasts about 14 months
• The bulk of the cycle is the growth stage
• Peak and Trough are meaningless because we cannot tell when we are in one or when it's over
• If a recession loses more than 10% of real GDP, then it's a depression
• Trough means end of succession
• 1 cycle is from Trough to Trough
• 6 month units are used or 2 quarters