Unit I Notes

Unit I

 Macroeconomics Vs. Microeconomics

-Macroeconomics: The study of the economy as a whole. 

“Looking at the big picture”

-          Inflation, international trade, and wages

-  Microeconomics: The study of individual or specific units of the economy. 

“Looking at the trees but not the forest”

-          Supplied and demand, Market structure: monopoly, competition

-          Business organization: corporations

·      Positive Economics Vs. Normative Economics

-  Positive Economics: Attempts to describe the world as is.

“Fact based”

-          It is very descriptive.

-          It thrives on "what is"

-          Collects and presents facts
- Example: Oil dropped in price from $3.00 to $2.00 in the past month.

-  Normative Economics: Attempts to describe the world should be.

“Opinion based”

- The national minimum wage should be raised.

·      Needs Vs. Wants

-  Needs: Basic requirements for survival. 

-  Example: food, shelter, water, and clothing

-  Wants: Desires of citizens. 

“You don’t need it but you still want it”

·      Goods Vs. Services

-  Goods: tangible commodities.

“Something you can feel or touch”

-Capital goods: Items used in the creation of other goods.

            -Example: tires, windows on a car, etc. 

-Consumer goods: Goods that are intended for final use by the consumer.

-  Services: Work that is performed for someone. 

-Example: restaurant, barber shop, etc.

·     Scarcity Vs. Shortage

-  Scarcity: The most fundamental economic problem that all societies face.

- How to satisfy unlimited wants with limited resources.

-Example: Oil

- Shortage: Quantity demanded is greater than the quantity supply.

·      Factors of Production: 

1.       Capital: 2 types(Human and Physical)

-  Human capital: Knowledge, skills, abilities, and talents that are gained through education and work experience.

-  Physical capital: Tools, machines, and robots.

2.       Entrepreneurship (innovative risk taker) 

3.       Land: natural resources

4.       Labor: The work force 

·      Trade Off: Alternatives that we give up when we choice one course of action over another.

·       Opportunity Cost: Next best alternative

 

Production Possibilities Graph(PPG): Shows alternative ways to use an economy's resources.

• 4 Assumptions
1. Two goods
2. Fixed resources(land, labor, capital, and entrepreneurship)
3. Fixed technology
4. Full employment of resources

Efficiency: Using resources in such a way to maximize the production of goods and services.

Allocative Efficiency: The products being produced are the ones most desired by society.

Productive Efficiency: Products are being produced in the least costly way and is any point on the Production Possibility Curve. 

Underutilization: Using fewer resources than an economy is capable of using. 

Production Possibilities Frontier(PPF):

Point A: Inside the curve

-Attainable but inefficient

-Underutilization

Points B, C, and D: On the curve

-Attainable and efficient

Point X: Outside the curve

-Unattainable

3 Types of Movement that occur within the PPC:

1. Inside the Curve

-Occurs when resources are underemployed or unemployed.

2. Along the PPC

3. Shifts of the PPC

What causes the PPC/PPT to shift?

1. Technological changes

2. Economic growth

3. Change in resources

4. Change in the labor force

5. Natural diseases/war/famine

6. More education and training(human capital) 

Elasticity of Demand: A measure of how consumers react to a change in price.
Elastic demand: Very sensitive to a change in price, (E>1), product is not a necessity, and there are available substitutes.

•     Examples: Soda, steaks, candy, and fur-coats.

Inelastic demand: Not very sensitive to a change in price, (E<1), the product is a necessity and there are few or no substitutes, and people will buy it no matter what.

•     Examples: Gas, salt, milk, insulin, medicine, and toothpaste.

Unitary demand: E=1

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: % change in quantity demanded/ % change in price

Total Revenue: The total amount of money a firm receives from selling goods and services.

• Price * Quantity = Total Revenue

Fixed Cost: A cost that does not change no matter how much is produced.

• Rent, mortgage, insurance, and salaries.

Variable Cost: A cost that rises or falls depending upon how much is produced.
Marginal Cost: Cost producing one more unit of a good.
Formulas:

• TFC + TVC = TC
• AFC + AVC = ATC
• TFC / Q = AFC
• TVC / Q = AVC
• TC / Q = ATC
• TFC = AFC * Q
• TVC = AVC * Q
• MC = NTC-OTC

Demand: The quantities that people are willing and able to buy at various prices.

• The Law of Demand: States there is an inverse relationship between price and quantity demanded (As price decreases, quantity decreases) and (As price decreases, quantity increases). 
• A "change in quantity demanded" is caused by a change in price.
• A "change in demand" is caused by 
• Change in buyer's taste (advertisement)
• Change in the # of buyers (population)
• Change in income (normal goods and inferior goods)
• Change in the price of related goods (complementary goods and substitute goods)
• Change in expectations

Supply: The quantities that producers or sellers are willing and able to produce at various prices.

• The Law of Supply: States there is a direct relationship between price and quantity supplied (As price increases, quantity increases) and (As prices decreases, quantity decreases). 
• A "change in quantity supplied" causes a change in supply.
• A "change in supply" is caused by
• Change in weather
• Change in the # of suppliers/sellers
• Change in technology
• Change in taxes or subsidies
• Change in the costs of production
• Change in expectations

Supply Curve Shifts to the Left:

• Increase in cost of production
• Decrease in technology
• Increase in taxes
• Decrease in subsidies
• Decrease in # of sellers
• Decrease in weather

Supply Curve Shifts to the Right:

• Decrease in cost of production
• Increase in technology
• Decrease in taxes
• Increase in subsidies
• Increase in # of sellers
• Increase in weather

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. For example, 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 he quantity demanded.  This will result in a surplus, where producers have inventories they cannot get rid of.
• Price floor is 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.

Business Cycle Terms:

• Peak: Highest point of real GDP.
• Greatest amount of spending and lowest amount of unemployment.
• Inflation becomes a problem in this phase.
• Expansion(Recovery Phase): Real GDP is increasing due to an increase in spending and a decrease in unemployment.
• Contraction/Recession: Real GDP declines for six months due to a reduction in spending and increasing unemployment. 
• Trough: Lowest point of real GDP.
• Least amount of spending and highest unemployment.