Unit 1

Introduction to economics

- Macroeconomics : The study of economics is concerned with large scale or general economic factors

• Examples: Inflation, GDP v GWP, supply and demand, business cycle

- Microeconomics : Study of how households and firms make decisions and how they may interact with the market

•  Examples : supply and demand, market structure

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

• Example : Minimum wage laws cause unemployment

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

• Example : Government should raise the minimum wage

- Wants vs. Needs

• Wants : Desires of citizens much broader than our needs 
• Needs : Basic for our survival

- Scarcity vs. Shortage

• Scarcity : Fundamental problem facing all society, how to satisfy a limited want with a limited resource
• Shortage : Quantity demanded greater than quantity supply

- Goods vs. Services

• Goods : tangible commodities 

1. Consumer goods : goods intended for final use by consumer 
2. Capital goods : Items used in the creation of other goods 

• Services : work that is performed for someone else

Factors of production

1. Land ( Natural resources)
2. Labor (work exerted)
3. Capital 

     - Human : knowledge and skills a worker gains through education and experience
     - Physical : human made objects used to create other goods
    4. Entrepreneurship : In venture/ risk taken

- Opportunity costs : Most desirable alternative given up by making a decision
- Production possibilities graph (PPG)

• Shows alternate ways to use resources

1. Only 2 goods can be produced 
2.  Full employment of resources
3. Fixed resources
4. Fixed technology

- Production Efficiency vs. Allocative efficiency

• Productive : Producing at the lowest cost 

       - Full employment of resources allocating resources efficiency

• Allocative : Combination most desired by society ( where to produce on curve)

- Law of increasing opportunity cost : When switching production from one item to another as you increase a higher rate of cost will be necessary to continue increasing.

Production Possibility Graph 
- Law of increasing opportunity : When resources are shifted from making one good or service to another, the cost of productivity, the second term increases.
       This occurs because not all resources are equally suited for the production of all goods and services.

 - Point "A" : Attainable but inefficient (Inside the curve)
Causes: war, famine, unemployment
- Point "B" "C" "D" : Attainable and efficient (On the curve)
- Point "X" : Inefficient (Outside of curve)
Causes : technology, economic growth


- Law of supply: direct relationship between price and quantity supplied
 * price increase = quantity increase

"Supply to the sky demand to the sand"
Supply 
 - The quantities that producers or sellers are willing and able to produce and sell at various prices.
Causes supply graph might shift

1. change in resource prices
2. change in technology or technique
3. change in tax or subsides
4. change in price of other goods
5. change in expectations
6. change in number of supplies
7. change in weather

Demand 
- The quantities that people are willing and able to buy at various prices
Causes that would change the shift in demand graph

1. Change in buyers taste
2. Change in number of buyers
3. Change in income
4. Change in price of related goods
5. Change in expectations

Shifting supply and demand

- Why graph would shift outward ?

1. Newly discovered land sources
2. Better education for employees

- Why graph would shift inwards?

1. Exhaustion of resources
2.  Famine, unemployment, war

Elasticity of demands 
Elastic :Substitute, luxury goods, always greater than one
Inelastic : Few substitutes, necessity, always less than one
Unitary elastic : Exactly one

The formula which determines whether the information is elastic or inelastic

1. Change in quantity and price : new - old / old
2. PEP : Change in quantity/ change in price

Price Ceiling and Price Floor
- Price ceiling : Minimum price for good/ service
   Example: Minimum wage
- Price floor : Maximum price that can legally be charged for good/ service
   Example: Rent control

Business Cycles

- Peak: Output is at it's highest point

- Trough: lowest point of real GDP

- Contraction: When the real output is decreasing

- Unemployment rate is rising

- One cycle is about six years long

-Recessions last about 14 months, if recession loses more than 10% of real GDP that is depression