Unit 1 Notes

Microeconomics VS. Macroeconomics:

• Microeconomics: it is the study of how households and firms make decisions and how they interact in the market
• ex.) supply & demand ; market structures
• Macroeconomics: it is the study of major components of the economy 
• ex.) inflation ; wage laws ; and international trade

Positive Economics VS. Normative Economics:

• Positive Economics: claims that attempts to describe the world as is. Very descriptive in nature.
• ex.) minimum wage laws causes unemployment
• Normative Economics: claims that attempt to prescribe how the world should be. It is very prescriptive in nature
• ex.) government should raise the minimum wage

Wants VS. Needs:

• Wants: desire
• Needs: basic requirements for survival

Scarcity VS. Shortage:

• Scarcity: most fundamental economic problem facing all societies; how to satisfy unlimited wants with limited resources
• Shortage: quantity demanded is greater than quantity supplies

2 Types of Goods:

• Goods: tangible commodities
• Capital Goods: items used in the creation of other goods
• ex.) factory machinery ; trucks
• Consumer Goods: goods that are intended for final use by the consumer
• ex.) hamburger

What is a Service:

• Services: cannot be touched or felt ; work that is performed for someone

4 Factors of Production:

1. Land: natural resources
2. Labor: work exerted
3. Capital: -Human: skills acquired or knowledge ; -Physical: machinery or equipment
4. Entrepreneurship: must involved risk taking

What is Opportunity Cost:

• Opportunity Cost: the most desirable alternative given up by making a decision

Graphs: 

• Production Possibility Graph (PPG): to show alternative ways to use resources ; each point on the graph shows a trade off
• Production Possibility Curve (PPC)
• Production Possibility Frontier (PPF)

• Increasing Opportunity Cost: the opportunity cost of producing an additional unit of a product increases as more of that product is produced
• Graphs are concave - bowed out

4 Assumptions can be Made:

1. Have fixed resources
2. Fixed technology
3. Full employment and productive efficiency
4. Two products are being considered

Productive Efficiency and Allocative Efficiency 

• Productive Efficiency: producing at the lowest cost
• have to allocate resources efficiency and have full employment of resources 
• Allocative Efficiency: a combination of most desired by society or those in change of economic decision

Why PPC shifts to the Right:

• Technological advancement
• New resources
• Trade (comparative advantage)

Why PPC Shifts to the Left: 

• Decrease in labor force, workskills, education levels
• Permanent loss of productive capacity (taxes, war, government regulations)

3 Types of Movement Occur with the PPC

1. Inside the PPC: unemployment (deals with people) ; under employment of resources
2. Outside the PPC: economic growth ; improvement in technology
3. Along the PPC: ceteris paribus (conditions remain the same)

Demand and Supply:

• Demand: is the quantities that people are willing and able to buy at various prices
• The Law of Demand: there is an inverse relationship between price and quantity demanded 
• What causes a "change in quantity demanded?": a change in price
• What causes a "change in demand?":
• Δ in the number of buyers (population)
• Δ in buyers taste (advertising)
• Δ in income (normal goods / inferior goods)
• Δ in the price of related goods (substitute goods / complimentary goods)
• Δ in expectations

• Supply: is the quantities that producers or sellers are willing and able to produce/sell at various prices
• The Law of Supply: there is a direct relationship between price and quantity supplied
• What causes a "change in quantity supplied?": a change in prices
• What causes a "change in supply?":
• Δ in resource prices
• Δ in technology
• Δ in weather
• Δ in taxes or subsidies
• Δ in the number of supplies/sellers
• Δ in expectations

Example: 

What is Elasticity of Demand:

• A measure of how consumers react to change in price
• Elastic Demand: demand that is very sensitive to a change in price
• E > 1
• ex.) soda, steaks, coffee
• Inelastic Demand: demand that is not very sensitive to a change in price
• E < 1
• ex.) gas, milk, sugar, salt, insulin
• Unit Elastic or Unitary Elastic Demand:
• E = 1

Equations:

Total Revenue: it is the total amount of money a firm receives from selling goods and services
Fixed Costs: cost that does not change no matter how much is produced (salaries, mortgage, car note)
Variable Costs: a cost that rises or falls depending upon how much is produced (electricity, water, etc.)
Marginal Costs: is the cost of producing one additional unit of a good
Marginal Revenue: it is the additional income from selling one more unit of a good 

• PED (Price Elasticity of Demand) = percentage change in quantity demand / percentage change in price 
• TR = PxQ
• AFC = TFC/Q
• AVC = TVC/Q
• ATC = TC/Q or AFC+AVC
• MC = new TC-old TC
• TVC = TC-TFC
  
  Table: