Unit 1

Microeconomics VS. Macroeconomics

Micro: it is the study of how households and firms make decisions and how they interact in the market

ex.) supply & demand ; market structures

Macro: it is the study of major components of the economy 

ex.) inflation ; wage laws ; and international trade

Positive Economics VS. Normative Economics

Positive: claims that attempts to describe the world as is. Very descriptive in nature.
ex.) minimum wage laws causes unemployment

Normative: 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

Want: is a desire
Need: 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
Increasing Opportunity Cost: the opportunity cost of producing an additional unit of a product increases as more of that product is produced

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)

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 Allocated Efficiency

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

PPC shifts to the Right

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

PPC Shifts to the Left

- Decrease in labor force (work skills, education levels)
- Permanent loss of productive capacity (taxes, war, government regulations)

3 Types of Movement 

Inside the PPC: unemployment (deals with people) ; under employment of resources
Outside the PPC: economic growth ; improve technology
Along the PPC: ceteris paribus - all 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
Causes a "change in quantity demanded?": Δ in price
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?": Δ 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 expectation

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; not mant suvstitutes

• E < 1

ex.) gas, milk, sugar, salt, insulin

Unit Elastic or Unitary Elastic Demand:

• E = 1

Equations 

Total Revenue (TR): 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 (salaris, 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: 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