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
Land: natural resources
Labor: work exerted
Capital: -Human: skills acquired or knowledge ; -Physical: machinery or equipment
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
Have fixed resources
Fixed technology
Full employment and productive efficiency
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
