Midterm Notes
Chapter 1

Economics – the study of the use of scarce resources to satisfy unlimited
human wants

Factors of Production – resources used to produce goods and services
frequently divided into the basic categories of land, labour, and capital
o Land – natural endowments (arable land, forests, lakes, crude oil,
and minerals)
o Labour – all mental and physical human resources, including
entrepreneurial capacity and management skills
o Capital – all manufactured aids to production, such as tools,
machinery, and buildings

Scarcity – the limited nature of society’s resources

Opportunity Cost – the value of the next best alternative that is forgone
when one alternative is chosen

Production Possibilities Boundary – a curve showing which alternative
combinations of output can be attained if all available resources are used
efficiently; it is the boundary between attainable and unattainable output
combinations
o Shows: Trade-offs, Opportunity Cost (moving along the line)
o Points within the curve represents unused resources
o Points outside the curve represent unattainable level of production

Specialization of Labour – the specialization of individual workers in the
production of particular goods or services

Division of Labour – the breaking up of a production process into a series
of specialized tasks, each done by a different worker

Barter – an economic system in which goods and services are traded
directly for other goods and services

Traditional Economy – an economy in which behaviour is based mostly on
tradition

Command Economy – an economy in which most economic decisions
are made by a central planning authority

Free-market Economy – an economy in which most economic decisions
are made by private households and firms

Mixed Economy – an economy in which some economic decisions are
made by firms and households and some by the government

Sunk Costs – a cost that has already been incurred and cannot be
recovered (if you drop out of University, the sunk cost is the tuition,
residence)

Economy – a system in which
scarce resources (labour, land,
capital) are all allocated among
competing uses
Chapter 2

A normative statement implies a value of judgement (“should”)

A positive statement is a statement of fact (the economy grew at a 3%
rate)

In 2017 9.5% of families have an income below the official poverty line

If a PPF is linear; the opportunity costs are constant

If a PPF is curved; opportunity costs are decreasing as you reach the
curved part of the line

A PPF with a bowed outward shape indicates increasing opportunity costs
are more and more of one good is produced

Variable – any well-defined item, such as the price of quantity of a
commodity, that can take on various specific values

Endogenous Variable – a variable that is explained within a theory
(dependent variable)

Exogenous Variable – a variable that is determined outside the theory
(independent variable)
Chapter 3

Law of Demand – higher prices leads to a smaller quantity demanded,
lower prices lead to a higher quantity demanded
o As the market price increases (decreases), the quantity demanded
by consumers in the market decreases (increases)

Complimentary Goods – goods that are consumed together and
impacted when the price of one or the other changes

Inferior Goods – characterized by an inverse relationship between income
and demand

Surplus – quantity supplied greater than quantity demanded

Shortage – quantity demanded greater than quantity supplied

Competitive Markets – require many buyers with free choice
o Homogenous Products – no brand differentiation

Monopoly – a market with one seller

Oligopoly – a market with few major sellers

Quantity Demanded – the amount of a good buyers are willing and able
to purchase at a given price, the amount of a good or service that
consumers want to purchase during some time period

Income
o Rising income increases demand  normal good
o Rising income reduces demand  inferior good

Related Goods
o Increase price X increases demand for Y  substitutes
o Increase price X reduces demand for Y  compliments

Quantity Supplied – amount of a good that sellers are willing and able to
sell

Law of Supply – as prices rise, supply of a good rises

Price Fixing – setting the price of a product or service rather than allowing
it to be determined naturally through free-market forces
Chapter 4

Tax Incidence – the division of the tax between buyers and sellers in a
market

Business Strategy – optimal pricing strategies for companies

Price Elasticity of Demand
o % change in quantity demanded/% change in price
o When PEd < 1  inelastic demand
o When PEd > 1  elastic demand

Price Elasticity of Supply
o % change in quantity supplied/% change in price
o When PEs > 1  supply is elastic
o When PEs < 1  supply is inelastic
o Inelastic  increasing price increases revenue
o Unit elastic  increasing price, no effect on revenue
o Elastic  increasing price decreases revenue

The demand for gasoline is inelastic in the short-term but elastic in the
long-term.

Income Elasticity of Demand – change in quantity demanded as income
changes
o E = % change in quantity demanded/% change in income
o Inferior goods – income elasticity  negative
o Necessities – income elasticity  less than one
o Luxuries – income elasticity  greater than one

Cross-price elasticity of demand – change in quantity demanded for one
good, as the price of another good changes
o % change in quantity demanded of one good/% change in price of
other good
o Compliments – cross-price elasticity  Negative
o Substitutes – cross-price elasticity  Positive
Chapter 5

Price Ceiling – a legally determined maximum price that sellers may
charge (rent control)

Price Floor – a legally determined minimum price that sellers must receive
minimum wage)

Inferior Good – a product that is wanted less when income increases
(public transportation)
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