1.1: Scarcity
Unlimited Wants but Limited Resources
GDP Growth Rate - Industrialized Economy: About 2-3%
Unemployment Rate: 4-5%
Inflation Rate: 1-3%
Economics: How People make CHOICES
4 Factors of Production
Land - Labor - Capital - Entrepreneurship
Capital Goods: Indirect things that are consumer (ex. Oven, blenders, machines)
Human Capital: Any Skill/Knowledge gained by a worker through education/experience
Difference between Opportunity Cost and Trade-Offs:
Trade Offs: ALL alternative resources VS Opp. Cost is your second choice MOST desirable
alternative that you lost after what you gained
Market vs Centralized Economy
Market Economy: Capitalist Economy - most of the world right now
Centrally Planned: Controlled by GOVERNMENT entirely
Mixed: A little bit of both (Ex. US)
1.2: Opportunity Cost and PPC
PPC: Graphically demonstrates scarcity, trade-offs, opportunity cost, and efficiency
Point INSIDE Line = Inefficient - OUTSIDE line = Unattainable ON the Line = Efficient
★ More Capital Goods INCREASE economic growth
Law of Increasing Opportunity Cost: As you produce more of ANY good, opportunity cost is
bowed out CONCAVE PPC
When you have constant Opportunity Cost - Highly unlikely it is a straight line
Remember: Opportunity Cost is ALWAYS what you LOST
A
B
C
D
E
Capital
Goods
0
1
2
3
4
Consume
r Goods
30
29
25
15
0
A to B Opp Cost = 1 Consumer Good
3 Shifters of PPC: Change in Resource Quantity/Quality - In Tech - Change in Trade
1.3 Comparative Advantage & Trade
Output: Other Value Goes Over
Sugar
Cars
Cuba
40 1S = ¼ C
10 1C = 4S
Mexico
50 1S=2C
100 1C = ½ S
Comparative Advantage: Who has Lower Opportunity Cost
Sugar: Cuba
Mexico: Cars
Term of Trade: 1C for between 4S and ½ S
Input: IT goes OVER
Canada
2hrs 1S=⅓ C
6 1C = 3S
UK
10hrs 1S=1C
10hrs 1C=1S
Absolute Advantage: Canada
Comparative Advantage
Sausage: Canada
Computer: UK
Terms of Trade: 1C for BETWEEN 3S and 1S
1.4: Demand
Quantity Demanded: Amount of Good/Service desired at Particular Level
Quantity Demanded is on 1 Point on the Line: While DEMAND is Entire LINE
★ Only thing that changes quantity demanded is price of good/service
Law of Demand: Price Increases, Quantity Decreases and Vice Versa
I-N-S-E-C-T
I = Income
N = No. of Buyers
S = Substitutes
E = Expectations
C = Complements
T = Tastes
Complements are good TOGETHER thus JOINT Demand
Remember: Demand is consumer perspective in market
Increase in Demand shifts to the right
Decrease in Demand shifts to the left
1.5 Supply
Quantity Supplied: Actual Amount of good/service products willing to sell
Law of Supply: Price Increases Quantity Increases - Positive Relationship
★ Only thing changing quantity supplied - price of good/service
R-O-T-T-E-N
R = Resources
O = Other good prices
T = Taxes
T = Technology
E = Expectations
N = No. of Competitors
1.6 Market Equilibrium, Disequilibrium, and Changes in Equilibrium
ONLY Changes in Supply and Demand will shift market disequilibrium
Market Surplus: Quantity of good/service exceeds Quantity Demanded
Quantity Supplied is greater than Quantity Demanded
Price Floor: Minimum Price
ABOVE equilibrium level
Shortage: Quantity Demanded greater than Quantity Demanded
BELOW equilibrium level
Quantity Demanded greater than Quantity Supplied
Price Ceiling: Create Shortages
MAX Price: Ex. Rent- Controlled Housing
Increase in Demand: Equilibrium Price Increases and Equilibrium Quantity Increases
Decrease in Demand: Equilibrium Price Decreases and Equilibrium Quantity Decreases
Increase in Supply - Equilibrium price , Equilibrium quantity
Decrease in Supply - Equilibrium price , equilibrium quantity
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Foreign Exchange Market:
Supply: Quantity of international currency all domestic and foreign sellers are willing and able to
sell at various rates of exchange. Relationship positive, exchange rates increase consumers
willing to sell more, vice versa
Demand: Inverse relationship
Circular Flow of the Economy:
Consumers give resources for the the money producers in the FACTOR MARKET
PRODUCT MARKET: Producers make the good/service and then consumers exchange with
money.