Scarcity and its relationship to economics Microeconomics Macroeconomics Factors of Production the resources that are used to produce goods and services o Land is the gifts of nature or natural resources earns rent o Labor is the work time and work effort that people devote to producing goods and services earns wages o Capital is the tools instruments machines buildings and other items that have been produced in the past and that businesses now use to produce goods and services earns interest Human Capital is the knowledge and skill that people obtain from education on the job training and work experience o Entrepreneurship is the human resource that organizes labor land and capital earns profit Self interest vs Social Interest o Self interest the choices that are best for the individual who makes them o Social Interest choices that are the best for society as a whole Efficiency vs Fairness Tradeoff is an exchange giving up one thing to get something else o A For whom tradeoff tells us that for whom goods and services get produced depends on the distribution of buying power o A What tradeoff tells us that what goods and services get produced depends on choices made by each one of us by our gov and by the businesses that produce the things we buy Opportunity Cost the highest valued alternative that must be given up to get it o the decrease in the quantity produced of one good divided by the increase in the quantity of another good as we move along the PPF o increasing opportunity cost bowed shaped out PPF shape Marginal Benefit vs Marginal Cost o Marginal Benefit is the benefit that arises from one unit increase in an activity The benefit of something is the gain or pleasure it brings Determined by preferences by what a person likes and dislikes and the intensity of those feelings o Marginal Cost is the opportunity cost that arises from one unit increase in an activity We calculate the marginal cost of producing the good plotted on the yaxis as the change in the value measured on the x axis as we move down along the PPF which equals the slope of the PPF Positive vs Normative Statements o Positive Statements are about what is they might be right or wrong and can be tested by checking it against the facts o Normative Statements are about what ought to be depend on values and cannot be tested Economic Model o An Economic Model is a description of some features of the economic world that includes only those features assumed necessary to explain the observed factssimpler than the reality it describes Example a roadmap Production Possibilities Frontier o PPF is the boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced given the available factors of production and the state of technology shows the limits to production Points outside of the frontier cannot be attained Any point inside the PPF and on the PPF can be produced so they are attainable Illustrates scarcity Production Efficiency vs Allocative Efficiency Production is efficient only if the economy uses all of its resources o Production Efficiency is a situation in which the economy is getting all that it can from its resources and cannot produce more of one good or service without producing less of something else o We achieve Production Efficiency is we produce goods and services at the lowest possible cost Achieved at points on the PPF As we move along the PPL increasing production of x we must give up some production of y o Allocative Efficiency occurs when we are producing at a point on the PPF that we prefer above all other points o We achieve Allocative Efficiency when goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit All points on the PPF are points of Production Efficiency When we produce at the point on the PPF that we prefer above all other points we achieve Allocative Efficiency Six Main Factors that Change Demand o The Price of Related Goods Substitutes a good that can be used in place of another good If the price for a substitute increases people buy less of the substitute and more of the original good so the demand for the original good increases Example a bus ride is a substitute for a train ride Compliments a good that is used in conjunction with another good If the price for a good decreases people will buy more of the good AND the compliment good o o o o o Example If the price of an hour at the gym falls people buy more gym time AND more energy bars Expected Future Prices If the expected future price of a good rises and if the good can be stored the opportunity cost of obtaining the good for future use is lower today than it will be in the future when people expect the price to be higher So people retime their purchases they substitute over time They buy more of the good now before its price is expected to rise and less afterward so the demand for the good today increases Income When income increases consumers buy more of most goods and when income decreases consumers buy less of most goods Although an increase in income leads to an increase in the demand for most goods it does not lead to an increase in demand for all goods A Normal Good is one for which demand increases as income increases An Inferior Good is one for which demand decreases as income increases Expected Future Income and Credit When expected future income increases or credit becomes easier to get demand for a good might increase now Example A sales person receives the news that she will be receiving a big bonus at the end of the year so she goes into debt and buys a new car right now rather waiting until she receives the bonus Population The larger the population the greater is demand for all goods and services the smaller the population the smaller is the demand for all goods and services Example the demand for parking spaces running shoes and almost everything else is much greater in NYC than it is in some bum fuck place in Idaho The larger the proportion of the population in a given age group the greater is the demand for goods and services used by that age group Example A decrease in the college age population leads to a decrease in demand for college places Preferences Determine the value that people place on each good and service Preferences depend on Weather Information Fashion o Example Greater health fitness awareness has shifted preferences in favor of energy bars so the demand for energy bars