ECON200 Class Notes Macro study of economy wide phenomena including inflation unemployment and economic growth Ex Decisions made by the president ensure that the country produces more keep employment rate up and maintain the stability of prices Micro study of how households and firms make decisions and how they interact in markets Attempting to figure out which decisions as individuals need to be made and how to do so Goal maximize profits take in goods and services Ex Georgetown cupcakes giving away free cupcakes to build clientele Resources Factors of Production 1 Land 2 Labor skills 3 Capital tools used to produce more goods scissors hammers pencils Need these to produce goods and maintain services Usually scarce always in need of more Assumptions and Models Assumptions simplify the complex world making it easier to understand Ex When studying international trade we might assume the world consists of two countries and two goods Models road map human body The Economist as a Policy Advisor Normative Statements Positive Statements Attempt to describe how world should be Attempting to believe Example A tax cut is needed to stimulate the economy Can be confirmed or refuted unlike normative statements Creates relationships checks it out uses data Example Prices rise when the government increases the quantity of the dollar Circular Flow Diagram Visual model of the economy shows how dollars flow through markets amount households type1 and firms type 2 2 Markets Goods Services Factors of Production OUTPUT quantity of goods or services produced in a given time period by a firm industry or country INPUT factors of production land labor capital 9 7 10 Production Possibilities Frontier PPF A graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology Produce more output by obtaining more resources or by receiving better technology Moving along PPF involves shifting resources like labor from the production of one good to the production of the other Society faces a tradeoff Getting more of one good involves sacrificing some of the other The slope of the PPF tells you the opportunity cost of one good over the other Y2 Y1 X2 X1 rise over run or the amount the line rises when you move to the right by one unit If opportunity cost remains constant then PPF is a straight line Usually a bow shaped curve in reality because opportunity cost increases as you produce a good Economic Growth producing more of both goods need more resources or better technology To show economic growth on PPF slope becomes less steep as more of each good is produce PPF could be a straight line or a bow shaped curve Depends what happens to opportunity cost as economy shifts resources from one industry to the other PPF is bow shaped when different workers have different skills therefore there are different opportunity costs of producing one good in terms of the other PPF would also be bow shaped when there is some other resource or a mix of resources with varying opportunity costs 9 9 10 Markets Competition Market a group of buyers and sellers of a particular product 1 product being bought and sold that buyers sellers are attempting to get Competitive Market market with many buyers and sellers each has no control over price only one type of good being considered Non Competitive Cut back on supply or increase supply depending on how they want the price to change Market for oil Demand comes from the behavior of buyers ex different types of land suited for different uses on a graph price will always be on the vertical axes and quantity will be on the horizontal one all demand curves have a negative slope Law of Demand As the price increases demand decreases and vise versa downward slope Quantity Demanded the amount of the good that buyers are willing and able to purchase at alternative prices only changes when the prices change Movement along the curve reflects law of demand Change in Demand shift off of the demand curve expresses the relationship btwn the quantity demanded and the price of the good Right increase Left decrease Change in demand shifters Demand Curve Shifters Number of Buyers as of buyers increase the quantity demanded at each price increases but price does not so there is a change in demand and curve shifts to the right Income Higher the income the higher the demand curve Normal Goods vs Inferior Goods income increases so does demand for normal goods while inferior demand decreases Price of Related Goods two goods are substitutes if an increase in the price of one good causes an increase in the demand for another good Two goods are complements if an increase in the price of one good causes a fall in the demand for another good Price of latte is too high so people switch to cappuccino substitute Price of computers increases so software demand decreases complement Price of beer increases so the supply of pizza remains the same Less people buying beer so less people buying pizza Only thing that changes is the equilibrium price Taste Anything that causes shift in tastes toward a good will increase demand for that good and shift its curve to the right Atkins diet caused an increase in demand for eggs so the demand for carbs went down Can also be taste in technology ipad comes out and demand for other things goes down Expectations Change in price in the future can either increase or decrease demand Changes consumer s buying decisions If people expect their incomes to rise their demands for meals at expensive restaurants may increase Demand Schedule a table that shows the relationship between the price of a good and the quantity demanded Market Demand versus Individual Demand the quantity demanded in the market is the sum of the quantities demanded by all individual buyers at per price per price being that each price has a different market demand Suppose 2 buyers each demand 5 pairs of shoes the market demand would then be 10 shoes 9 14 10 The Demand Function a general equation representing the demand curve equation on written notes Qxf quantity of demand of good X P price of good X PY price of related good Y Substitute good or Complement good M income Normal or Inferior H any other variable affecting demand Supply Comes from the behavior of the sellers upward slope Quantity Supplied The amount that sellers are willing and able to sell at alternative prices Law of Supply The claim that the quantity supplied of a good rises when the price
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