General Economics Principles Studying Economics Microeconomics deals with specific parts or sectors of the economy examines in detail the specific economic units which comprise the economic system Macroeconomics deals with the entire economy as a whole in the aggregate large subdivisions Definition of Economics Microeconomics is the study of choices that individuals and businesses make the way those choices interact in markets and the influence of governments Two microeconomic questions Why are people streaming more movies Would a tax on online shopping affect Amazon Macroeconomics is the study of the performance of the national and global economies Two macroeconomic questions Why does the unemployment rate fluctuate Can the Federal Reserve make the unemployment rate fall by keeping interest rates low Definition The rational analytical study of the way society uses its available resources to satisfy its wants Economic Perspectives Resources things of value which society possesses Want desire for a thing Economic Perspectives Need necessity Scarcity everything for which a want must go unfulfilled Definition of Economics All economic questions arise because we want more than we can get Our inability to satisfy all our wants is called scarcity Because we face scarcity we must make choices Economic Way of Thinking A Choice Is a Tradeoff You can think about every choice as a tradeoff an exchange giving up one thing to get something else On Saturday night will you study or have fun You can t study and have fun at the same time so you must make a choice Whatever you choose you could have chosen something else Your choice is a tradeoff Economic Perspectives Good product which satisfies want Service action performed for someone s benefit Free Good does not require giving up something to obtain it Economic Perspectives Economic choice resources are scarce wants are insatiable tradeoffs become necessary Opportunity Cost what must be foregone to obtain an item Ceteris Paribus other things equal status quo Economic Way of Thinking To make a choice at the margin you evaluate the consequences of making incremental changes in the use of your time The benefit from pursuing an incremental increase in an activity is its marginal benefit The opportunity cost of pursuing an incremental increase in an activity is its marginal cost If the marginal benefit from an incremental increase in an activity exceeds its marginal cost your rational choice is to do more of that activity Demand Desire ability and willingness to pay Demand Demand schedule table showing how much consumers will purchase at each price ceteris paribus Demand a b c d e 1 2 3 4 5 Price Quantity dollars per tape millions of tapes per week 9 6 4 3 2 Demand Demand curve picture of buyer s side of market illustrates inverse relationship between price and QD downward slope shows extent and intensity of Demand Demand Curve e d c e p a t r e p r a l l o d e c i r P 6 5 4 3 2 1 0 b a Demand for tapes 2 10 Quantity millions of tapes per week 4 8 6 Demand Law of demand as price falls quantity demanded rises and vice versa Demand If you demand something then you 1 Want it 2 Can afford it and 3 Have made a definite plan to buy it Wants are the unlimited desires or wishes people have for goods and services Demand reflects a decision about which wants to satisfy The quantity demanded of a good or service is the amount that consumers plan to buy during a particular time period and at a particular price Demand Law of demand shows the inverse relationship between price and demand Demand Determinants of demand number of consumers consumer tastes consumer income price and availability of substitutes price of complements consumer expectations market population A Change in the Quantity Demanded Versus a Change in Demand e c i r P Decrease in quantity demanded Decrease in demand Increase in demand Increase in quantity demanded D0 D2 D1 Quantity Demand Income effect shows impact of a change in price on consumer s real income and consequently on quantity of product demanded Demand Income effect decrease in price means more real income is available to bring subsequent amounts of the product and vice versa Demand Substitution effect at a lower price buyers have the incentive to substitute the cheaper good for similar good which is relatively more expensive and vice versa Definitions Normal good product whose demand varies directly with money income superior good Inferior good product whose demand varies inversely with money income Supply Schedule showing the amounts of a product which a producer is willing and able to produce and make available at each specific price during a period of time Supply Supply Curve and Supply Schedule Supply curves show the relationship between the quantity supplied of a good and its price ceteris paribus Supply schedules list the quantities supplied at each different price ceteris paribus Supply a b c d e 1 2 3 4 5 Price dollars per tape Quantity millions of tapes per week 0 3 4 5 6 Supply Supply Curve picture of seller s side of market illustrates direct relationship between price and quantity upward slope QS based on costs to produce Supply of Tapes Supply 6 5 4 3 2 1 e p a t r e p r a l l o d e c i r P b a e d c 0 2 4 10 Quantity millions of tapes per week 6 8 Supply Law of Supply as price rises the corresponding QS rises and vice versa producers are willing to offer more at higher prices Supply Determinants of supply number of sellers resource prices inputs technology taxes and subsidies prices of other goods seller expectations A Change in the Quantity Supplied Versus a Change in Supply e c i r P S2 Increase in quantity supplied S0S0 S1 Decrease in Increase in supply supply Decrease in quantity supplied Quantity Market Equilibrium Surplus excess supply Shortage excess demand Equilibrium where D S Market Equilibrium Surplus of 2 million tapes at 4 a tape Supply of tapes Equilibrium e p a t r e p r a l l o d e c i r P 6 5 4 3 2 1 Shortage of 3 million tapes at 2 a tape 4 Quantity millions of tapes per week 10 6 8 Demand for tapes 0 2 Predicting Changes in Price and Quantity An Increase in Demand Figure shows that when demand increases the demand curve shifts rightward At the original price there is now a shortage The price rises and the quantity supplied increases along the supply curve Predicting Changes in Price and Quantity A Decrease in Demand The figure shows that when demand decreases the demand curve shifts leftward At the