What is Economics unlimited wants The study of how people allocate their scarce resources to satisfy their Resources Land Labor Capital o Anything provided by nature o The mental and physical efforts of human beings o Anything that is produced which in turn is used to produce other goods and services Physical capital machines tools equipment Human capital skills acquired through training education Microeconomics vs Macroeconomics Micro o The study of decision making by individual economic agents firms households governments o The 3 main questions What to produce How to produce it For whom to produce Macro o The study of the economy as a whole o Main topics Unemployment Output Overall prices Economic growth How do economies answer the three basic questions of microeconomics Command Economy o The s are answered by a central authority or government Free Market Economy Laissez faire o Markets determine the answers to the s Market any place where buyers and sellers come together to buy and sell goods services Mixed Economy o Has elements of both command and FM economy Positive vs Normative Economics Positive makes statements about what is or what will be They are testable statements Normative makes statements about what we should or we ought to do Economics is a Science Scientific method 1 Make observations 2 Use inductive reasoning to make theories 3 Collect data to test theories 4 Modify theories Economists Use Models theory Models a simplified representation of reality It is a formal statement of a 2 Main Assumptions 1 People are rational 2 Ceteris paribus All other things equal Opportunity Cost make a choice Ex The value of the next best alternative that we give up or forego when we o Cost of going to PSU for 1 semester Tuition 8 286 activity fee 93 books 500 time Wages lost 10 hr x 40 hrs wk 6 000 Costs that cannot be recovered think of the sorority recruitment sign up fee Production Possibilities Curve Frontier A graph showing all possible combinations of goods and services that can be produced with a given amount of resources and a given technology Sunk Costs Ex o Assume there are 2 types of goods Consumer Goods produced for final consumption Capital Goods in turn used to produce other goods Law of Increasing Marginal Opportunity Costs Resources are not equally well suited to the production of different goods As you produce more and more of one type of good you have to use resources that are less and less well suited to the production of that type of good So you have to use more and more resources to produce additional units of that type of good Production Possibilities Curve is drawn assuming a society is Using all of its resources Using resources efficiently Points inside PPC Not using all of our resources Not using our resources efficiently Shifting the PPC Increase in our resources Increase in technology increases in these things cause an outward shift decreases would cause inward shift Main Points about the PPC Its downward sloping o This represents opportunity cost It exists there are limits to what we can produce scarcity It has a bowed out shape law of increasing marginal opp cost Points inside represent unemployment or inefficiency Shifts of the PPC economic growth Absolute Advantage One country or firm group state etc has an absolute advantage in the production of a good over another country if it can produce a given amount of the good using fewer resources than the other country can Comparative Advantage One country has a comparative advantage in the production of a good over another country if it can produce a given amount of that good at a lower opportunity cost than the other country can Supply and Demand Quantity Demanded The amount of a good or service that a person would buy during a given period of time at a given price A change in QD is represented by a movement along the demand curve It occurs because of a change in the price of a good A table showing the relationship between price and QD There is an inverse relationship between price and quantity demanded When one of those things goes up the other goes down Demand Schedule Law of Demand Demand demand means entire demand curve entire demand schedule the RELATIONSHIP between price and QD A change in demand is represented by a shift of the demand curve It is caused by a change in something other than the price of a good ex o Change in preferences o Change in income o Change in price of a related good Normal goods an increase in income causes an increase in demand and vice versa Inferior goods an increase in income causes a decrease in demand Ex walmart clothes public transportation frozen food Compliments 2 goods are compliments if an increase in the price of 1 good causes a decrease in the demand for the other good Ex guitars guitar strings PB J xbox and xbox games Substitutes 2 goods are substitutes if an increase in the price of 1 good causes an increase in demand for the other you could use one or the other Ex Coke and Pepsi o Changes in expectations future prices and income o Change in the number of consumers Supply Quantity Supplied Firms are the agents that supply goods and services The amount of a good service that a firm will produce and offer for sale in a given period of time at a given price Change in QS is a movement along a given supply curve point A to point B It occurs because of a change in price of a good A table showing the QS at different prices There is a positive or direct relationship between Price and QS ceteris Supply Schedule Law of Supply paribus Supply Change in supply is represented by a shift of an entire supply curve It occurs because of a change in something other than price Ex o A change in the cost of production Increase in cost decrease in supply and vice versa o A change in the price of inputs o A change in technology o A change in the number of firms in the market o Government policies Taxes and subsidies Taxes decrease supply subsidies increase supply o Weather natural disasters Equilibrium A situation where there is no tendency for change Equilibrium price the price at which the DQ QS o Suppose QD QS excess demand or shortage o If QD QS there is a tendency for price to rise when there is a shortage there is a tendency for price to rise o Suppose QS QD excess supply or surplus o If QS QD there is a tendency for price to fall When there is a surplus there is a tendency for price to fall o Only if QD QS is there no tendency for price to change Sufficient and Necessary