Economy Economics study of how we make decisions The study of how people allocate their scarce limited resources to satisfy them Resource land anything provided by nature ocean wind food other goods and services Labor the mental and physical efforts of human beings Capital not money machine tools Anything that is produced which in turn is used to produce White physical capital machines tools equipment human capital skills acquired through education and training Marginalism The process of analyzing the additional or incremental costs or benefits arising from a choice or decision Effect market market in which profit opportunities are eliminated almost instantaneously Industrial revolution the period Micro vs Macro Micro study of decision making by individuals economic agents household firm government Macro the study of the economy as a whole aggregate overall domestic What to produce How to produce Whom to produce Unemployment Overall price Total output Economic growth How do economies answer the three basic questions of microeconomics Command economy let others to decide Answered by a central government Free market economy Laisse faire Markets determine the price where buyers and sellers come together to by and sell goods Mixed economy has element of both command and free market economy Positive economy seeks to understand behavior and the operation of systems without making judgments Normative economy policy economics analyzes outcomes of economic behavior evaluates them as good or bad and may prescribe courses of action Economy is a science Scientific method observing Ockham s razor the principle that irrelevant detail should be cut away Model simplified formal statement of a theory Post hoc ergo propter hoc after this therefore because of this A common error made in thinking about causation Fallacy of composition the erroneous belief that what is true for a part is necessarily true for the whole Empirical economies The collection and use of data to test economic theories Economic Policy 1 Efficiency allocative efficiency 2 Equity Fairness 3 Economic growth an increase in the total output of an economy 4 Stability condition in which national output is growing steadily with low inflation and full employment of resources Assumptions People are rational they choose Ceteris Paribus All other things are equal What value There is no such thing as free lunch Opportunity cost the value of the next best alternative that we give up or forgo when we make a choice Every choice is valuable Sunk cost costs that cannot be recovered ex No recovery whatever you choose What to produce that can be produced with a given amount of resources and a given technology Production Possibilities curve a graph showing all possible combination of goods and services consumer goods capital goods Law of increasing marginal opp cost resources are not equally well suited to the production of different good 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 unites of that type of good Production Possibility Frontier Capital 6 5 4 3 2 1 0 PPC Production Possibilities Frontier is drown assuming a society is Consumer Using all of its resources Using resources efficiently Points inside the PPC shortage Not using all of our resources Not using our resources efficiently A is not using resources in fully or efficiently PPC shifts to right PPC points move Main points about PPC Increase and decrease in unemployment Only when Technology increased Only when resource is increased Ex when buy Alaska and when nuclear fusion is build It is downward sloping This represents opportunity cost It exists there are limits to what we can produce scarcity It has a bowed out shape This represents the law of increasing marginal opp cost Points inside represent unemployment or inefficiency 6 5 4 3 2 1 0 Wheat Cotton Without Trade Absolute Shift of PPC means economic growth Wealthy Contry Capital Poor Contry l 6 Capita 5 4 3 2 1 0 Consumer Consumer Capital government nation weapon facility The PPC can be grow outwards Consumer people necessities food goods Absolute Advantage New Zealand Australia Assume 6 2 2 6 Each country has 100 acres of land Each country wants an equal amount of wheat and cotton New Zealand 25 acres of wheat x 6 wheat acre 150 wheat Australia 75 acres of cotton x 2 cotton acre 150 cotton 75 acres of wheat x 2 wheat acre 150 wheat 25 acres of cotton x 6 cotton acre 150 cotton New Zealand 100 acres of wheat x 6 wheat acre 600 100 acres of cotton x 6 cotton acre 600 Australia 300 Wheat New Zealand Australia 300 Cotton each country gets 300 wheat cotton Absolute Advantage one country has an absolute advantage in production of a good over another country if it can produce a given amount of good using FEWER RESOURCES than the other country Comparative Advantage Wheat Cotton New Zealand Australia 6 6 1 3 Same as above Without trade Suppose New Zealand 50 acres wheat x 6 wheat acre 300 50 acres cotton x 6 cotton acre 300 Australia 75 acres wheat x 1 wheat acre 75 25 acres cotton x 3 cotton acre 75 cotton 25 acres x cotton x 6 cotton 150 cotton 100 acres cotton x 3 cotton acre 300 cotton New Zealand 75 acres wheat x 6 wheat acre 450 wheat Australia New Zealand Australia 100 Wheat 200 Cotton NZ gets 350 wheat cotton AS gets 100 wheat cotton 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 OPP COST than the other Supply and Demand Demand Law of Demand There is an inverse relationship between price and Qd When one of those things goes up goes down Demand demand is an entire demand curve entire demand schedule the relationship between price Change in demand is represented by a shift of the demand curve It is curved by a change not the and Quantity demand price Quantity Demand Quantity demand The amount of goal or service that a person would buy during a given period of time at a given price QuantityDemand change is represented by a movement along the demand curve It occurs because of a change in price of a good Change in Demand quantity is moving to a new row on demand schedule Demand Schedule a table showing the relationship between Price and Qd Elements that shift demand curve 1 Different Preferences 2 Change in Income Normal good increase in income