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scarcity

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the fundamental economic problem of resources being limited in amount but desired in a seemingly infinite amount

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Relative Scarcity

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scarcity at one specific point in time

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Absolute Scarcity

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Scarcity of everything on earth

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Economics

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the study of how society manages its scarce resources

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tradeoff

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the exchange of one thing for another of more or less equal value

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organize economic activity

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Managing Resources Determining: -What to produce -How to produce -Who gets the product

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Economic systems

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1. Traditional economy 2. command econnomy 3. market economy

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traditional economy

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original economic system in which traditions, customs, and beliefs shape the goods and the services the economy produces, as well as the rules and manner of their distribution. Countries that use this type of economic system are often rural and farm-based

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command economy

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group of few make decisions for everyone involved.

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market economy *focus of entire class*

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an economy in which decisions regarding investment, production, and distribution are based on market determined supply and demand, and prices of goods and services are determined in a free price system.

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division of labor

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-specialization -Economics of scale -trade

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Adam Smith

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Wrote The Wealth of Nations (1776); spoke about the invisible hand and division of labor

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invisible hand

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the unseen force believed to drive market economies, where each participant pursuing his or her own private interest theoretically benefits all participants)

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deductive reasoning

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using simplified assumptions

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assumptions

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simplify the complex world

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models

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simplifies representation

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circular flow model

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Visual model of the economy, shows how dollars flow through markets among households and firms.

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households

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-own the factors of production, sell/rent them to firms for income. -buy/consume goods/services

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firms

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-buy/hire factors of production, use them to produce goods/services - sell goods+services

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factors of production

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land, labor, capital

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microeconomics

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Focuses on INDIVIDUAL decision makers

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macroeconomics

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study of ECONOMY-WIDE phenomena -inflation, unemployment, etc.

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roles of an economist

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1. scientist: try to explain the world (scientific method) 2. policy advisor: try to improve the world

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positive statements

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describe the world as it is (Able to be proven true or false)

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normative statements

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attempt to prescribe how the world should be (ought to be)

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opportunity cost

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The opportunity of any item whatever must be given up to obtain it

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Production Possibilites Frontier: Definition

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-visual model of scarcity, tradeoffs, and efficiency (productive, allocative) -shows the combinations of two goods an economy can possibly produce. -given available resources + technology

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Production Possibilites Frontier: Assumptions

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1 location, 2 goods, 1 resource

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PPF shapes

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linear, curved, resource specialization

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Linear PPF shape

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Opportunity cost is constant

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Curved PPF shape

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increasing opportunity cost (If opportunity cost of a good rises as the economy produces more of it, PPF is bow shaped)

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PPF: Efficiency

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Productive: On PPF (technical efficiency) Allocative: Where society wants to be on PPF

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PPF: Inefficiency

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Below the PPF

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PPF: Unemployment

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lowers the PPF

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PPF: Economic Growth

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widens the PPF

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PPF: No trade production and consumption

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PPF stays the same

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PPF: Trade between two countries

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1. calculate opportunity cost of production in terms of the other 2. consumption vs. production positions 3. calculate world output/gains from trade

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Exports

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Goods shipped out of country

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Imports

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Goods shipped into country

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Absolute Advantage

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The ability to produce a good using fewer inputs than someone else (when comparing, be able to identify country with absolute advantage)

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Comparative Advantage

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The ability to prodicae a good at a lower opprtunity coset than another producer. (When comparing, be able to identify country with comparative advantage)

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Reasons why a country may choose not to trade

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-National defense items (best produced within country in case of war) - Nessecities (steel, energy) - Infant Industries: could be destroyed if exposed to foreign markets. *Risk of over protecting industry and giving it no reason to become efficient*

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Market

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Buyers and sellers coming together in a voluntary exchange

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Competitive Market

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lots of buyers and lots of sellers. Easy entry and exit from market.

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Perfectly Competitive Market

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"price takers", Sellers have no control over price of their good. No one person has ability to dominate the market

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Marginal Analysis

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an examination of the additional benefits of an activity compared to the additional costs incurred by that same activity. Companies use marginal analysis as a decision-making tool to help them maximize their potential profits

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Ceteris Paribus

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"all other things equal"

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Law of Demand

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states that, all else being equal, as the price of a product increases (↑), quantity demanded falls (↓) ; likewise, as the price of a product decreases (↓), quantity demanded increases (↑).

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Quantity Demanded

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# of items demanded at a given price.

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Demand schedule

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a table of the quantity demanded of a good at different price levels. Thus, given the price level, it is easy to determine the expected quantity demanded.

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Market Demand

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the less a good costs, the more consumers will want to buy it.

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Demand Curve Shifters

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Number of buyers, Income, Price of related good, tastes, expectations

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Normal Goods

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any goods for which demand increases when income increases, and falls when income decreases but price remains constant, i.e. with a positive income elasticity of demand

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Inferior Goods

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a good that decreases in demand when consumer income rises (or rises in demand when consumer income decreases)

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Substitutes in Consumption

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goods which, as a result of changed conditions, may replace each other in use (or consumption). A substitute good, in contrast to a complementary good, is a good with a positive cross elasticity of demand. This means a good's demand is increased when the price of another good is increased.

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Complements in Consumption

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two or more goods that satisfy wants or needs when consumed jointly. Satisfaction is greater when both goods are consumed together than when they are consumed separately.

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Shift vs. Movement Along Demand Curve

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Increase in demand: Demand curve shifts change in quantity of demand: Movement along demand curve

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Shift vs. Movement Along Supply Curve

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change in supply: Supply curve shifts change in quantity supplied: movement along supply curve

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Law of Supply

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states that, all else equal, an increase in price results in an increase in quantity supplied. In other words, there is a direct relationship between price and quantity: quantities respond in the same direction as price changes.

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Supply Schedule

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Quantity supplied at a certain price within a set period of time.

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Supply Curve

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The more $ producers can sell an item for, the more money they'll make, and the more they'll want to sell.

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Market Supply

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At a specific price, add together the quantity that all producers will make of an item and that is the market supply

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Supply Curve Shifters

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Number of sellers, Input prices, Technology, Expectations, Gov't policy, "Natural" Production conditions, Substitutes in Production

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Supply and Demand Together

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Supply curves move up from left to right, Demand curves go down from left to right

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Equilibrium Price

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Price where supply and demand curves intersect. When P^s=P^d

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Equilibrium Quantity

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Quantity where supply and demand curves intersect. When Q^s=Q^d

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Surplus

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When producers make more of a good at a certain price than consumers want to buy. Producing at a point on the Production curve higher than the equilibrium point.

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Shortage

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When consumers want more of a good than producers are willing to make at a certain price. Demanding at a point lower on the Demand curve than the equilibrium point.

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Stable Equilibrium Model

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Producing and Consuming a product at the most efficient point, where the Demand Curve and the Production Curve intersect.

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Three Steps to Analyzing Changes in Equilibrium

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A change in supply, a change in demand, or both

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Equilibrium Price and Quantity When:

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Supply or Demand Shifts Double shift of curves

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Consumer theory

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preferences (for the consumption of both goods and services) to consumption expenditures; ultimately, this relationship between preferences and consumption expenditures is used to relate preferences to consumer demand curves.

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Utility:

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Total Utility Marginal Utility Diminishing Marginal Utility

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Producer Theory

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the study of production, or the economic process of converting inputs into outputs. Production uses resources to create a good or service that is suitable for use, gift-giving in a gift economy, or exchange in a market economy.

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Profit

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Profit= Total Revenue- Total Cost

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Total Revenue

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Total Revenue= (Price of the goods)(quantity sold)

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Total Cost

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Total Cost= Total Revenue- Profit

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Explicit Costs

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require an outlay of money

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Implicit Costs

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do not require an outlay of cash (opportunity cost!)

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Accounting Profit

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Accounting Profit= total revenue- total explicit costs

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Economic Profit

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Economic Profit= total revenue- total costs (both implicit and explicit)

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Market Structure

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-The environment a firm "lives in" -Determined by 3 Characteristics: 1.Number of Firms 2.Product differentiation 3.Entry and Exit

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Perfect Competition

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-Lots of producers, identical product. -"price takers" -No barriers to enter/exit the market. -Unlimited consumers. (wheat farmers, all have to sell their wheat at same price in market)

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Monopolistic Competition

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-Lot of producers, but product is different. -Unlimited consumers (think fast food; ie Taco Bell, McDonalds, etc. All different, but all still "fast food") -Easy entry/exit from market. -Slight price maker, can differentiate themselves through advertising.

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Oligopoly

answer

-A few firms (Google, Apple, Microsoft) -Each firm can effect entire market -Standardized or differentiated products. -Significant barriers to entry into market -Price Maker (opportunity for collusion or cartels to form)

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Monopoly

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-One firm: sole seller of a product -Unique product (no close substitutes) -Barriers to entry: 3 characters 1. Ownership of Key resource 2. Gov't gives a single firm the exclusive rights to produce (copy writes, patents) 3.Cost barriers (huge facility required, etc.)

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natural monopoly

answer

A single firm can produce the entire market equilibrium quantity at a lower cost per unit than several firms could.

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public policy towards monopolies, including antitrust laws

answer

-Increasing competition w/ anti-trust laws -Regulation -Public Ownership (electric company) -Do nothing

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