1.

Economics
⁃ Social science that analyzes the most efficient way to use our scarce resources
2. Efficiency
⁃ Using resources to their maximum potential
3. Scarcity
⁃ We have unlimited wants but limited resources
4. Microeconomics
⁃ Economic problems faded by individual units within the overall economy
5. Macroeconomics
⁃ Economic problems encountered by the nation as a whole
6. Positive Economics
⁃ Based on the scientific method, logical deduction or induction; value judgements are
avoided
⁃ Hypotheses are formulated and tested
7. Normative Economics
⁃ Based on the way someone believes things ought to be
⁃ Involves value judgements
8. Terms of Trade
⁃ The amount of one good a country is willing and able to trade for another
9. Factors of Production
⁃ Resources: A resource is anything that can be used to produce a good or service
Land
Macro
All natural resources
Labor
Macro
Encompasses all human attributes that are productive
The work capacity of each worker is tased on his own training, education and work
experience
Capital
Macro
Investment in the capital goods
Fixed Capital
New technologies, factories, buildings, machinery and other equipments
Working Capital
The stock of goods, will be utilized in near future
Capital productivity
Efficiency of how capital is used to generate output
Infrastructure
A stock of capital that is used to maintain the whole economic system
⁃ Outrange
time, health, money, adventurousness, willingness
10. Opportunity Cost
⁃ Most desirable alternative given up when you make a choice
⁃ Opportunity Cost of X
Change in Good Y Production / Change in Good X Production
 Amount of Time Required to Make 1 Unit of Good X / Amount of Time Required to Make
1 Unit of Good Y
⁃ Constant Opportunity Cost
⁃ Increasing Opportunity Cost
⁃ Who gets what?
How much, if any, of each good and service should be produced?
Who will get how much of each good and service?
11. Production Possibility Frontier
⁃ Graphical portrayal of two goods that can be produced if the economy uses all of its
resources fully and efficiently
⁃ A normative analysis is required to determine which point is preferred
⁃ On efficiency grounds all the points along the frontier are equal
⁃ Points inside the PPF
The economy could do better by producing some combination of the two goods that lies
on the frontier
⁃ Points outside the PPF
Unobtainable
May be attained at some future data
⁃ PPF shifts
Changes in the amount of resources in the economy
Changes in technology and productivity
Left: the amount of resources were decreased or technology step backward
12. Law of Increasing Cost
⁃ Reason why opportunity cost will not be constant in the real world
⁃ More of a product is produce, the opportunity cost increases
⁃ A line that is cursed concave to the origin
⁃ The fact that some resources are more adept at the production of one good than
another
⁃ When resources are forced to work in an industry where they are not proficient, they are
less productive
13. Comparative Advantage
⁃ Specialized tasks could increase productivity and output
⁃ Based on opportunity costs
⁃ The idea that trade is beneficial to all parties involved when one party has an absolute
advantage
⁃ Isolation v.s. Specialization with trade
⁃ The ability to produce something with a lower opportunity cost
14. Absolute Advantage
⁃ The product can be produced more efficiently with fewer inputs
⁃ Consider with isolation
15. Government commands (Command economy)
⁃ Dictates what will or will nor be produced
⁃ Stipulates how much of each item is to be produced
⁃ Who is to get how many of the final products?
⁃ Communism & Socialism - central commands
⁃ Set wages no lower class
⁃ Incentives to work hard and develop new lines of business are discouraged
⁃ Underground economy
Transaction between households that the government cannot control
16. Capitalism
⁃ How the basic economic questions are addressed
⁃ An economic system where supply and demand determine prices
⁃ Resolving what and how much will be produced, also determine a person’s income
⁃ The government does not run the economy, instead attempts to create an environment
where prices can be determine in free market
⁃ Consumers’ favorite send a signal to suppliers to provide more of that product
⁃ Wage rate - the price of labor
⁃ Prices govern the behavior of consumers and producers who seek to make the most
our of their respective resources
17. Allocative efficiency
⁃ Supply and demand are allowed to determine prices in competitive markets
⁃ The right goods and services are produced in just the right amounts
⁃ The more perfectly competitive markets there are in an economy, the closer the
economy is the perfect capitalism
⁃ Follows from free markets
⁃ The result of decisions are made by buyers and sellers across the economy in s
decentralized way; no central planning is required
⁃ Resources are deployed in the production of the things society desires
18. A blend of government commands and capitalism (Mixed economy)
⁃ Government commands are used when free markets break down
⁃ Ensure that markets are indeed competitive
⁃ Settle disputes between buyers and sellers
⁃ Protect people, their products, and their money while they are conducting market
exchange
⁃ An economy organized by government commands can be more equitable while a
market economy is more efficient
⁃ No country in the world is purely capitalistic or purely command economy
19. The circular flow diagram
⁃ Firms ^ Market for resources(Factor Market) - [Wages, Profits] ^ Households -
[Spending] ^ Market for goods and services(Product Market)
⁃ Firms ^ Market for goods and services(Product Market) - [Spending] ^ Households -
[Land, Labor, Capital] ^ Market for resources(Factor Market)
⁃ Shows how institutions in capitalist economies are tied together
20. Law of Demand
⁃ Law that states that when the price of a product increases, the quantity demanded
decreases
⁃ Demand curve
Showing the quantity consumers want to by at every price
“DEmand DEclines” (downward slope)
⁃ Reasons for the Law of Demand
The income effect
Prices fall, can afford to buy more; prices rise, will not buy as many, quantity decreases
 The substitution effect
When the price of a good increases, its price has gone up relative to the other, all else
equal
Customer purchases more other similar goods and fewer original
Diminishing marginal utility income
As more units of the same product are consumed, the utility or satisfaction from each
good decreases with each additional unit
The decrease in price as quantity demanded increases
⁃ Change in quantity demanded
No shift in the demand curve, but move along an existing curve, known as quantity
demanded
As price is the only variable that changes, this change the quantity people would buy at
the new price
Hint: Less to the left, more to the right
⁃ Change in demand
Determinants of demand (shifters of demand)
Purchase more or less of a good at the same price
An increase in one of these determinants of demand would would shift demand curve to
the right, a decrease would shift to the left
⁃ SPICE (Determinants of demand)
S - Substitute goods
When an increase in the price of one good result in an increase in demand for the other
good, and vice versa
Hint: If the price of one goes up (a movement along a fixed demand curve), the demand
for the other product goes up (demand curve shifts)
P2 - Preferences and population
Preferences
Consumers tastes or preferences for a good or service
Population
Total number of buyers in a specific market, a bigger market will mean more demand
I - Income
When people have more income, they generally increase their demand for most
products
Normal goods, income increases, the demand for a product increase
Inferior goods, increase in income leads to a decrease in demand
C - Complementary goods
Goods that are purchased separately but are used together are known as
complementary goods
Inverse relationship, price of one increase, the demand for the other good decreases,
and vice versa
E - Expectations
Consumers’ expectations of future prices can have a large effect on current demand
An expectation of higher prices in the future will cause an increase in current demand
before the price increases
21. Law of Supply
⁃ Law that states that when the price of a product increases, the quantity supplied
 increased
⁃ Supply curve
Shows the quantity of a product a producer is willing and able to offer for sale at various
prices
“Supply to the sky” (positive slope)
⁃ Reasons for the law of supply
Price increase, sellers have greater opportunities for increasing their profits
Prices rise, so does the quantity supplied
Producers increase production, the cost of producing each additional unit generally
increases as sellers face rising marginal costs of production
It takes a higher price for the product to induce producers to offer more for sale
Prices fall for a product, less incentive or motivation to offer a product for sale
Earn smaller profits, so less is offered for sale
⁃ Change in quantity supplied
No shift in the supply curve, buy move along an existing curve, known as quantity
supplied
As price is the only variable that changes, this change in the quantity producers will
offer for sale
⁃ Change in supply
Determinants of supply (shifters of supply)
Offer more or less of a product for sale at the same prices
an increase in one of these determinants of supply would shift the supply curve to the
right, a decrease would shift to the left
Hint: Just like demand shifts, increase to the right, decrease to the left
⁃ COTTEN (Determinants of supply)
C - Cost of inputs
A change in the cost of producing a product affects the supply of a good or service
O - Other goods’ prices
Profit-maximizing first will choose to produce what gives them the most profit
T - Technology
New technology can decrease production costs and increase productivity that results in
the supply curve shifting to the right
T - Taxes and subsidies
Tax
A tax on the production of a good will result in increased production costs, which will
decrease supply
Subsidy
If a firm is fortunate enough to get a subsidy, profits increase at each price level that
induce increased supply
E - Expectations
Sellers think the price will increase in the future, they may hold back the amount offered
for sale
The ultimate goal of increase profits in the future
N - Number of sellers
Extra competition may be difficult for sellers, the extra supply usually is good for
consumers
 Who receive more choice and lower prices as the supply curve shifts to the right
22. Supply and demand together
⁃ Marker’s equilibrium price
The only price in a market buyers want to buy the exact amount seekers want to sell
⁃ Surplus
When the quantity supplied is greater than the quantity demanded, which is above the
equilibrium price
Prices will fall to the equilibrium price
⁃ Shortage
When the quantity demanded is greater than the quantity supplied
Prices will increase to the equilibrium price
⁃ Equilibrium occurs where the quantity demanded = quantity supplied, if not, then
disequilibrium occurs
⁃ The double-shift rule says that when there are simultaneous shifts in both demand and
supply, either price or quantity will be indeterminate
23. Effects on price and quantity
⁃ Ceteris paribus - holding all other factors or conditions constant
⁃ Effects on price and quantity
Change in demand Change in supply Effect on equilibrium price Effect on
equilibrium quantity
Increase Increase Indeterminate Increase
Decrease Decrease Indeterminate Decrease
Increase Decrease Increase
Indeterminate
Decrease Increase Decrease
Indeterminate
⁃ Price ceilings and price floors
Government may wish to establish a price ceiling which prohibits
Prices to rise above a certain level as in rent
Interest rate for mortgage loans
Below equilibrium
Government may wish to establish a price floor which makes it illegal
hire workers at a wage lower than the minimum wage
Above equilibrium