 Production Possibilities Curve -Principles

o Want to be at full employment

 Supply and Demand Analysis- why price and quantity ends up where it does
o Always negative sloping
o Price and quantity is an inverse relationship
o Demand Curve/ downward sloping- Buyers Intentions
o Three reasons why the buyer will buy less when the price goes up
1. Substitution effect- If one price goes up I’ll switch to other product
2. Income effect- I’ll have less money
3. Diminish Marginal Utility- Every additional unit I get will give me less
satisfaction- how much the item is worth spending my money for it
4. Complements- goods that are used together with other goods= car and gas-
they work in the same direction
o Supply Curve/ Upward Sloping- The Seller- If you pay me more I’ll give you more and
vice versa
o Cost go up per unit because of the Law of Demising Returns
o An increase in a variable factor. You get an increase in production and a decreasing rate
therefore you get diminishing returns
o Summary, diminishing returns means an increase in cost which then leads to supplier
charging more. Before the point of diminishing retunes the cost might go down, beyond
the point of diminishing returns the cost will start to go up.
 Elasticity of Demand- Asks how much does the demand change when I change my price ( its
important for revenue and profit)
o The formula is - % change in Q/ % change in P
o If the % the Q is greater the % change in P = Elastic- it is greater than 1 ( i.e. If Q is
changing more than P)
o If the % the Q is less than the % change in P = Inelastic -less than 1
o If the % the Q is equal to the % change in P =Unitary Elasticity - the same
 P( price) x Q (Quantity) = Revenue ( Revenue is gross profit)
 Incidence of tax- On whom a sales tax will be born- who will end up paying the sales tax, the
buyer or seller
o The supply curve will shift up, the exact amount of the tax