INTRODUCTION TO ECONOMICS

Economics: is the study of how individuals and societies make decisions about ways to use scarce resources to fulfill
wants and needs.

STUDY OF ECONOMICS

 Macroeconomics ~ the big picture: growth, employment, etc. Choices made by large groups (like
countries).
 Microeconomics ~ how do individuals make economic decisions.

5 ECONOMIC QUESTIONS (SOCIETY MUST FIGURE OUT)

1) What to produce (make)?

2) How much to produce (quantity)?
3) How to produce it (manufacture)?
4) For whom to produce (who gets what)?
5) Who gets to make these decisions?

Resources: are the things used to make other goods.

Scarcity: is unlimited wants and needs but limited resources.

Choices: we make choices about how we spend our money, time, and energy so we can fulfill our needs and wants.

Needs: stuff we must have to survive, generally: food, shelter, clothing.

Wants: stuff we would really like to have (fancy food, shelter, clothing, big screen TVs, jewelry, conveniences
which also known as luxuries.

Trade-offs: you can’t have it all so you have to choose how to spend your money, time, and energy. These decisions
involve picking one thing over all the other possibilities.

Opportunity Cost: the value of the next best choice.

Production: is how much stuff an individual, business, country, even the world makes.

Stuff: goods and services.

Goods: tangible (you can touch it) products we can buy.

Services: work that is performed for others.

FACTORS OF PRODUCTION

 Land - natural resources like water, natural gas, oil, trees (all stuff we find on, in, and under the land).
 Labor – physical and intellectual. Labor is manpower.
 Capital – tools, machinery, factories. The things we use to make things. Human capital is brainpower,
ideas, innovation.
  Entrepreneurship – investment. Investing time, natural resources, labor and capital are all risks associated
with production.

THREE PARTS TO THE PRODUCTION PROCESS

 Factors of Production, what we need to make goods and services.

 Producer, company that makes goods and/or delivers services.
 Consumer, people who buy goods and services (formerly known as stuff).

CAPITAL GOODS AND CONSUMER GOODS

 Capital Goods ~ are used to make other goods.

 Consumer Goods ~ final products that are purchased directly by the consumer.

CHANGES IN PRODUCTION

 Specialization – dividing up production so that goods are produced efficiently.

 Division of Labor – different people perform different jobs to achieve greater efficiency (assembly line).
 Consumption – how much we buy (consumer sovereignty).
 If we increase land, labor, and capital, we increase production.
 If we decrease land, labor, and capital, we decrease production.

Gross Domestic Product (GDP): the total value of all final goods and services produced in a country in a year.

Cost: the total amount of money it takes to produce an item (to pay for all factors of production).

Revenues: the total amount of money a company or the government takes in.

Fixed Costs: the amount of money a business must pay each month or year (like rent and capital expenses).

Variable Costs: the amount of money a business pays that changes over time (labor and raw materials).

Total Costs: fixed costs + variable costs.

Marginal Costs: the additional cost of the next unit produced.

Profit: the difference between total costs and revenues. This is why you’re in business (profit motive!).

 Profit = Revenues – Total Cost

 Profit Motive – why you are in business---to make money.

Cost Benefit Analysis: weighing the marginal costs vs. the marginal benefits of producing an item or making any
economic decision. If the benefit is greater than the cost, then business does it.

CHAPTER 2 THE CONCEPT OF DEMAND, SUPPLY, AND MARKET EQUILIBRIUM

Market Mechanism. A term used to describe the manner in which the producers and consumers eventually determine
the price of the goods that are produced. Producers usually set a price to respond to how many goods are being
purchased, and consumers, on the other hand, react to that price.

MARKET MECHANISM CAN EXIST IN EITHER

Free Market Economy (Capitalism) is where all the resources are given to the private sector, that is, individuals,
groups of individuals, and households.

 Freedom of choice based on government control

 Primary and secondary industry
 Not essential

Planned Economy (Communism) is the public sector, that is, both the local and central government owns the public
sector.

 A command economy
 Governments control facets of economic production.

Mixed Economy (Socialism) is where all the resources are distributed to both the public and private sectors.

 Free market co-exists with government intervention.

Demand refers to the consumer’s desire to purchase goods and services and willingness to pay a price for a specific
good or service.

Demand Schedule is a table that shows the quantity demanded of a good or service at different price levels.

Demand Curve (pababa) is a graphical representation of the relationship between the price of a good or service and
the quantity demanded for a given period of time.

Law of Demand (inverse relationship) stated that a higher price leads to a lower quantity demanded and that a lower
price leads to a higher quantity demanded.

DETERMINANTS OF DEMAND

 Price
 Tastes and References
 Price of Complements
 Price of Substitutes
 Income
▫ Normal Goods
▫ Inferior Goods
 Expectations (of future prices)
 Population

Changes in Quantity Demanded and Movements along the Demand Curve refers to a change in the specific quantity
of a product that buyers are willing and able to buy, this change in quantity demanded is caused by a change in the
price. In this case, the demand curve doesn’t move; rather, we move along the existing demand curve.
Ceteris Paribus Assumption (all other things being equal) is typically used to describe an economic situation of
cause and effect while assuming that all other factors stay the same.

Changes in Demand and Shifts in the Demand Curve refers to a shift in the entire demand curve, which is caused by
a variety of factors (preferences, income, prices of substitutes and complements, expectations, population, etc.). In
this case, the entire demand curve moves left or right.

Supply refers to the quantity of goods and services that are available to be sold.

Supply Schedule is a table which lists the possible process for a good and services and the associated quantity
supplied.

Supply Curve is simply a supply schedule presented in graphical form. The standard presentation of a supply curve
has price given on the Y-axis and quantity supplied on the X-axis.

Changes in Quantity Supplied and Movements along the Supply Curve is a movement along the supply curve in
response to a change in price.

Law of Supply (positive relationship) states that there is a positive relationship between price and quantity supplied,
leading to an upward-sloping supply curve.

DETERMINANTS OF SUPPLY

 Price
 Level of Technology Used
 Prices of Inputs Used
 Government Regulation and Taxes in a Market
 Expectations of Future Prices
 Weather
▫ Favorable
▫ Unfavorable
 Number of Producers

Changes in Supply and Shifts in the Supply Curve refers to a shift in the entire supply curve, which is caused by
shifters such as taxes, production costs, technology, etc. Just like with demand, this means that the entire supply
curve moves left or right.

Market equilibrium is the state in which market supply and demand balance each other, and as a result prices
become stable.

Shortage occurs id the market price is below the equilibrium price, quantity supplied is less than quantity demanded.

Surplus occurs if the market price is above the equilibrium price, quantity supplied is greater than quantity
demanded.

VIOLATIONS OF LAW OF DEMAND

 Giffen Goods (Robert Giffen)

 Veblen Goods (Thorstein Veblen)
 Expectations of Price Change
 Habitual Goods
VIOLATIONS OF LAW OF SUPPLY

 Closure of Business
 Agricultural Products
 Monopoly
 Tight Competition