Economics Unit 1

Utility: satisfaction; how much pleasure/return you get from something (yoodles/stars)
Marginal: additional
Allocate: distribute

Shortages occur when producers will not or cannot offer goods or services at current prices.
Shortages are temporary.

Price: amount buyer pays

Cost: amount seller pays to produce a good
Investment: the money spent by businesses to improve their production
Goods: physical objects that satisfy our needs and wants
Consumer goods: created for direct consumption
Capital goods: created for indirect consumption; goods used to make consumer goods
Services: actions or activities that once person performs for another

Four factors of production: land, labor, capital, entrepreneurship

Land: anything natural (water, sun, plants, oil, trees, stone, animals, etc)
Labor: any effort a person devotes to a task for which that person is paid (manual laborers,
lawyers, doctors, teachers, waiters, etc)

Two types of capital: physical and human

Physical capital: any human-made resource that is used to create other goods and services
(tools, tractors, machinery, buildings, factories)
Human capital: any skills or knowledge gained by a worker through education and experience
(college degrees, vocational training, etc)
Entrepreneurship: ambitious leaders that combine the other factors of production to create
goods and services
Entrepreneurs take the initiative, innovate, and act as the risk bearers so they can
obtain profit

profit = revenue – costs

Accountants vs. Economics

Accountants look at only explicit costs (traditional “out of pocket costs” of decision making)
Economists look at both explicit costs and implicit costs (the opportunity costs such as forgone
time and forgone income)

The Production Possibilities Curve/Graph/Frontier (PPC/PPG/PPF):

A model/representation that shows alternative ways that an economy can use its scarce
resource. This model graphically demonstrates scarcity, trade-offs, opportunity costs, and
efficiency. Four key assumptions: Only two goods can be produced, full employment of
resources (minimal waste), fixed resources (ceteris paribus), fixed technology. Inside the curve
means you have leftovers/is called inefficient/unemployment. Outside the curve is
impossible/unattainable. On the line is efficient.

Constant Opportunity Cost: resources are easily adaptable for producing either good; the result
is a straight line PPC (which is not common)

Law of Increasing Opportunity Cost: As you produce more of any good, the opportunity cost
(forgone production of another good) will increase. Why? Resources are NOT adaptable to
producing both goods. Result is a bowed out (concave) PPC

How much each marginal unit costs = opportunity cost / units gained
Product Efficiency: products are being produced in the least costly way; this is any point ON the
PPC

Allocative Efficiency: products being produced are the ones most desired by society; this
optimal point on the PPC depends on the desires of society

Three Shifters of the PPC

1. Change in resource quantity or quality
2. Change in technology
3. Change in trade

Economic systems: the method used by a society to produce and distribute goods and services

Centrally-Planned (Command) Economy:

Free Market Economy:
Mixed Economy: mix between command and free market (some regulations)
Traditional: you do what your family does

Invisible Hand: The concept that society’s goals will be met as individuals seek their own self-
interest. Competition and self-interest act as an invisible hand that regulates the free market

Demand: the different quantities of goods that consumers are willing and able to buy at
different prices. (Ex: Bill Gates is able to purchase a Ferrari, but if he isn’t willing, he has NO
demand for one)

Law of Demand: states there is an inverse relationship between price and quantity

Quantity demand =/ demand: Demand refers to the willingness of consumers to buy different

amounts of products or services at different prices. Quantity demanded refers to the
willingness of consumers to buy a specific quantity of a specific product or services at a specific
price
Demand: you don’t care what the price of the truck in the commercial is because you’re not
looking to buy a truck
quantity demand: you do not want to buy a truck because it is overpriced

The law of demand is the result of three separate behavior patterns that overlap:
1. The Substitution Effect
o If the price goes up for a produce, consumers buy less of that product and more
of another substitute product (and vice versa)
2. The Income Effect
o If the price goes down for a product, the purchasing power increases for
consumers- allowing them to purchase more
3. The Law of Diminishing Marginal Utility
 o Utility = satisfaction
o We buy goods because we get utility from them
o The law of diminishing marginal utility states that as you consume more units of
any good, the additional satisfaction from each additional unit will eventually
start to decrease
o Basically, the more you buy of ANY GOOD, the less satisfaction you get from each
new unit

A demand curve is a graphical representation of a demande schedule. The demand curve is

downward sloping showing the inverse relationship between price (on the y-axis) and quantity
demand (on the x-axis)

Changes in Demand

Ceteris paribus: “all other things held constant”

When the ceteris paribus assumption is dropped, movement no longer occurs along the
demand curve. Rather, the entire demand curve shifts. A shift means that at the same prices,
more people are willing and able to purchase that good
This is a change in demand, not a change in price.

Five Shifters (Determinates) of Demand:

1. Tastes and Preferences

2. Number of consumers
3. Price of Related Goods
4. Income
o The incomes of consumer change the demand, but how depends on the type of
good.
 i. Normal goods (name brand/luxury): As income increases, demand
increases. As income falls, demand falls. Ex: luxury cars, sea food, jewelry
ii. Inferior goods: As income increases, demand falls. As income falls,
demand increases. Ex: ramen, used cars, used clothes
5. Future Expectations

Supply: the different quantities of a good that sellers are willing and able to sell (produce) at
different prices.

There is a DIRECT (or positive) relationship between price and quantity supplied. As price
increase, the quantity producers make increases. As price falls the quantity producers make
falls. Why? Because at higher prices, profit seeking firms have an incentive to produce more.

Six Shifters (Determinants) of Supply:

1. Prices/Availability of inputs (resources)

2. Number of Sellers
3. Technology
4. Government Action: Taxes & Subsidies
5. Opportunity Cost of Alternative Production
6. Expectations of Future Profit

Changes in PRICE don’t shift the curve. It only causes movement along the curve. When costs
increase, suppliers make less.
The free market system automatically pushes the price toward equilibrium.

Six Shifters (Determinants) of Supply: Five Shifters (Determinates) of Demand:

1. Prices/Availability of inputs 1. Tastes and Preferences
(resources) 2. Number of consumers
2. Number of Sellers 3. Price of Related Goods
3. Technology 4. Income
4. Government Action: Taxes & 5. Future Expectations
Subsidies
5. Opportunity Cost of Alternative
Production
6. Expectations of Future Profit

If two curves shift at the same time, either price or quantity will be indeterminate.

Consumer Surplus: the difference between what you are willing to pay and what you actually
pay. (CS = Buyers Maximum – Price)

Producers Surplus: the difference between the price the seller received and how much they
were willing to sell it for. (PS = Price – Seller’s Minimum)

Why do people trade?

If you didn’t trade, you would never have anything except for want you produce
yourself. Everyone specializes in the production and services and trades it to others. Limiting
trade would reduce people’s choices and make people worse off.

Absolute and Comparative Advantage:

Per Unit Opportunity Cost = Opportunity cost/units gains

Absolute Advantage: the producer that can produce the most output OR requires the least
amount of inputs.

Comparative Advantage: the produce with the lowest opportunity cost