Lesson 2

 The PPF curve shows the possible combinations of goods and services available to
an economy, given that all productive resources are fully and efficiently employed.

 The PPF curve is bowed out because resources are not perfectly adaptable to the
production of the two goods. As we increase the production of one good, we
sacrifice progressively more of the other.

 SHIFTING THE PPF CURVE | to increase the production of one good without
decreasing the production of the other, the PPF curve must shift outward.
 The PPF curve shifts outward as a result of an increase in the economy’s
resources OR a technological innovation that increases the output obtained from a
given amount of resources.

Lesson 3

THE SUPPLY CURVE

Equation: Q s = Q s( P )

Factors effecting the supply curve:

 Cost of Production:
Effect: Increase shifts supply curve left; decrease shifts it right.
 Technological Advances:
Effect: Positive shifts supply curve right.
 Prices of Inputs: (e.g., raw materials, labor).
Effect: Increase shifts supply curve left; decrease shifts it right.
NON-PRICE DETERMINING VARIABLES OF SUPPLY
 Costs of Production
 Labor Capital
 Raw Materials

THE DEMAND CURVE

Equation: Q D = Q D (P)

Factors effecting the demand curve:

 Income Changes:
Effect: Increase in income shifts demand curve right for normal goods; left for inferior
goods.
 Price of Substitutes:

Effect: Increase in substitute price shifts demand curve right; decrease shifts it left.

 Price of Complements:

Effect: Increase in complement price shifts demand curve left; decrease shifts it right.

NON-PRICE DETERMINING VARIABLES OF DEMAND

 Income
 Consumer Tastes
 Price of Related Goods (• Substitutes • Complements)

THE MARKET MECHANISM

Characteristics of the equilibrium or market clearing price:
 QD = QS
 No shortage
 No excess supply
 No pressure on the price to change