CHAPTER 2
»Microeconomics vs macroeconomics
»Micro - the study of how households and firms make decisions and how they interact in the market
EX: supply and demand and market and market structures
»Macro - it is the study of the major components of the economy EX: international trade, inflation, wage laws
»Positive vs normative economics
»Positive economics - it is an attempt to describe the world as is so it's very descriptive in nature
EX: minimum wage law cause unemployment
»Normative economics - claims that attempts to prescribe how the world should be very prescriptive in nature
EX: the government should raise the minimum wage
»wants and needs
»Wants are your desires
» needs are basic requirements for survival.
»Scarcity vs shortage
» scarcity - the most fundamental economic problem that a society faces. Satisfying unlimited wants with
limited resources EX: gas
»shortage - it is a situation in which quantity demanded is greater than quantity supplied. EX: food item
» goods vs services
»goods- tangible commodities; Capital goods and consumer goods.
» capital goods - items used in the creation of other goods such as factory machinery and trucks
»consumer goods - goods that are intended for final use by the consumer
»Services - work that is performed for someone
» factors of production
» land - natural resources, labor (work exerted)
»Capital - Physical capital and human capital
»Physical capital are human made objects used to create other goods EX: buildings and tools
»Human capital is the knowledge and skills a worker gains through education and experience
»Entrepreneurship - risk taking motivation
Opportunity cost - the most desirable alternative given up by making a decision
Production possibility graph PPG
Production possibility curve PPC
Production possibility frontier PPF
»Shows alternative ways to use resources. each point on the PPG reflects a trade off
» PPC shifts - left: decrease in the labor force/ work skills/ education, permanent lost of productive capacity
EX: war, taxes, government regulation
Dot inside curve
Right: technology advancement, discover new resources, trade (comparative advantage), economic
growth
Dot Outside curve- unattainable region
Inside PPC: unemployment, underemployed (resources)
Outside PPC: technology, economic growth
Along the PPC: ceteris paribus - all things remain constant
Graphs are concave
»Four assumptions can be made
Fixed technology
Fixed resources
Full employment and productive efficiency
Two products are being considered
»Productive efficiency
»Producing goods at the lowest cost. You're allocating resources efficiency and full employment of
your resources
Any point on the curve (a -top, b - middle c- bottom)
»allocative efficiency
»It is the combination of the most desired products by society or those who are in charge of
economic decision
Where do we want to produce on the curve
-------------------------------------------------------------------------
Chapter 3
»Elasticity of demand: a measure of how consumers react to change in price
»Elastic demand:
»Demand that is very sensitive to change in price
»E>1 EX: soda, candy, fur coat, steak
»Product is not a necessity, there are substitute
»Inelastic demand:
»Demand that is not very sensitive to a change in price
»E<1. EX: salt, milk, insulin, gas
»Product is a necessity, there are few to no substitutes
»People will buy no matter what
Unitary elastic: E=1
»Calculating elasticity
EX: the price of moo iced coffee drink has risen from $1.50 to $1.70 per 500 ml container. Sales at your local corner store at "moo"
fall from 500 container per week to 300 containers per week.
Step 1: (New quantity - old quantity)/old quantity
300-500 / 500 = -0.4
Step 2: (New price - old price)/old price
1.70-1.50/1.50=0.13
Step 3: PED = (% ^ in quantity demanded)/% ^ in price
-0.4/0.13 = -3.1 » |-3.1| » 3.1
Ans = 3.1 elastic
»»Supply
»Total revenue : it is the total amount of money a firm receives from selling goods and services
»Equation: P x Q = TR (price x quantity = total revenue)
1. Fixed costs: a cost that does not change, no matter how much is produced EX. salaries, mortgage, car note
2. Variable costs: a cost that rises or falls depending on how much is produced (fluctuates or changes) EX: electricity, cell phone, water, etc
3. Marginal costs: is the cost of producing one additional unit of good
Equation: New total revenue - old total revenue
4. Total costs: Fixed cost + variable cost = total cost
"Cost is what you spend out, revenue is what you get in."
»Supply equations
AFC = TFC/Q
AVC = TVC/Q
ATC = TC/Q
Or
ATC = AFC + AVC
marginal cost: New TC - old TC opp
Price floor: above equilibrium and is the minimum price that can be paid for a product
Price ceiling: set below equilibrium and is the maximum price that can be paid for a product
»Microeconomics vs macroeconomics
»Micro - the study of how households and firms make decisions and how they interact in the market
EX: supply and demand and market and market structures
»Macro - it is the study of the major components of the economy EX: international trade, inflation, wage laws
»Positive vs normative economics
»Positive economics - it is an attempt to describe the world as is so it's very descriptive in nature
EX: minimum wage law cause unemployment
»Normative economics - claims that attempts to prescribe how the world should be very prescriptive in nature
EX: the government should raise the minimum wage
»wants and needs
»Wants are your desires
» needs are basic requirements for survival.
»Scarcity vs shortage
» scarcity - the most fundamental economic problem that a society faces. Satisfying unlimited wants with
limited resources EX: gas
»shortage - it is a situation in which quantity demanded is greater than quantity supplied. EX: food item
» goods vs services
»goods- tangible commodities; Capital goods and consumer goods.
» capital goods - items used in the creation of other goods such as factory machinery and trucks
»consumer goods - goods that are intended for final use by the consumer
»Services - work that is performed for someone
» factors of production
» land - natural resources, labor (work exerted)
»Capital - Physical capital and human capital
»Physical capital are human made objects used to create other goods EX: buildings and tools
»Human capital is the knowledge and skills a worker gains through education and experience
»Entrepreneurship - risk taking motivation
Opportunity cost - the most desirable alternative given up by making a decision
Production possibility graph PPG
Production possibility curve PPC
Production possibility frontier PPF
»Shows alternative ways to use resources. each point on the PPG reflects a trade off
» PPC shifts - left: decrease in the labor force/ work skills/ education, permanent lost of productive capacity
EX: war, taxes, government regulation
Dot inside curve
Right: technology advancement, discover new resources, trade (comparative advantage), economic
growth
Dot Outside curve- unattainable region
Inside PPC: unemployment, underemployed (resources)
Outside PPC: technology, economic growth
Along the PPC: ceteris paribus - all things remain constant
Graphs are concave
»Four assumptions can be made
Fixed technology
Fixed resources
Full employment and productive efficiency
Two products are being considered
»Productive efficiency
»Producing goods at the lowest cost. You're allocating resources efficiency and full employment of
your resources
Any point on the curve (a -top, b - middle c- bottom)
»allocative efficiency
»It is the combination of the most desired products by society or those who are in charge of
economic decision
Where do we want to produce on the curve
-------------------------------------------------------------------------
Chapter 3
»Elasticity of demand: a measure of how consumers react to change in price
»Elastic demand:
»Demand that is very sensitive to change in price
»E>1 EX: soda, candy, fur coat, steak
»Product is not a necessity, there are substitute
»Inelastic demand:
»Demand that is not very sensitive to a change in price
»E<1. EX: salt, milk, insulin, gas
»Product is a necessity, there are few to no substitutes
»People will buy no matter what
Unitary elastic: E=1
»Calculating elasticity
EX: the price of moo iced coffee drink has risen from $1.50 to $1.70 per 500 ml container. Sales at your local corner store at "moo"
fall from 500 container per week to 300 containers per week.
Step 1: (New quantity - old quantity)/old quantity
300-500 / 500 = -0.4
Step 2: (New price - old price)/old price
1.70-1.50/1.50=0.13
Step 3: PED = (% ^ in quantity demanded)/% ^ in price
-0.4/0.13 = -3.1 » |-3.1| » 3.1
Ans = 3.1 elastic
»»Supply
»Total revenue : it is the total amount of money a firm receives from selling goods and services
»Equation: P x Q = TR (price x quantity = total revenue)
1. Fixed costs: a cost that does not change, no matter how much is produced EX. salaries, mortgage, car note
2. Variable costs: a cost that rises or falls depending on how much is produced (fluctuates or changes) EX: electricity, cell phone, water, etc
3. Marginal costs: is the cost of producing one additional unit of good
Equation: New total revenue - old total revenue
4. Total costs: Fixed cost + variable cost = total cost
"Cost is what you spend out, revenue is what you get in."
»Supply equations
AFC = TFC/Q
AVC = TVC/Q
ATC = TC/Q
Or
ATC = AFC + AVC
marginal cost: New TC - old TC opp
Price floor: above equilibrium and is the minimum price that can be paid for a product
Price ceiling: set below equilibrium and is the maximum price that can be paid for a product
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