Unit 1

Microeconomics vs Macroeconomics

Micro:

• Study of how household and firms make decisions and how they interact in the market.
• Supply and demand market structures

Macro:

• Study of the major components in the economy
• International trade, inflation, and wage laws.

Positive vs. Normative Economics

Positive:

• An attempt to describe the world as is
• Very Descriptive in nature

Normative:

• Claims that attempts to prescribe 
• Ex: Government should raise the minimum wage

Wants vs. Needs

• Want - a desire
• Need - necessity for survival

Scarcity vs. Shortage 

• Scarcity  - most fundamental economic problem a society faces
• Satisfying unlimited wants with limited resources
• Shortage - situation in which quantity demanded is greater than quantity supply

Goods vs. Services

• Goods - tangible commodities
• 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

1. Land - Natural Resources
2. Labor - Work exerted
3. Capital 
• Physical - human made objects used to create other goods
• Ex: Buildings and tools
• Human - Knowledge and skills a worker gains through education and decisions
4. Entrepreneurship 

Opportunity cost - most desirable alternative given up by making a decision

PPC -Production possibility Curve

PPF  - Production possibility Frontier 

PPG - Production Posibility Graph

• A curve depicting all maximum output possibilities for two or more goods given a set of inputs (resources, labor, etc.). Assumes that all inputs are used efficiently
• Shows alternative ways to use resources, each point reflects a trade off
• Graphs are concave (bowed out)

4 Assumptions

1. Fixed Technology
2. Fixed Resources
3. Full Employment + product efficiency
4. Two products are being considered

Points A,B, & C

• Efficient and attainable

Point D

• Inefficient and attainable
• Under utilization
• Resources

Point E

• Efficient and unattainable
• Over-extended
• Technology 

Shifts:

Left:

• Decrease in work force/ work skills/ education
• Permanent loss of productive capacity
• Ex: War, taxes, government regulation

Right:

• Technological advancement
• Discovery of new resources
• Trade ( Comparative advantage)
• Economic Growth

Movements:

1. Inside the PPC
1. Unemployment
2. Underemployed
2. Outside the PPC
1. Technology
2. Economic growth
3. Along the PPC
1. Ceteris Parins - all things remain constant

Productive vs. Allocative Efficiency

Productive - Producing goods at the lowest cost

• Full employment
• Allocating resources efficiently

Allocative - Combination of the most desired products by society or those who are in charge of economic decision

• Where we want to produce on the curve

Demand and Supply

Demand:

• The quantities that people are willing and able to pay at various prices
• There is an inverse relationship between price and quantity demanded
• Causes:
1.  A Δ in the number of buyers ( population)
2. A Δ in buyer's taste (Advertising) 
3. A Δ in income ( inferior goods vs normal goods)
4. A Δ in price of related goods ( Substitute vs Complimentary goods)
5. A Δ in expectation

Supply:

• The quantities that producers or sellers are willing and able to produce or sell at various prices
• There is a direct relationship between price and quantity supplied
• Causes:
1. Δ in technology
2. Δ in weather
3. Δ in resources or factor prices
4. Δ in taxes or subsidies
5. Δ in the number of suppliers
6. Δ in expectations

Elasticity of Demand

• Measure of how consumers reacts to a change in price

Elastic Demand

• Demand that is very sensitive to change in price
• Product is not a necessity
• There are substitutes
• E>1
• Ex: Soda, Candy, fur coat, and steak

Inelastic Demand

• Demand that is not very sensitive to change in price
• Product is a necessity
• Few or none substitutes 
• People need no matter what
• E<1
• Ex: Salt, milk, insulin, and gas

Unitary Elastic

• E=1

How to Calculate Elasticity of Demand

1. New Quantity - old quantity / old quantity
2. New price - old price / Old price
3. % Δ in quantity demanded / % Δ in price 

 Total Revenue

• Total amount of money a firm receives from selling goods and services
• P(Q) = TR

Business Cycle

• Average cycle is 6 years
• Recessions last about 14 months
• The bulk of a cycle is the growth stage
• Peak and trough are meaningless because we never know we are in one until it's over
• If a recession loses more than 10% of real GDP, the it is a depression
• Trough means the end of recession 

Production Costs

Fixed Costs

• Cost that does not change no matter how much is produced
• Salary, mortgage, car payment

Variable Costs

• Cost that fluctuates or changes depending upon how much is produced
• Electricity bill, water bill, marginal cost

Marginal Cost

• Cost of producing one additional unit of a good

Total Cost

• FC+VC = TC