Comparative Advantage

Specialization

• Individuals and countries can be made better off if they will provide in what they have a comparative advantage and then trade with others for whatever else they want/need

Absolute advantage

• Producer that can produce the most output or requires least amount of inputs(resources)

Comparative advantage

• producer with the lowest opportunity cost
• countries should trade if they have a relatively lower opportunity cost 
• an output problem presents data as products produced given a set of resources
• input problem presents data as amount of resources needed to produce a fixed amount of output
• when identifying absolute advantage input problems change the scenario from who can produce a given product with the least amount of resources

Balance of Payments

5-4-17

• a measure of money inflows as well as outflows in the U.S. and the world

Three Accounts

• Current accounts
• net exports
• exports give credit
• imports give debit
• Net foreign income
• income that is earned by foreign assets
• Net transfers
• Foreign aid
• capital account
• balance of capital ownership
• investments in the U.S.
• Purchase of financial assets by the foreigners
• Official Reserves
• Foreign currency holdings given by the feral reserve sytm.

Balance of Goods and Services 

• goods exports +/- services + net investment + net transfers

Official Reserves

• current account + current capital = 0

Foreign Exchange

5-8-17

• Buying and selling of currency
• Any transaction that occurs in the Balance of payments necessitates foreign exchange
• The exchange rate(e) is determined in the foreign currency markets
• simply exchange rate is the price of currency

Change in exchange rate

• exchange rates are a function of the supply and demand for currency
• increase in supply of currency will decrease exchange rate of currency
• decrease in supply of currency will increase in exchange rate of currency
• increase in demand for currency will increase exchange rate of currency
• decrease in demand for currency will decrease the exchange rate of currency

Appreciation and Depreciation

• Appreciation of currency occurs when the exchange rate of that currency increase (e Increase)
• Depreciation of a currency occurs when the exchange rate of that currency decreases(e decreases)

Determinants

1. Consumer taste
2. Relative income
3. relative price level
4. Speculation

Exports and imports

• exchange rate is a determinant of both exports and imports
• Appreciation of the dollar causes american goods to be relatively more expensive and foreign goods to be relatively cheaper thus reducing exports and increasing imports
• Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be relatively cheaper and foreign goods to be relatively more expensive this increasing exports and reduce imports

Supply side economics/Reaganomics

4-19-17

• Manipulate aggregate supply by enacting policies designed to stimulate incentives to work, save, and invest 
• ex: tax cuts= increase disposable income

Laffer Curve

• Theoretical relation between tax rate and govt revenue

Criticism of laffer curve

• 1- imperial evidence suggest that the impact of tax rates on incentives to work save and invest are small
• 2- tax cuts also increase demand which can fuel inflation
• 3- where the economy is actually located on the curve is difficult to determine 

Phillips curve

Phillips Curve

• Inverse relationship between inflation and unemployment
• trade off
• Each point of the Phillips curve corresponds to a different level of output

Long run Phillip curve

• occurs at natural rate of unemployment
• is represented by a vertical line
• no trade of between unemployment and inflation
• due to economy producing at full employment level
• only shift if LRAS shifts 
• NRU is equal to
• frictional, seasonal, and structural unemployment 

Short Run

• since wages are sticky inflation changes wages moves the point on the LRPC
• If inflation persist and expected rate of inflation rises then the entire SRPG moves upward
• Stagflation- unemployment and inflation simultaneously rises 
• Supply shock- rapid and significant increases in resource cost
• If inflation expectations drop due to new tech or efficiency then SRPC will move downward
• Misery index- combination of unemployment and inflation in any given year
• single digit misery is good

Long run extra

• increase in Un will shift LRPC right
• decrease in Un will shift LRPC left

loanable

Loanable Funds Market

4-3-17

• is interest rate of 50% good or bad
• bad for borrowers but good for lenders
• Loadable funds market is private sector supply and demand of loans
• this market brings together those who want to lend $1(savers) and those who want to borrow(firm with investment spending projects)
• This market shows effect of real interest rate 
• Demand- inverse relationship between real interest rate and quantity loan demanded
• Supply- direct relationship between real interest rate and quantity loans supplied
• supply is not vertical

Federal Funds rate

• interest rate that banks charge one another for overnight loans

Prime rate

• interest rate that the banks charge their credit worthy customers

Loadable Funds Market

4-3-17

Loadable Funds Market 

• IS interest rate of 50% good or bad?
• bad for borrowers but good for lenders
• loadable funds market is private sector supply and demand of loans 
• this market brings together those who want to lend money (savers) and those who want to borrow(firms with investment spending projects)
• this market shows effect of real interest rate
• demand- inverse relationship between real interest rate and quantity loan demanded
• Supply- direct relationship between real interest rate and quantity loans supplied
• supply is not vertical

Federal fund rate

• interest rate that banks charge one another for over night loans

Prime rate

• Interest rate that the banks charge their credit worthy customer

Tools of Monetary Policy

3-31-17

Tools of Monetary Policy

3 tools

1. Setting RR
2. lending $ to banks and thrifts
• Discount rate
3. Open Market Operations
• Buying and selling bonds

RR

• "fractional reserve system"
• The Fed sets the amount that bank must hold
• RR is % of deposit that banks must hold in reserve
• loan eventually becomes deposits for another bank that will loan out ER 
• If there is a recession fed actions on RR
• decrease reserve ratio
• Banks hold decrease money and have more ER
• Banks create more $ by loaning out excess
• money supply increases, interest falls, AD increases, RR decreases, MS increases, i increases, I increases, and AD increases
• If there is inflation fed actions on RR
• Increases reserve ratio
• Banks hold more money and have less excess reserve
• banks create less money
• RR increases, MS decreases, i increases, I decreases, AD increases
• OMO is when fed. buy or sell govt bonds
• this is most important and widely used monetary olicy
• of fed buys bonds it takes bonds out of the eco and replaces them with $
• If fed sell bonds it takes $ and give the security to the investor
• To increase MS fed should BUY govt securities
• to decrease MS fed should sell govt securities
• If fed buys bonds the DD X MM

Discount Rate

• interest rate that fed charges commercial banks for short term loans
• DD generally not used by the fed to affect monetary supply

Money creation formula

3-27-17

Money creation formula

• A single bank can create $ by amount of its ER
• banking system as a whole can create $ by a multiple of excess reserves
• MM X ER = Expansion of $
• Money multiplier= 1/RR

News vs Existing $

• Initial deposit in a bank comes from the FED/bank purchase of a bond or other $ out of circulation (buried treasure), the deposit immediately increases the $ supply
• deposit then leads to further expansion of $ supply through the $ creation process
• Total change in MS if initial deposit is new $ = Deposit + $ created by banking system 
• if deposit in a bank is existing $ (already counted in M1), depositing the amount does NOT change the MS immediately cs it already counted
• Existing currency deposited into a checking account changes only the composition of the $ supply from coins.paper $ to checking account depositing
• total change in the MS if deposit is existing $ = banking system created $ only

Bond and stocks

3-22-17

Bonds and Stocks

• bonds are loans, or IOUs, that represent debt that the govt or corporation must repay to investor
• bond holder has no ownership of company

Bonds

• First if a corporation issues and then sells a bond
• liability or asset is corporation
• assets  or liability are buyers
• If that corporation issues a lok bond with a 10 yr. term and a 5% interest
• nominal interest rate = 5%
• nominal interest falls 3% = value of bond increases
• nominal interest rate rises 8 = value of bond decreases

Stock owners

• earn profit in two ways:
• Dividends, portions of corporations profit are paid out to stock holders
• higher corporate profit, the higher the divided
• Capital gain: earned when stockholders sell stock at lower price than purchase price suffers a capital loss

The money market

• Demand fir $ has inverse relationship between nominal interest rates and quantity of $ demanded
• What happen when demand of $ when in. rates increases?
• Quantity demand falls because of individuals would prefer to have interest earning assets instead of borrowed liabilities
• What happens when quantity demanded when in. rates decreases
• quantity demand increases no incentive to convert cash

Money Demand Shifters

1. Changes in price lvl
2. changes in income
3. changes in taxation that affect investment

• Money demand curve slopes decreases and to the shifts because all else being equal higher interest rates increase the opportunity cost of holding $, thus leading public to reduce quantity of $ it demands

Fractional Reserve system

• Demand deposits/checks
• process by which banks hold a small portion of their deposits in reserves and loan out the excess
• banks keep cash on hand which is (RR) to meet depositor's needs 
• MS only moves by bond or loans 

Unit 4 Money Exchange

3-20-17

Unit 4 Money Exchange

Barter System

• good and services are traded directly
• no money exchange

Money

• anything generally accepted in payment for goods and services
• money does not equal wealth and income
• wealth equals total collection of assets that store value 
• Income equals flow of earnings per unit of time
• can be used as

1. Medium of exchange: buys goods and services
2. Unit of account: measuring value of goods and services
3. Store value

Types of Money

• Representatives $
• something of value
• ex: IOU
• Commodity $
• something that preforms function of money and has alternative uses
• ex: Gold, salt, silver
• Flat $
• $ cause govt says so
• ex: paper, coin

Characteristics $

• durability, portability, divisibility, limited supply, uniformity, acceptability

3 Types of Money

• liquidity- ease with which an asset can be accessed and converted into cash

1. M1 (High Liquidity)- coins, currency, and checkable deposits (personal and corporate checking accounts which are largest compent of M1). AKA demand deposits. Generally money supply
2. M2 (Medium Liquidity)- M1 and savings deposits ($ market accounts), time deposits (CDs: certificates of deposit), and mutual funds below $100k
3. M3 (Low Liquidity)- M2 plus time deposits above $100k

Financial institutions

1. store money
2. save money

• savings acct., checking acct., CD, money market acct.

      3. loan money

• Interest- price paid for the use of borrowed money
• Principal- amount that you borrow

Types of Financial Intermediaries

• Commercial Banks
• savings and loans institution
• Credit Union
• Mutual Funds Companies
• Finance Companies

Financial System

• Assets- anything of monetary value owned by a person or business.
• Financial Asset- a paper claim that entitles the buyer to future income from the sellers.
• Physical Asset- claim on tangible object (Ex: car, house)
• If you go to your bank and take out loan 
• bank created Financial Asset, you have created a Liability
• Liability- requirement to pay money in the future (usually with interest)
• there are 5 major financial assets: loans, stocks, bonds, loan-backed securities, and bank deposits

Interest rates and Inflation

• The time value of money- A dollar is worth more today that it is tomorrow. You are losing money every second you are not investing.

Present vs. Future Value

• Future Value: If you invest (or lend) money to someone, it will compond (grow) according to the following equation: FV=PV(1+i)^t
• Present Value: amount of $ I need to invest new, in order to get some amount (FVS known) in the future. PV=FV/ (1+i)^N

Simple Interest Formula

• Let v= future value of $
• p= present value of $
• r= real interest rate (nominal-inflation rate) expressed as a decimal
• n= years
• k= # of times interest is credited per year
• simple interest formula
• v=(1+r) ^n X P

WOWOWOWOWOWOWOW!!! DON'T WORRY I GOTCHU

Unit 3

3-7-17

Fiscal Policy

How govt stabilize eco.

• Actions by congress to stabilize economy

Fiscal Policy

• changes in expenditures or tax revenues of federal govt
• 2 tools of fiscal polic
• taxes govt can increase or decrease taxes 
• spending govt can increase or decrease spending
• Fiscal policy is encoded to promote our nations economic goals: full employment, price stability, economic growth

Deficit, Surplus, Dept

• Balanced budget
• revenues = expenditures
• Budget deficit
• revenues< expenditures
• Budget Surplus
• revenue> expenditures
• govt debt
• sum of all deficits - sum of all surpluses
• Govt must borrow money when it runs a budget deficit
• Govt borrows from
• individuals, corporations, financial institution, foreign entities of foreign

Fiscal policy 2 options

• Discretionary Fiscal Policy(action)
• expansionary fiscal policy- think deficit
• constractionary fiscal policy- think surplus
• Non Discretionary Fiscal Policy (no action)

3 types of taxes

• 1- progressive taxes- takes a larger percent of income from high income group
• ex: current federal income tax system
• 2- proportional taxes (flat rate)- takes same % of income from all income groups
• 3- Regressive tax- takes larger percentage from low income groups

Contractionary Fiscal Policy

• laws that reduce inflation, decrease GDP
• decrease govt spending
• tax increase
• combinations of the two

Expansionary FP

• law that reduce unemployment and increases GDP
• increase govt spending
• decrease tax on consumers
• combinations of the two

Automatic/Built in stabilizer

• Anything that increases govt budget deficit during recession and increases its budget surplus during inflation without requiring explicit action by policymakers
• 1- transfer payments
• welfare checks, food stamps, unemployment checks
• 2- progressive income tax
• automatic stabilizers take 33-50% out 

Unit 3

2-26-17

MPC and MPS

Spending Multiplier effect

• initial change in spending (C,Ig,G,Xn) causes larger change in aggregate spending/ (AD)
• multiplier = Δin AD/Δin spending or ΔAD/ΔGDP
• why does this happen?
• expenditures and income flow continuously which set off spending increase in economy

Calculating spending multiplier

• multiplier = 1/(1-MPC) or 1/MPS
• Multilier are (+) when there is an increase in spending and (-) when there is a decrease

Calculate tax multiplier

• when govt taxes, the multiplier works in reverse
• bc now money is leaving circular flow
• Tax multiplier (note: it's negative)
• formula = -MPC/(1-MPC) or -MPC/MPS
• If there tax - cut, multiplier is positive bc there now more money in circular flow 
• Range 1- employment is high, roduction is low
• Range 2- unemployment is medium out put is high
• Range 3 - output high unemployment   

Unit 3

2-23-17

Consumption and savings

Disposable income (DI)

• income after taxes/ net income
• DI= gross income - taxes
• 2 choices, disposable income, households can either
• consume (spend money on goods and services) 
• save(not spend money on goods and services)

Consumption

• household spending
• ability to consume is contained by
• amount of disposable income
• propensity to save
• Do households consume if DI = 0?
• autonomous consumption
• Dissavings
• APC = C/DI % DI that is spent

Savings

• Household not spending
• ability to save is constrained by
• amount of disposable income
• propensity to consume
• Do households save if DI = 0? - No
• APS = S/DI% DI that not spent

APC and APS

• APC + APS = 1
• 1 - APC = APS
• 1 - APS = APC
• APC > 1 Dis-savings 
• -APS dis-savings

MPC and MPS

• Marginal Propensity to consume
• ΔC/Δ DI
• % of every extra dollar earned that is spent
• Marginal Propensity to save 
• ΔS/ΔDI
• % of every extra dollar earned that is saved
• MPC + MPS = 1
• 1- MPC = MPS
• 1- MPS = MPC

Determinants of C and S

• Wealth
• Expectations
• Household debt
• Taxes

  

Unit 3

2-21-17

Interest Rates and Investment Demand

• Investment
• Money spent or expenditures on:
• new plants (factories)
• capital equipment(machinery) 
• technology(hardware and software)
• new homes
• inventories(goods sold by producers)
• Expected Rates of Return
• cost/ benefit analysis - how business make investment
• how business count cost?
• invest cost
• How business determine amount of investment they undertake
• if expected return > interest cost, then invest
• if expected return < interest cost, then do not invest 
•  Real(R%) vs.Nominal(I%)
• How you compute real interest rate (R%)?
• r%= i% - π%
• nominal is observable rate of invest, real subtract out inflation ( π%) and is only known ex post factor
• what determines cost of investment decision?
• real interest rate (R%)
• Investment(ID) Demand curve shifts in (ID)
• shape of investment demand curve
• downward shaping
• Shifts in (ID)
• cost of production
• business taxes
• technology change
• stock of capital
• expectations

Aggregate supply

• Level of real GDP that firms produce at each price level (PL)
• long run vs. short run
• long run
• will be vertical
• period of time where input prices are completely flexible and adjust changes in price level
• level of real GDP supplied is independent at price level
• short run
• period where input prices sticky and do not adjust to changes in price levellevel of RGDP supplied directly related to price lvl
• Long run aggregate supply (LRAS)
• Yf is full employment
• bc inut prices are sticky SRAS is upward sloping
• Short run aggregate supply(SRAS)
• SRAS increase a shift to the right
• SRAS decrease a shift to the left 
• Per unit production cost= total input cost/ total output
• Determinate of SRAS
• Input price, productivity legal institutional environment
• Input
• Domestic resources prices
• wage(78% of business costs)
• price of capital  
• raw material (commodity prices)
• foreign resources price
• strong $- lower foreign resources prices
• weak= higher foreign resource prices
• Market Power
• monopolies and cartel that control resources control rice of those resources
• increase in resource prices = SRAS<-----
• decrease in resources prices= SRAS------>
• Productivity
• total output/total input
• more productivity = lower unit production cost = SRAS ----->
• lower productivity = higher unit production cost = SRAS<-----
• legal institution environment
• Taxes and subsides
• taxes ($ to govt) to business reduce per unit production cost=  SRAS <---
• subsides ($ to govt) on business reduce per unit production cost = SRAS--->
• govt regulation creates a cost of compliance= SRAS----->
• Deregulation reduces compliance cost = SRAS ---->

Unit 3

2-16-17

Aggregate Demand Curve

• Aggregate Demand curve
• AD is demand by consumers, businesses, government and foreign countries 
• changes in price level cause move along curve not shift on curve
• inverse relationship between price level and level of RGDP

• 3 reasons why AD downward sloping
• 1- wealth effect
• higher prices reduce purchasing power of $
• decreases quantity of expenditures
• lower price level increase purchasing power and increase expenditures
• 2- interest rate effect
• As price level increases, lenders need to charge higher interest rates to get real return on their loans
•  higher interest rates discourage consumer spending and business investment
• 3- Foreign trade effect
• When U.S, price level increases, foreign buyers purchases fewer U.S. goods and americans buy more foreign goods
• exports fall and imports rise causing RGDP demanded to fall. (Xn decreases)
• Shift in AD
• 2 parts to shift in AD
• A change in GDP
• multiplier effect that produces greater change than original change in 4 component
• Increases in AD=AD right
• Decrease in AD=AD left  
• 4 determinate of AD 
• 1-GDP: C, IG, G, Xn
• 2: Change in investment spending
• real interest rates (price of borrowing $)
• (if interest rate increases/decreases)
• future business expectations (High expectations)
• productivity and technology (new robots)
• business taxes (higher corporate taxes mean)
• 3: Change in govt spending
• war, nationalized health care, decrease defense spending
• 4 : change in net exports (X-M)
• exchange rates
• if U.S, dollar depreciates relative to euro
• national income compared abroad
• if major importer has a recession
• AD= GDP
• "if U.S. gets a cold, Canada gets Pneumonia
• Govt spending
• more govt spending AD ------->
• less govt spending AD <------- 

REALLY?!? LAST MINUTE STUDYING AGAIN?

Unit 2

1-26-17

Circular Flow Model

• Household- A person/group that shares income
• Business/Firm- Organization that produces goods and serves for sale
• GDP
• G-Gross
• D-Domestic
• P-Product
• Total value of all final good and services produced with countries border in a given year
• includes all production or income earned within U.S. and foreign countries
• Excludes production outside of U.S. even by Americans 
• GNP
• G-Gross
• N-National
• P-Production
• total value of all final goods services produced by the Americans in a given year
• includes production/income earned by Americans anywhere in the world
• excludes production by non-Americans even in the U.S. 
• GDP
• Formula: C +  IG + G + XN
• C- consumption (67%)
• IG- Gross private domestic investment (18%)
• factory equipment maintenance
• new factory equipment 
• construction of housing 
• Unsold inventory of product built in a year 
• G- Government purchases (17%)
• XN- Net exports
• Formula: Exports - imports 
• Include
• C
• IG
• G
• XN
• Exclude
• Intermediate goods
• goods to make final good
• avoid double or multiple
• Used or secondhand
• Stocks;bonds
• No production
• Unreported business activity(ex. Tips)
• Gifts and trans-fee payments
• things such as scholarships, social security , unemployment
• illegal activity
• Non market activity
• Income approval to GDP
• W + R + I + P +
• W-wages(compensation of employees/salaries)
• R-Rents(income received by households and business that supply property resources
• I- interest(money paid by private businesses for to supplier or loans used to purchase capital)
• P-Profits(When you own your own business)
• Formulas that you need to know
• Trade: Exports - imports
• Budget: Gov't purchases for goods and services + gov't transfer payments - gov't fee
• National income: compensation of employees + Rental Income + Interest Income + Proprietor's Income + Corporate Profits
• 2nd: GDP - indirect Business taxes - Depreciation - Net foreign factor payments
• Disposable personal income: National income - personal household taxes + gov't transfer payments
• Net National Product: GNP - Depreciation
• Net Domestic Product: GDP - Depreciation
•  Depreciation
• loss in value in capital equipment due to normal wear and tear 
• Gross investment formula: Net investment + Depreciation
• house is not consumption
• GNP formula: GDP + Net foreign factor payment
• another phrase for depreciation is consumption for fixed capital

2-3-17

Nominal GDP vs. Real GDP

• Nominal GDP
• value of output produced in current prices
• Formula : P X Q
• deduced from current year prices
• Value of output produced in constant based yr. prices
• Real GDP
• Formula: P X Q
• base yr. prices
• adjusted for inflation
• nominal can increases yr. to yr.
• Real GDP can increases yr. to yr. if only output increases
• base yr. nominal = GDP
• years after base yr., nominal > real GDP
• years before base year Real GDP> nominal GDP
• Base yr. is always the earlier year
• GDP Deflator
• Price index used to adjust from nominal to real
• Formula: (nominal GDP) / (Real GDP) X 100
• Base yr. GDP deflator will always = 100
• yrs. after base yr. GDP deflator will be greater than 100
• yrs. before base yr. GDP deflator will be less than 100
• Consumer Price Index (CPI)
• measures inflation by tracking changes in the price of market basket of goods
• Cars, trucks, etc.
• Formula: (price of market basket in current yr.) / (price of market basket in base yr.) X 100
• Inflation
• General rising level of prices
• reduces the purchasing power of money
• amount of goods and serves that money buys
• ideal inflation rate is 2-3%
• 3 causes of inflation
• Printing of money
• Demand pull inflation
• demand pulls up prices
• demand increases but supply stats the same
• overheated economy with excessive spending but same amount of good
• Cost push inflation
• higher production cost increase prices
• formula inflation: (current year price index - base yr. price index) / (base yr. price index) X 100 
• deflation - decline in general price level
• disinflation - occurs when inflation rate itself declines
• rule of 70
• used to calculate # of yrs. it will take for price level to double at any given rate of inflation
• formula: 70 / (annual rate of inflation
• real interest rate - amount of # that is borrowed 
• formula: real = nominal interest rate - expected inflation
• percentage increase in purchasing power that is borrower pays to the lender
• Nominal interest rate - percentage increase in money that the borrowers pay back to the lender not adjusting for inflation 
• Hurt inflation
• lenders people who lend money ( at fixed interest rates)
• people with fixed income
• savers
• Helped by inflation
• borrowers- people who borrow money
• a business where the price of the product increases faster than the price of resources

2-9-17

Unemployment

• Percent of people in labor force that want a job but not working
• Labor force
• consist of unemployed and employed
• if you work at least 1 hour a month than you are employed
• part time workers
• Not in labor force
• kids
• full time students
• people in mental institution 
• incarcerated- jail and prison
• retirees
• suesy home makers- people who stay home
• military person
• discouraged
• when  you are over 24 you are considered part of the work force
• unemployment= (unemployed + employed)
• also: (number employed) / (number in labor force) X 100
• 4 types of unemployment
• standard #4-5%
• 1. frictional unemployment1% 
• temporarily employed / being between jobs
• individual qualified workers with transferable skills but are not working     
• ex: high school and college graduates looking for jobs
• 2. seasonal unemployment
• specific type of frictional unemployment which due to tome of yr. and nature of the job
• these jobs will come back
• 3. structural unemployment
• changes in structures of labor force make some skill jobs obsolete
• workers DO NOT have transferable skill and jobs will never come back
• workers must learn new skill to result new jobs
• permanent loss of jobs is call creative destruction
• 4. Cyclical unemployment
• unemployment results from econ. down turns ( recession)
• as demand for goods and services fall, demand for labor falls and workers are fired
• Natural rate and full employment
• 2 of 3 types of unemployment are unavoidable
• frictional unemployment
• structural employment
• together make up natural rate of unemployment 
• formula: Frictional; +   Structural = full employment to NRU (4 to 5%)
• Full employment = no cyclical employment
• Okuns law: when unemployment rises 1% above natural rate , GDP falls by about 2%

WOW! LAST MINUTE STUDYING AGAIN?!?

Unit 1

Unit 1 

Basic Concepts of Economics  January 3, 2017

1. Positive vs Normative
• Pos. is describing the world as it really is (facts)
• Norm. describes how the world should be (opinion)
2. Needs vs Wants
• Needs- basic requirements for survival
• Wants- desires that we seek
3. Scarcity vs Shortage 
• Scarcity- fundamental problem that the whole world faces
• satisfy unlimited wants with limited resources
• Shortage- quantity demand exceeds quantity supply
4. Goods vs Services
• Goods- tangible commodities
• anything you can touch
• Capital- item used in creation of another good
• Consumer- goods intended in final use by contenders
• Ex: grapefruit juice, capital is grapefruit
• Services- Work that is preformed for someone's entertainment
5.  Factors of Production
• Land- natural resources
• Labor- Work exerted
• Capital 
• Human capital- when people acquire skills and knowledge through experience and education
• Physical capital- deals with money and is tools, buildings and machinery 
• Entrepreneurship- Risk taking and requires creativity and take lands, labor and capital to operate
6. Trade offs opportunity cost
• Alternative that we sacrifice when we make decision
• next best alternative ex: next best choice after high school is college
7. Guns and butter
• refers to trade offs that country face when choosing whether to produce more or less of military goods or consumer goods
8.  2 types of efficiency
• Productive efficiency- products are being produced in the least costly way
• any point on the PPC
• Allacative efficiency- products being produced are the ones most desired by society
• optimal point on PPC depends on desires of society
9. PPC, also known as Production Possibilities Curve

• PPC shows the carious combinations of output a nation can produce at a certain time, given its available resources and technology
• The economy can produce efficiently on letters A, B, and C ; while points A, B, C, and D are ATTAINABLE, point D is being produced inefficiently due to under-utilization, unemployment, recession, famine and etc.
• In the other hand, point E is UNATTAINABLE  using the current technology and also due to economic growth

Demand and Supply

1. Demand- quantities that people are willing and able to buy at various prices
• Law of demand-  inverse relationship between price and quantity demanded
• Keep in mind that Δ= Change
2. Causes of Δ in demand 
• Δ in # of buyers(population)
• Δ in buyer's taste(advertising)
• Δ in income (normal or inferior goods)
• normal goods- increase in income causes increase in demand
• inferior goods- increase income causes fall in demand
• Δ in the price of related goods
• EX:
• substitute good- substitute for coke is sprite
• complimentary goods- plain hot dog but with mustard or ketchup
• Δ in expectations(future)
3. Supply- quantities that producers or sellers are willing and able to produce/sell at various prices
• Law of supply- there is a direct relationship between price and quantity supply
4. Causes of Δ supply
• Δ in # of sellers
• Δ in technology
• Δ in cost of production
• Δ in weather
• Δ in tax or subsidies
• subsidies- gov't $ given to for ex. farmers
• Δ in exceptions
5. 
   

• Price will always be on y-axis
•  Δ in price will always be downward
• IF YOU ARE TOO LAZY TO READ, THIS IS FOR YOUUUUUU!

Elasticity and Demand January 11, 2017

• measure of how consumers act in Δ in price

1. Elastic Demand

• Demand that is very sensitive to Δ in price
• Products is not necessity
• there are available substitutes
• Always greater than 1, E > 1

1. Inelastic Demand

• Demand that is not very sensitive in demand in price
• Products is a necessity
• There are few or no substitutes
• E < 1

1. Unitary Elastic
• E = 1

• Calculations
• quantity:  New quantity - old quantity   /   Old quantity
• Price:  New price - old price   /   Old price
• PED: % Δ in quantity   /   % Δ in price

Supply Equations January 13, 2017

1. Equations used when calculating
• TFC + TVC = TC
• AFC + AVC = ATC
• TFC / Q = AFC
• TVC / Q = AVC
• TC / Q = ATC
• New TC - Old TC = Marginal cost

• Note that you can manipulate the equations algebraically to find other variables 
• Fixed Cost- a cost that does not change no matter how a good is produced
• Variable Cost- a cost that rises or falls depending upon how much is produced

HAVE A TEST OVER UNIT UNO TOMARROW?!? NO PROBLEM!!!