Unit 1

Unit 1 

Basic Concepts of Economics

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

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

• Price will always be on y-axis
•  Δ in price will always be downward

Elasticity and Demand

• 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