Economics Study Guide

Economics Study Guide 5

Economics Fundamentals:

Economics

The study of (behavior) how people try to satisfy what appears to be seemingly unlimited and competing wants through the careful use of relatively scarce resources

Need vs. Want

Need-something required for survival (food, water, shelter)

Want- a way of expressing a need

Scarcity

The condition that results from society not having enough resources to produce all of the things people want

4 factors of production *all must exist for production to occur*

Land-anything that occurs naturally

Capital- the tools, machinery, products etc. that are used to make other goods and services; man-made

Labor-people with all their efforts and ability; always most expensive

White collar-professional; high skilled

Blue collar-no/low skill; manual

Entrepreneur- a risk taker who does something new with existing resources (inventor)

TINSTAAFL

There is no such thing as a free lunch

Nothing is ever free because resources were used (ex: time, energy, transportation…)

3 basic questions

What to make?

How to make it?

For whom to make it?

Allocation of resources:

Competition, random, personal choice, price, divide equally, first come first serve

Goods and services

Good-a tangible item that has an economic value

Final (consumer) goods- the products at the end of production

Capitol (intermediary) goods- the tools, machinery etc.

that are used to create final goods and services

Service- an action that one person does for another (intangible)

Value, utility, wealth

Value- something that can be expressed in $ and cents

2 criteria to have value:

Scarce, must provide utility

Utility- having a function or provide personal satisfaction

Wealth- an accumulation of those items that are tangible, scarce, provide a utility; must be transferrable from one person to another

Tradeoffs and opportunity cost

Marginal analysis (thinking on the margin)- the point at which you have to make a choice

Tradeoffs- all the other things you did not choose when making a choice

"choosing is refusing"

Opportunity cost- the next best choice that you did NOT choose

If mc > mb don't do it

If mc < mb do it

c=cost b=benefits

buyer's remorse

(Theoretical) circular flow of economic activity

Static model- data represents a specific time (supply and demand) (snapshot)

Dynamic model- model that changes over time (economic activity[above^^])

Market-a place where goods and services are exchanged

Product market- final (consumer) goods and services

Factor market-where factors or production are bought and sold

Revenue-the total amount ($) brought in [from consumers]

Revenue-expenses=profit (for business)

Economic systems

Traditional economy-the 3 essential questions are answered by traditions and customs of that group of people (Amish)

Very conservative and patriarchal (men run the government)

Command economy- dictatorship, communism, socialism; 1 person or a very small group answers the 3 essential questions (N. Korea)

Free Market/ Capitalism- consumers and producers answer the 3 essential questions through supply and demand

Influenced by traditions

Microeconomics

Demand

Demand- the want, willingness, and ability to trade or purchase a good or service

Demand affected by:

Price, convenience, tradition, function, popularity (trend/peer pressure), style, advertising/marketing, quality

A consumer is always right

The supplier needs to adapt to the customer

Action and inaction send a message to the market

Graphing demand

Demand schedule- a schedule (chart) showing how much of a good or service people will purchase at any (given) price during a specified time period, other things being constant

Law of Demand- the quantity demanded is inversely related to price holding other factors constant

Always a negative slope

Demand vs. QD

Demand=range of prices

QD=given price

Change in QD

Caused by a change in price

Movement is along the demand curve

Change in demand-when more or less is demanded of a good or service at every given price

Entire curve shifts left or right

Right=positive shift

Left=negative shift

What causes the demand curve to shift:

Taste and preference

Income

Normal goods- demand rises as income rises (most goods)

Inferior goods- demand falls as income rises (Walmart)

Number of consumers

Price of related goods

Adequate substitutes

If the price of the substitute goes up, the original product will be in higher demand

Complement

If the price of the complement goes up then the price of the product goes up

Computer software, milk for cereal

Price expectations

Elasticity of demand

Elasticity-sensitivity to a price change

Demand elastic- sensitive to price change (no adequate substitutes)

Demand inelastic-not sensitive to price changes (many adequate substances)

Supply

Supply- a price/quality schedule showing amounts of a product producers are willing and able to make available for a set of prices during a specific time period

Quantity supplied- the amount that producers bring to market at any given price

Law of supply- the principle that suppliers will normally offer more for sale at higher prices and less at low prices

Direct relationship between price and quantity supplied

Change in QS

Caused by a change in price

Movement along the supply curve

Change in Supply

Caused by change in supplied

Movement of entire curve

Reasons for shift in supply

Cost of inputs (4 factors of production)

Productivity

Technology

Taxes

Subsidies-a payment for an economic activity (scholarship)

Expectations- anticipated level of demand

Government regulations

Number of sellers

Market clearing price/equilibrium price-the price at which two people compromise on when bargaining

Surplus=too many goods made

Shortage=too few goods made

Production Considerations

Profit formulas

revenue-expenses=profits (supply/ businesses)

total amount of money brought in

income-expenses=disposable income (people/family)

Productivity- an economic measure of output per unit of input

Productivity=efficiency

Inputs include: labor and capital

Output measured in revenues and other GDP (gross domestic product) components such as business inventories

Examined collectively (whole economy) or industry by industry to examine trends in labor growth, wage levels, and technological improvements

Cost of production (expenses)

Fixed costs-the costs associated with the product that has to be paid regardless of the volume you sell (contract!!)

ex: rent, taxes, salary/waged employee, cell phone

variable costs- a corporate expense that varies with production output, costs that vary depending on a company's production volume; rise as production increases, fall as production decreases

ex: utilities (electric, water), food, hourly employee

Business/ Company structures

sole proprietorship- one legal entity owns the company (person, family)

partnership- two or more legal entities who own the business (law firm, doctor offices)

have a contract

corporation-creating its own entity (virtual person)

sell stocks ($$ quickly)

reduces risk (of liability)

Market Structures