Unit 1

Unit 1

Introduction

*The Difference between Macroeconomics vs. Microeconomics

-          Macroeconomics is basically the entire economy while microeconomics is the study of parts of the economy.

*Both macroeconomics and microeconomics contains elements of positive economics and normative economics.

-          Positive – it claims that attempting to describe the world as is it is very descriptive. (Fact)

Ø  Positive eco. Concern what is.

-          Normative- claims that attempt to prescribe how the world should be. (Opinion)

Objective Thinking

-          Biases

Ø  People bring a bundle of biases and preconceptions to the field of economics.

Ø  The economic terminology used in newspapers and popular magazines is sometimes biased.

-          Fallacy of composition- the assumption that what is true for one individual or part of a whole is necessarily true for a group of individuals or the whole.

Chapter 2

*Needs vs. Wants

-          Needs are basic requirement for survival

-          Wants are desires of citizens much broader for your needs

Ø  Insatiable or unlimited, means that our desires for goods and services cannot be completely satisfied.

Ø  For a particular good or service can be satisfied; over a short period of time. General goods that is a list that would probably never end.

*Scarcity vs. Shortage

-          Scarcity- most fundamental economic problem that all society face.

-          Shortage- situation in which quantity demand is greater than quantity supply.

*Goods

-          Consumer good- is intended for final use

-          Capital good- is money (What bankers and normal people would think)

Ø  But really is items used in the creation of another good. (Example: Car is made with bolts, screws, steel, glass, etc.)

* 5 Factors of production (Everything is by Choice)

1.       Land- natural resources

2.       Labor- any work that is exerted

3.       Capital

-          Physical capital- human made to create other goods and services.

-          Human Capital- knowledge and skills gain through work and education

4.       Entrepreneurship- initiative, risk taker

Trade- offs- alternative that we give up whenever we choose a course action over another

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

‘Guns on butter’ – military and agriculture

*Production possibilities graph- this shows the alternative ways to use resources

Ø  Point ABC is on the curve, which means they are efficient and attainable.

Ø  Point D on the other hand is inside the curve

·         The Reason for it to be in the curve for example could be because of:

-          Recession

-          War or Famine

-          Underemployment/Unemployment

-          Population Loss

-          Resources are no available

Ø  Point E- Is unattainable and outside the curve

·         The Reason is:

-          Economic Growth

-          Technology

5 Key Assumptions on Production Possibilities Graph

1.       Two goods are produced

2.       Full employment

3.       Fixed resources (land, labor, capital, entrepreneur)

4.       Fived state of technology

5.       No international trade

*Price Elasticity of demand- tells how drastically buyers cut back or increase their demand for a good.

-          There are Three Types:

Ø  Elastic demand- when demand changes greatly due to a change in price (wants)

Ex. Cable TV or Regular TV, cable is pricier then having regular.

                E > 1

Ø  Inelastic demand- demand products will not change even if the price change, there are a few substitute (needs)

Ex. Everyday needs, eggs, tooth paste, milk, etc.

                E < 1  

Ø  Unit elastic (unitary elastic) –

E=1

Surplus                                                                                 Shortage

Quantity Supply > Quantity Demand       QD > QS

Ø  Correcting- is a point supply and demand at this point resources are used efficiently

Ø  Disequilibrium- not intersecting, something is happening  

Ø  Price ceiling (rent control) – below equilibrium, it is a government imposed price control on how high a price can be charged for product or service

Ø  Price floor- minimum wage, above the equilibrium it is a government imposed price control on how low someone can change for a product or service

                                       

 Marginal cost- cost of producing 1 more unit of output; equal to the change in total cost divided by the change in output