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Everyone in the world has limited resources and therefore cannot produce all the goods and services that people wish to have. Because resources are
limited, products that can be produced with those resources are also limited. |
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a social science that seeks to understand how societies allocate their limited
resources to satisfy unlimited human wants |
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| (or factors of production) are resources used by firms in their production processes to make outputs. |
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(1) Land (farmland, industrial site, mineral deposits)
(2) Labor (accounting skills, landscaping skills)
(3) Capital (machinery, computers, buildings)
(4) Entrepreneurship (Bill Gates' ability to put all other resources together). |
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| goods and services that are either consumed (i.e. a hamburger) or used for further production (i.e. ground meat used to make a hamburger). |
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| Consumed outputs (i.e. hamburgers) |
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| Intermediate goods and services |
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| Outputs used in the production of other goods (i.e. ground beef) |
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| The concept that one must give up something for goods and services (i.e. money, time, or freedom) |
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| Getting the most one can out of a scarce resource |
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| The distribution of an economic outcome, remember pie example (i.e. redistributing income of rich and poor by means of taxing) |
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| What you give up to get something |
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| (a.k.a. economic cost) The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action. (i.e. going to college costs money and time that could be used to earn more money) [explicit cost + implicit cost = total true cost] |
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| The opportunity cost of direct payment made to someone (i.e. the upfront cost of buying a pizza) |
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| The opportunity cost of resources one makes with no direct cash outlays. (i.e. time going to school instead of work) |
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| The principle that actions should be taken only if added incremental benefit is greater than added incremental cost. (i.e. marking down a nearly expired gallon of milk for quick sale) |
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| Incremental costs and benefits |
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| Costs and benefits that would occur if a particular course of action is taken, compared to those that would have been obtained if that course of action had not been taken |
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| A thing that motivates or encourages one to do something. If I receive a pay raise then I will work harder. Political policies such as taxing and regulation may create less incentives to work, to save, and to invest. |
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| Trade or voluntary exchange |
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| The act of buyers and sellers freely and willingly engaging in market transactions. It is win-win situation for everyone. It allows more products for us to buy and consume. |
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| An organization of economic activity. When ever an intervention in the market occurs, the end result is either a shortage or a surplus. |
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| An economy which allocates resources through the decentralized decisions of market participants. The key is that it is decentralized, and it is the "invisible hand" that guides market decisions. |
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A situation in which a market left on its own fails to allocate society’s scarce
resources efficiently. |
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| When one person’s actions in the market impact the well-being of THIRD PARTIES who, unwillingly, receive a benefit or incur a cost. There is no such thing as a free market with externalities, it is a market failure. A possible role for the government to play is to fix externalities, but as long as the market is working properly there is no need for government intervention. |
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| (a.k.a. external costs) When I drive I make an agreement between me and the road builder (the government.) If I drive I pollute and it affects third parties. To compensate those affected, the government imposes pollution taxes. Government intervention should be to weaken negative externalities. |
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| (a.k.a. external benefits) Example- vaccinations prevent me from getting sick, and because I don’t third parties (my co-workers) are affected therefore the government must subsidize. The government subsidizes milk producers, yet there is no reason. This creates an imbalance in the market. Government intervention should be to support positive externalities. |
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| The ability of a single economic unit or a group of units to have a substantial influence on market prices. If KSU were the only college providing higher learning, KSU would have a lot of market power. An unregulated private monopoly is an extreme case of market power. If I were a burger monopoly my strategy should be to increase the price to increase my profits. This is another role the government could play to make the market environment more competitive. Monopolies are illegal in the U.S. The USPS is a government created monopoly, but it is regulated therefore legal. |
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| The amount of output per unit of input utilized in production (the efficiency of a resource). This is one measure that is closely monitored by the government and private sector economists as well as policymakers. Ultimately it is the nation’s people and people’s productivity that determines the nation’s standard of living. |
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| Occurs when overall prices in the economy rise. Can occur for various reasons, but long term, chronic, persistent, inflation can only occur if the central bank keeps printing money. If I go to the mall with $100 and I spend $200, short term inflation occurs. |
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| A (typically downward sloping) curve that shows the inverse relationship between the unemployment rate and the inflation rate. A. W. Phillips realized when there is an increase in the overall price level (inflation) unemployment goes down (short term) and may become a spiraling effect and result in more spending causing more inflation.If we spend a lot of money at the mall, the mall expands and hires more employees, giving more people money and causing more spending, repeating the cycle. (I would like some feedback if this example is appropriate) |
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| Thinking like an economist |
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| Economics is a science and as such uses the same scientific method as other sciences. |
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A statement about cause and effect, action and reaction in economic
life. It is a deliberate simplification of relationships used to explain how they work. (i.e. the theory
of supply and demand) |
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| A formal statement (usually a mathematical statement) of a theory. It is a small-scale version of some aspect of the economy (i.e. Quantity Demanded =20,000-500xPrice). |
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| An illustration of a mathematical relationship between variables. It is a picture of an economic model. |
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A measure that can change from time to time, or from observation to observation.
(i.e. the price of a product) |
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| Purposefully omitting or ignoring details in order to focus on important elements. Example- How do I get to downtown Atlanta? Go down I-75 south. No mention of how to get on to I-75. |
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A model of the economy that shows how dollars, inputs, outputs flow through goods and services, and inputs markets among households and firms. This describes a private and closed (to international transactions) economy. It consists of two parts:
Upper loop-
Market for goods and services or products (computers, food, etc.)
In product markets, firms are sellers and households are buyers
Lower loop-
Markets for factors of production (a.k.a. factor markets). Firms are buyers and households are sellers |
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| Production Possibility Frontier (PPF) |
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| A model that shows various combinations of goods and services that can be produced given the available resources and the technology. For the sake of simplicity it is limited to only two products. |
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| Statements that attempt to describe the world as it is. Therefore, positive statements are descriptive (i.e. minimum wage laws reduce employment opportunities for low-income earners). |
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| Statements that attempt to describe how the world ought to be. Therefore, normative statements are prescriptive (i.e. the government should reduce the budget deficit by raising taxes or decreasing its spending). |
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A graph on which the value of one variable is plotted against the value of
another variable. This allows us to study the relationship between "two" variables holding all other variables constant (ceteris paribus). |
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| If variables are correlated, they move up or down or against each other at the same time. A high degree of correlation indicates a possible connection for causation. |
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| If you are able to make a prediction of a variable by using the values of another variable, there is a causal relationship. |
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| Positively related variables |
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| If two variables move in the same direction, they are said to be positively or directly related. The increase (decrease) in one variable results in an increase (decrease) in the other variable. |
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| Negatively related variables |
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| If two variables move in the opposite directions, they are said to be negatively or inversely related. The increase (decrease) in one variable results in a decrease (increase) in the other variable. |
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If two variables are said to be unrelated, an increase or a decrease
in one variable results in no change in the other variable. |
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| Infinitely related variables |
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| If two variables are said to be infinitely related, for no change in one variable the other variable can take on any value. |
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| Linear relationship between variables |
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| A relationship described by a straight line |
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| Non-linear relationship between variables |
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| A relationship described by a curved line |
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Represents the change in one variable when the variable changes. Slope is calculated by: (S = Rise/Run)
Run-
Change of the variable on the X-axis
(Delta X = change in X)
Rise-
Change in the variable on the Y-axis
(Delta Y = change in Y)
(S = Delta Y/Delta X)
What does the slope tell me? What messages are given by the slope?
If the slope of a line stays the same between any two point, then there is a linear relationship between X and Y and will end up with a straight line. |
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| Sign and numerical value of a slope |
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The sign of the slope tells me the direction of the relationship, up or down.
Positive relationship- when the points move with each other
Negative relationship- variables are negatively/inversely relate
Numerical value of the relationship- describes magnitude |
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What if the Y value was constant?
The math (rise/run) adds up to zero, therefore it is a "zero relationship"
What if the X value was constant?
The math adds up to infinity, therefore it is an infinite relationship |
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Since the slope of a curved line changes at every point on the line, we need to find the point slope to understand the relationship between variables.
-The Point Slope
To calculate the slope at a point on a curved line, we draw a line that has the same slope as the curve at that point and tangent to that point. Then, we calculate the slope of the tangent line using S=Rise/Run. |
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An organization that transforms resources (inputs) into products (outputs). Firms are the primary
producing units in a market economy. Sellers in a product market, buyers in a factor market. |
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| A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business. |
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| The consuming units in an economy. Buyers in a product market, sellers in a factor market. |
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| The markets in which goods and services are exchanged. |
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| The markets in which the resources used to produce products are exchanged. |
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| The consumers’ willingness and ability to purchase goods and services (various quantities at various prices). Therefore, demand is not a fixed number but a schedule of quantities demanded at various prices. |
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| All other things being constant, if the price of something goes down then I (the consumer) buy more, if the price goes up then I buy less. When the price of the product changes the only other thing that changes is quantity demand. When the other variables change (anything other than price and quantity demand) a new relationship between P and QD emerges (demand changes) causing the demand to shift on a graph. |
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| Price determinant of demand |
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| Price of the product (a change causes a change in quantity demanded NOT in demand) |
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| Non-price determinants of demand |
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Price of related products:
•Substitutes (Coke vs. Pepsi)-
When the price of Coke goes up, the demand of Pepsi goes up. Graphically the demand curve for Pepsi shifts right (vice versa).
•Complements (Ketchup and fries)-
When the price of Ketchup goes up the demand for fries go down (vice versa)
Consumers’ incomes:
•Normal goods-
As income increases, demand increases
•Inferior goods-
As incomes increases, demand decreases (example- cheap food)
Tastes and preferences, causes change in demand
The market size/number of buyers, causes change in demand |
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| The sellers’ willingness and ability to provide goods and services for sale in the market (various quantities at various prices). Therefore, like demand, supply is not a fixed number but a schedule of quantities supplied at various prices. |
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States that a direct relationship exists between the price (P) of a product and its quantity supplied (QS) by buyers over a period of time, other things held constant -ceteris paribus-.
Two important points:
(1) All else constant, an increase (decrease) in P results in an increase (decrease) in QS (quantity supplied
changes NOT the supply), and
(2) When the other variables change, a new relationship between P and QS emerges (supply changes). |
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| Price determinant of supply |
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| Price of the product (a change causes a change in quantity supplied NOT in supply) |
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| Non-price determinants of supply |
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Production costs:
(1) prices of labor and other inputs, (2) technical innovations, and
(3) taxes (a change causes a change in supply)
(For the market supply) The market organization/the number of sellers (a change causes a change in supply) |
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| The difference between total revenue and total cost of production. Profits are possible if and only if total revenue is greater than total cost of production. |
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The price where quantity demanded equals quantity supplied. In a free market the market price would be the equilibrium price. Graphically, where the supply curve and the demand curve meet.
Any price above the equilibrium price would result in a surplus.
Any price below the equilibrium price would result in a shortage. |
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