Why Economics Economics exists as a discipline of study because the “things” that we value in our world are not available in a limitless supply. Such as raw materials and resources, clean air and water, and all types of manufactured goods and services.

Scarcity and choice economies have Limited resources but Unlimited human wants so because of scarcity, choices have to be made

The study of Economics Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.

Efficiency to meet the (unfulfilled) needs of people, economies struggle to produce goods and services efficiently. When an economy is producing efficiently, it cannot produce more of one good without producing less of another.

Microeconomics Economics study distinct between the behavior of individual components of an economy (individuals, households, firms, industries, etc.),, and the functioning of the economy taken as a whole. How are vegetable prices set? How do people negotiate their employment contracts? These are the types of questions that are asked in the study of microeconomics.

Macroeconomics Macroeconomics focuses on broader sorts of questions. What is the relationship between the rate of unemployment and the rate of inflation? What should we expect to see as a consequence of federal government budget deficits? These are typical macroeconomic issues

The Three Problems of Economic Organization The key economic questions are: What is to be produced? How to produce? Who to produce for?

what Since we are faced with both scarcity and the wants of the people, each society must decide “what” goods and services to produce. No country has enough resources to meet all the wants of all its citizens. Scarcity means that choices have to be made.

HOW “How” deals with the production process. Typically, there may be several different ways of producing a particular product. Depending upon the availability (and cost) of these alternative inputs, either method could prove to be the best way to do the job. Technology, or the knowledge used to combine inputs, is also an important factor in determining how to produce outputs.

For Whom Society must determine who will get the outputs that are produced. This is the “for whom” part of the economic problem. This is a very difficult decision, and often issues of fairness and equity come into play when deciding how to distribute a nation’s output.

Addressing the three problems There are two fundamentally different ways that societies use to address these three problems. Market economy: individuals and private firms make the major decisions about what, how, and for whom. In a Command economy: these decisions are made by the government. In fact no contemporary society falls completely into either of these polar categories. Mixed economies, with elements of both market and command decision making.

Society’s Technological Possibilities Firms use inputs to produce goods and services, which are called outputs. The three main categories of inputs are land, labor, and capital.

The Production Possibilities in a Graph Chapter 1 Figure 1-1 The Production Possibilities in a Graph

Chapter 1 Table 1-1

The Production-Possibility Frontier Chapter 1 Figure 1-2 The Production-Possibility Frontier

Opportunity costs Opportunity costs measure the cost of doing something in terms of the next-best alternative that is given up. In a two-good, PPF world, the opportunity cost of producing more of one commodity is the amount of the other good that must be given up. Because economic resources are scarce, society is forced to make choices. The cost of these choices can be measured in terms of opportunity cost.

Economics Must Choose between Public Goods and Private Goods Chapter 1 Figure 1-4 Economics Must Choose between Public Goods and Private Goods

Economic Growth Shifts the PPF Outward Chapter 1 Figure 1-3 Economic Growth Shifts the PPF Outward

Chapter 1 Figure 1-5 Investment for Future Consumption Requires Sacrificing Current Consumption

Six Possible Pairs of Food-Machine Production Levels Appendix 1A Figure 1A-1 Six Possible Pairs of Food-Machine Production Levels

Appendix 1A Table 1A-1

A Production-Possibility Frontier Appendix 1A Figure 1A-2 A Production-Possibility Frontier

Calculation of Slope for Straight Lines Appendix 1A Figure 1A-3 Calculation of Slope for Straight Lines

Steepness Is Not the Same as Slope Appendix 1A Figure 1A-4 Steepness Is Not the Same as Slope

Tangent as Slope of Curved Line Appendix 1A Figure 1A-5 Tangent as Slope of Curved Line

Different Slopes of Nonlinear Curves Appendix 1A Figure 1A-6 Different Slopes of Nonlinear Curves

Shift of Curves versus Movement along Curves Appendix 1A Figure 1A-7 Shift of Curves versus Movement along Curves

What Is a Market A market economy has at its heart the actions of buyers and sellers who exchange goods and services with one another. There is no higher authority that directs the behavior of these economic agents; rather, it is the invisible hand of the marketplace that allocates final goods and services, as well as factors of production.

Supply and Demand Buyers and sellers receive signals from one another in the form of prices. If buyers want to buy more of a good, prices rise and sellers respond by supplying more to the marketplace. If buyers want to buy less of a good, prices fall and sellers respond by supplying less to the marketplace.

invisible hand. Prices rise and fall naturally as people change their behavior there is no need for a higher authority. Price signals tell sellers what to do with their production levels.

The Equilibrium Market equilibrium occurs when the price is such that the quantity that buyers are interested in purchasing is equal to the quantity that sellers are interested in supplying to the market.

The market mechanism The market mechanism allows an economy to simultaneously solve the three economic problems of what, how, and for whom. Consumers indicate their preferences over what is produced through their willingness to pay for a good or service. Firms respond to this by considering the mix of final products that will maximize their own profits, that is, the difference between their revenues from sales and their production costs. This must involve the question how, since firm production costs are determined by the prices of inputs and technology used in the production process. Once these questions have been addressed, for whom is found to be those consumers who have the money to pay for the goods and services produced.

Money Money is not an input or factor of production. Consumers and firms use money in order to more efficiently carry out market transactions. it is a kind of lubricating oil that allows the machinery of an economy to operate with a minimum of friction.

Capital the term capital does not refer to money. Instead, the term refers to productive inputs that have, themselves, been manufactured. The notion of capital includes durable items like blast furnaces, factory buildings, machine tools, electric drills, jack hammers, and so on. It also includes stocks of semifinished goods. These are goods which are on the way to becoming consumer goods but which are still manufactured inputs to be used in later stages of the production process

The Economic Role of Government In the real world, markets do not always operate as smoothly as we might like. Market imperfections lead to a wide range of problems, and governments step in to address them.

Governments intervene in a market economy in order to promote efficiency Market allocations are only efficient when conditions of perfect competition hold; this means that nofirm or consumer is large enough to affect input or output market prices. Market allocations become inefficient when externalities occur. Externalities are the positive or negative effects on outside parties that production or consumption in an industry yields. Market allocations do not work well in the case of public goods. A public good is something that is nonrival.

Fairness Governments intervene in a market economy in order to promote equity, or fairness, in the distribution of resources and income. This is a difficult concept because there is no universal definition of fairness. Markets distribute goods and services to those who have the money to purchase them, not necessarily to those who need or deserve them the most.

macroeconomic growth and stability. Governments intervene in a market economy in order to promote macroeconomic growth and stability. Fiscal policies of government and monetary policies help to move an economy along a stable path, avoiding periods of excessive inflation and unemployment.

Chapter 2 Table 2-1

The Demand Schedule (curve)

the law of downward-sloping demand When economists refer to the law of downward-sloping demand, they are speaking of a particular kind of behavior among buyers that is observed with so few exceptions that it can be designated as a “law” of behavior.

A Downward-Sloping Demand Curve Relates Quantity Demanded to Price Chapter 3 Figure 3-2 A Downward-Sloping Demand Curve Relates Quantity Demanded to Price

conditional schedule It is essential to keep in mind that a demand curve is a conditional schedule; it answers an “if this, then that” type of question. It shows, in particular, that if the price of some good were to stand at some specified level, then consumers would be willing to purchase the indicated quantity.

Chapter 3 Table 3-1

This is the demand side The quantity of a good or service that is read from a demand curve does not depend at all upon whether or not that quantity is feasible to supply at the given price. It reflects only the desires of consumers who worry only about their own preferences and what they can afford.

factors that influences consumers’ decisions to buy. Average income, number of buyers, price and availability of related goods, tastes and preferences buyers in markets. Any changes in these factors will cause the demand curve to shift.

Increase in Demand for Automobiles Chapter 3 Figure 3-4 Increase in Demand for Automobiles

Chapter 3 Table 3-2

The supply schedule (curve) The supply schedule (and supply curve) for a commodity shows the relationship between its market price and the amount of that commodity that producers are willing to produce and sell, other things being held equal.

Supply Curve Relates Quantity Supplied to Price Chapter 3 Figure 3-5 Supply Curve Relates Quantity Supplied to Price

Chapter 3 Table 3-3

supply side The quantity of a good or service that is read from a supply curve does not depend upon whether or not people want to buy that much. It reflects only suppliers who worry only about their costs and their anticipated profits (given the quoted price).

Supply Shift Technology, input prices, prices of related goods, and government policy all define the behavior of sellers. Thus, changes in any of these factors will cause the supply curve to shift.

Increased Supply of Automobiles Chapter 3 Figure 3-6 Increased Supply of Automobiles

Chapter 3 Table 3-4

Equilibrium of Supply and Demand In all but a very few exceptional cases, economic forces directly influence either the demand side of a market or the supply side of a market, but not both. Market-clearing equilibrium prices are achieved when the quantity supplied matches the quantity demanded.

Chapter 3 Table 3-5

Chapter 3 Figure 3-7 Market Equilibrium Comes at the Intersection of Supply and Demand Curves

Surplus Vs. Shortage When the quantity demanded exceeds the quantity supplied, the resulting shortage pushes the price up toward equilibrium. On the other hand, when the quantity demanded is less than the quantity supplied, the resulting surplus pushes the price down.

Shifts in Supply or Demand Change Equilibrium Price and Quantity Chapter 3 Figure 3-8 Shifts in Supply or Demand Change Equilibrium Price and Quantity

Moving along the curve Vs. shifting When we draw demand and supply schedules, we are defining a relationship between quantities demanded or supplied and the relative price of the product. When relative prices change, consumers or producers change their behavior along the demand and supply curves. Demand and supply curves shift only when a factor other than the own-price of the product has changed.

Shifts of and Movements along Curves Chapter 3 Figure 3-9 Shifts of and Movements along Curves

Impact of Immigration on Wages Chapter 3 Figure 3-10 Impact of Immigration on Wages

Gasoline Prices Move with Demand and Supply Changes Chapter 3 Figure 3-1 Gasoline Prices Move with Demand and Supply Changes

Chapter 3 Figure 3-3 Declining Computer Prices Have Fueled an Explosive Growth in Computer Power

Chapter 3 Table 3-6