I. Economics Social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants Economic perspective = way of thinking Rational behavior Utility – Satisfaction Citizenship & personal application

Positive economics “what is” Normative economics “what ought to be” Macroeconomics – economy as a whole Microeconomics – specific economic units Ceteris paribus – other things equal assumption Marginal - Extra

II. The Economic Problem There is no such thing as a free lunch (tinstaafl) Scarcity: Limited resources are never sufficient to satisfy unlimited wants –What to produce –How to produce –For whom to produce Opportunity cost – alternative forgone in decision making (a tradeoff)

III. Economic Resources – Factors of Production Land Capital Labor Entrepreneurial Ability –Combines resources, makes decisions, innovator, risk bearer *Note* Money is a medium of exchange, not a factor of production

IV. Economic Goals Growth Full employment Efficiency Price-level stability Freedom Equitable distribution of income Security Balance of trade

V. Faulty Economic Reasoning Bias Definitions Association implies causation Fallacy of composition Faulty ceteris paribus

VI. Production Possibilities Production Possibilities Curve – shows the combinations of 2 goods or services that can be produced in an economy Full productive efficiency & employment on the PPC Law Of Increasing Opportunity Costs –To get more of one thing one gives up ever increasing quantities of something else –Curve is bowed outward from origin

Q Q Robots (thousands) Pizzas (hundred thousands) U Unemployment Shown by Point U More of either or both is possible PRODUCTION POSSIBILITIES

Economic Growth Q Q Robots (thousands) Pizzas (hundred thousands) A’ B’ C’ D’ E’ PRODUCTION POSSIBILITIES

Two Examples of Economic Growth US - FAVORS PRESENT GOODS China - FAVORS FUTURE GOODS Goods for the Present Goods for the Future CURRENT CURVE FUTURE CURVE CONSUMPTION Goods for the Present Goods for the Future FUTURE CURVE CONSUMPTION CURRENT CURVE PRODUCTION POSSIBILITIES US China

Comparative advantage – the country or individual with the lowest opportunity cost has the comparative advantage, and should specialize in the production of that good or service –Often this idea will lead to trading where all parties or countries will benefit

VII. Market Economies Market – Place where buyers & sellers come together Capitalism – Property Rights Consumer Sovereignty - $ Votes Circular Flow = System of incentives

BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE CIRCULAR FLOW MODEL

$ I. DEMAND DEMAND SCHEDULE Various Amounts A Series of Possible Prices …a specified time period …other things being equal PQDQD

II. LAW OF DEMAND As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls An inverse relationship exists between price and quantity demanded

Diminishing Marginal Utility Income Effect Substitution Effect

P Q o $ PQDQD $ D Price of Corn Quantity of Corn CORN Connect the Points GRAPHING DEMAND

III. DETERMINANTS OF DEMAND Tastes Number of Buyers Income – Normal Good (Superior) Income up, Demand up –Inferior Goods Income up, demand down

Prices of Related Goods – Substitutes & Complements – Unrelated Goods Expectations

“Demand Shifters” [TIMER] 1. Taste [direct] 2. Income [normal-direct] [inferior-inverse] 3. Market Size [number of consumers-direct] 4. Expectations [of consumers about future *price-direct, about future availability-inverse, or about future income–direct. about future availability-inverse, or about future income–direct. 5. Related Good *Prices [substitutes-direct] [complements-inverse] Changes in “D” [curve] 1. Non price change [“TIMER”] 2. Whole “D” curve shifts [There is a change in “QD” but it is not caused by a change in “price.” QD-”single price”D-”all prices” [QD-”single price”; D-”all prices”] Complement [ inverse ] Substitute [ Direct ] Butter Bread Bagels P D3D3D3D3 D1D1D1D1 D3D3D3D3 QD 3 QD 1 QD 2 D1D1D1D1 D2D2D2D2 P P1P1P1P1 QD 1 QD 2 P2P2P2P2 D1D1D1D1 D2D2D2D2 D P

$ IV. SUPPLY SUPPLY SCHEDULE PQSQS CORN Various Amounts A Series of Possible Prices …a specified time period …other things being equal

V. LAW OF SUPPLY As Price Rises… …Quantity Supplied Rises As Price Falls… …Quantity Supplied Falls A direct relationship exists between price and quantity supplied

S P Q o $ $ PQSQS Price of Corn Quantity of Corn CORN Connect the Points GRAPHING SUPPLY

VI. DETERMINANTS OF SUPPLY Resource Prices Technology Taxes & Subsidies Prices of Other Goods Price Expectations Number of Sellers

11 7 S P Q o $ D Price of Corn Quantity of Corn Shortage MARKET DEMAND & SUPPLY Surplus

VII. Government Set Prices Price Ceilings –Shortages –Rationing Problem –Black Markets –Rent Controls Price Floors –Surpluses

VIII. Complex Cases Supply Increases; Demand Increases –Prices Indeterminate –Quantity Increases Supply Decreases; Demand Decreases –Price Indeterminate –Quantity Decreases Multiple shifts…