1. Economic Basics

2.  Economics is the social science that analyzes the production, distribution, and consumption of goods and services.  The academic purpose of economics is to understand human behavior based on choices.  The practical purpose of economics is to make predictions for individuals, firms, and the macro-economy based on rational choices.

3.  Economics is also the study of how people, firms, and societies use their scarce productive resources to satisfy their unlimited wants and needs.  Resources or Factors of Production:  Land – Natural Resources (Oil, Water, Land)  Labor – Human effort and talent (Lawyer, Engineer)  Capital – Man-made equipment (Building, machinery)  Entrepreneurial Ability – Effort and know-how to put all the other resources together in a productive venture

4.  A situation with limited quantities of resources to meet unlimited wants.  A situation in which a resource has more than one valuable use.  Scarcity always exists because our needs and wants always are greater than our resource supply.

5.  Trade-offs – all the alternatives that we give up whenever we choose one action over another.  Societies must often make trade-offs when deciding how to use their limited resources.

6.  Opportunity Cost – the most desirable alternative given up as the result of a choice.  Every ordinary decision made involves making choices based on opportunity cost. ◦ Sleep late or go to school ◦ Take a vacation or buy a new TV

8.  Most decisions are made based upon a change in the status quo.  You have studied four hours for an economics exam (the status quo) and need to decide if it is in your best interest to study another hour.  These decisions are said to be made at the margin.

9.  Marginal – “the next one,” or “additional,” or “incremental.”  Marginal Cost (MC): The additional cost incurred from the consumption of the next unit of a good or service.  Marginal Benefit (MB): The additional benefit received from the consumption of the next unit of a good or service.

10. A soda machine charges $1.00 for every can. The decision to buy another soda is an example of MA. # of Sodas $ 4 MC = $1 MB = MC (stop here) MB MB > MC (consume) MB < MC (don’t buy) $1

11. The Economist’s Creed This is my graph. There are many like it, but this one is mine. My graph is my best friend. It is my life. I must master it as I must master my life. My graph, without me, is useless. Without my graph, I am useless. I must draw my graph true. I must avoid inefficiency who is trying to destroy me. I must find equilibrium before time runs out. I will... My graph is human, even as I, because it is my life. Thus, I will learn it as a brother. I will learn its weaknesses, its strength, its parts, its determinants, its X and Y axes. I will keep my graph clean and ready, even as I am clean and ready. We will become part of each other. We will... Before Danskin, I swear this creed. My graph and myself are the defenders of macroeconomics. We are the masters of our enemy. We are the saviors of my life. So be it, until victory is ours and there is no inflation or recession, but full-employment.

12.  Do something if MB ≥ MC  Stop doing something when MB = MC  Never do something when MB < MC

14.  Economists use graphs to analyze the choices and trade-offs that people make.  Production possibilities curve – shows alternative ways to use an economy’s productive resources. THEY SHOW COST.

15.  A line that represents where a nation is using all of its resources to produce a maximum combination of products  Law of Increasing Costs – the more of a good that is produced, the greater the opportunity cost (creates a concave curve).

16.  Point A - country is not using all of its resources (RECESSION)  Points B, C, D - maximum production  Point X - unattainable for this country

17.  Alpine Sports can produce 300 pairs of skis and 100 snowboards.  If Alpine Sports chooses to increase snowboard production to 200, it will cost them 100 pairs of skis.  Increasing to 300 snowboards will cost them 200 more pairs of skis

18.  Using resources to maximize production or output of goods/services.  A PPC represents an economy working at its most efficient level.  Increasing resources will cause the PPC to move out from the origin

20.  Absolute Advantage – Exists if a producer can produce more of a good than all other producers.  Comparative Advantage – Exists when a producer can produce at a lower opportunity cost than other producers.  Specialization – When firms focus their resources on production of goods for which they have comparative advantage.

21. 1. Find the cost of producing an item by reducing it to one. 2. Divide the number of product 1 produced by itself to get one. 3. Divide the number of product 2 produced by the number of product 1produced to find the cost of producing 1 unit of product 1. 4. Compare the two producers for the lowest cost.

22. Good Songs Trash Good songs Trash 10050 050 Lady Ga GaKe$ha Opportunity Costs 1 good song 1 trash1 good song 1 trash ½ trash2 good songs 2 trash½ good song Both musicians could produce good songs, but the Lady GaGa can produce a good song at a lower opportunity cost. Lady GaGa has a comparative advantage. Ke$ha has a comparative advantage in trash. Both musicians benefit by specialization.

23. Who has the comparative advantage in the production of corn? Sunscreen? Corn (bushels per year) Sunscreen (gallons per year) United States300150 France200150

24.  Read pages 29-38, answer questions 1-3 and 11-13 on pages 42 and 43.

25. Trading PriceRound 1Round 2Round 3Round 4Trading Price $5.40 5.40 $5.30 5.30 $5.20 5.20 $5.10 5.10 $5.00 5.00 $4.90 4.90 $4.80 4.80 $4.70 4.70 $4.60 4.60 $4.50 4.50 $4.40 4.40 $4.30 4.30 $4.20 4.20 $4.10 4.10 $4.00 4.00 $3.90 3.90 $3.80 3.80 $3.70 3.70 $3.60 3.60 $3.50 3.50 $3.40 3.40 $3.30 3.30

27. Writing Assignment #1 OUTPUT PER WORKER PER DAY CountryUnits of ClothUnits of Food Ayland102 Beeland101 1.The table above gives the production alternatives of two nations that are producing cloth and food, using equal amounts of resources. a)Calculate the opportunity cost of producing a unit of cloth in Ayland. b)Calculate the opportunity cost of producing a unit of cloth in Beeland. c)Which nation has the comparative advantage in cloth production? d)Which nation has the comparative advantage in food production? 2.Assume that productivity for Beeland’s workers triples for each good. a)Which nation has comparative advantage in food production? b)Explain how you determined your answer.

29.  In a market system, the interaction of buyers and sellers determines the prices of most goods as well as what quantity of a good that will be produced.  Buyers demand goods, sellers supply goods, the interaction between the 2 groups sets the price and quantity traded.

30.  P = Price  Q = Quantity  D = Demand  S = Supply  E = Equilibrium  i = Interest  Δ = Change   = Increase, up   = Decrease, down

31.  Demand – The amount buyers are willing and able to buy at ALL possible prices  Quantity Demanded – The amount buyers are willing and able to buy at ONE specific price  Law of Demand – As price goes up quantity demanded goes down.

32.  Demand reflects all possible prices and changes when underlying conditions change. (Change in season or new information)  Quantity demanded reflects only one specific price and changes only when price changes.

33.  Demand Curve – graphic representation of a demand schedule. PriceQuantity Demanded $2.00250 $4.00200 $6.00150 $8.00100 $10.0050 P Q

35.  Supply – The amount a seller is willing and able to sell at all possible prices.  Quantity supplied – The amount a seller is willing and able to sell at a specific price.

36.  Law of supply – As P goes ↑, QS goes ↑.  Increased S comes either from current firms producing more, or new firms created to take advantage of high P.

37.  S reflects all possible P and Δ when underlying conditions Δ. ( Δ in production cost or natural disaster)  QS reflects only one specific P and Δ only when P Δ.

38. Quantity Supplied Price 502 1004 1506 2008 25010 S Curve– A graphic representation of a S schedule. P Q 10 8 6 4 2 250 200 150 10050

39.  Read pages 45-50  Answer questions 1 and 2 on page 63. Include these answers in your notes section.

40.  Supply  Read pages 50 – 53  Answer questions 4, 5, and 6 on page 63. Include these answers in your notes section.

42.  When conditions other than P Δ, D or S at all possible P will Δ as well.  D or S may ↑ or ↓ based on these conditions. Increase in Demand P Q D1D1 D

43. 1. Δ in Consumer Income – ↑ in income leads to an ↑ in D of normal goods, and ↓ in D of inferior goods. 2. Δ in Number of Consumers 3. Δ in Consumers’ Price Expectation – If P are expected to ↑, consumers will buy now 4. Δ in Consumer Tastes – New fads, information, and technology changes. 5. Δ in Price of a Complementary Good 6. Δ in Price of a Substitute Good

44.  Complements – Goods or services that are consumed together – for example, tennis rackets and tennis lessons.  Substitutes – Goods or services that may be used in place of other goods or services – for example, shoes and sandals

45. 1. Δ in Costs of Production – An  in costs of Land, Labor or Capital will lead to a  in S. 2. Change in Technology – New technology often  cost, leading to S . 3. Government policies – Subsidies, taxes and regulation imposed by the government Δ costs and availability of resources.

46. 4. Δ in Producers’ P Expectations – If sellers expect the P for their good to  in the future, they may reduce what they offer to sell today. S  even when production does not. 5. Δ in number of sellers – More sellers will  S. 6. Physical availability of resources – Natural disasters, war can  S.

47. Equilibrium

48.  The point at which QS and QD are equal.  This is also the point of balance between P and Q.  At E, the market for a good is stable. P 0Q S D $5 100 E

49.  Surplus – When QS is greater than QD.  Shortage – When QD is greater than QS. P 0Q S D $5 100 E

50.  When P or Q do not meet with E, market forces will drive them there.  Changes to E occur when changes to S and D occur. P 0Q S D $5 100 E

51.  Changes to supply and demand in a market has lasting effects on prices and quantities.  An increase in D will increase P and Q  A decrease in D will decrease P and Q  An Increase in S will decrease P and increase Q  A decrease in S will increase P and Decrease Q P 0Q S D $5 100 E

52.  Read pages 53-61, answer questions 8, 9, 14 and 15 on page 63. Be sure to create a graph from the table on question 8 and individual graphs for a.- h. on question 9.

53.  Demand: -  Supply: -  Equilibrium Price: -  Equilibrium Quantity: - P 0Q S D P Q E

54. Unit 1 Review 1.Define/give an example of each type of productive resource. 2.Define scarcity, opportunity cost. 3.Explain the marginal analysis formula and why we need it. 4.Explain the following about PPCs – shape, movement. 5.Complete Question 4a and 4b in page 694. 6.Define command economy. 7.Define the law of supply and law of demand. 8.List all determinants of demand and give an example of each. 9.List all determinants of supply and give an example of each. 10.Show an increase in S, decrease in S, increase in D, and decrease in D on four separate graphs.