1. Microeconomic Review

2. Scarcity and the Factors of Production
Need: something like food, air, shelter that is necessary for survival
Want: an item that we desire but that is not essential to survival
Goods: physical objects such as clothes or shoes
Services: actions or activities that one person performs for another

3. Scarcity vs. Shortage
Scarcity: Implies limited quantities of resources to meet unlimited wants. Limits are always reached. Economics is about solving the problem of scarcity.
Resources are scarce because they are limited relative to our wants
Shortage: occurs when producers will not or cannot offer goods or services at the current prices. Can be temporary or long term.

4. Factors of Production Land: Labor: Capital
Anything found naturally in the earth
Examples?
Labor:
Capital
Physical Capital:
Human Capital:

5. Circular Flow

6. Examples of opportunity costs?

7. Three Basic Economic Questions
What goods and services should be produced?
How should these goods and services he produced?
Who consumes these goods and services?

8. Production Possibility Frontier/Curve

9. Market Systems

10. Market Economy Definition: Details:
Decisions are made by individuals and are based on exchange, or trade.
Also called: FREE MARKET/Capitalism
Details:
Choices made by individuals determine what gets made and how (and who consumers the goods and services produced)

11. Mixed Economy Definition: Details:
Market-based economic systems in which the government plays a limited role
Details:
Exist because no one is self-sufficient
Markets allow us to exchange the things we have for the things we want
Establishes goods and services that markets cannot so efficiently or fairly
Balance between control and freedom

12. Command Economy Centrally Planned Economy: Details:
The central government alone decides how to answer all three key economic questions.
Also Called: COMMAND ECONOMIES
Details:
Central authority is in command of the economy

15. ECONOMIC GOALS Major U.S. Goals: Economic Growth Secondary Goals:
Full Employment
Economic Efficiency
Price Stability
Economic Freedom
Equitable Distribution of Income
Economic Security
Balance of Trade

16. What is American Free Enterprise?
Profit Motive—force to improve material well-being
Competition—rivalry to attract customers & lower costs
Private Property Rights—you own your possessions
Voluntary Exchange—you may decide what & when to buy & sell
Open Opportunity—everyone can compete
Free Contract—you decide what agreements to enter into
Legal Equality—everyone has the same legal rights
Public Disclosure Laws—companies provide full information

17. Law of Demand At a given point in time,
a rise in price causes a fall in the quantity demanded;
a decline in price causes an increase in the quantity demanded.
An INVERSE relationship.
Ex. Pizza!

18. Law of Supply At a given point in time,
The lower the price, the smaller the quantity supplied;
The higher the price the larger the quantity supplied.
This is a DIRECT relationship.

19. Law of Supply
Price
As price increases…
Supply
Quantity supplied increases
The law of supply predicts that producers will offer more of a good as its price goes up.
Individual firms will raise their level of production
New firms will enter the market
If the price goes down, the opposite would be true
We will discuss costs to enter/exit later
Price
As price falls…
Supply
Quantity supplied falls

20. Supply and Demand
Both supply and demand influence the price of a good and the quantity produced
We’ll generally be looking for the equilibrium (or the market clearing price)

21. Shifts in the Demand Curve
Shifts to the Right:
If consumers decide they are willing to pay higher prices for a product a want to purchase more of it
(Increased worth of the product)

22. Shifts in the Demand Curve
Shifts to the Left:
The less consumers are willing to pay for a product (decrease worth of the product)

23. Shifts in Demand Curve Shift to the Right: Shifts to the Left:
Increase in Demand, More Desirable
Shifts to the Left:
Decrease in Demand, Less Desirable

24. Shifts Occur: What Determines Demand?
The determinants of demand include:
Tastes and preferences.
Income.
Price and availability of substitutes and complements.
Consumer Expectations
Population.

25. Changes in Cost affect Supply
Any change in the cost of an input such as the raw materials, machinery, or labor used to produce a good, will affect supply.

26. Changes in Cost affect Supply
As input costs increase, the firm’s marginal costs also increase, decreasing profitability and supply.

27. Changes in Cost affect Supply
Input costs can also decrease. New technology can greatly decrease costs and increase supply.

28. Supply and Demand Review
What were factors that shifted demand?
Population
Tastes and Preferences
Income
Price and availability of substitutes and compliments
Fads
Consumer Expectations
What were factors that shifted supply?
Government
Number of suppliers
Cost of inputs
Natural disasters
Technology
Outsourcing
Producer Expectations

29. Elastic or Inelastic
Elastic
Describes demand is very sensitive to a change in price
You will by less of a good after a small price increase
Inelastic
Describes demand that is not very sensitive to change in price.
You will continue to buy the good no matter the price.

30. Factors that determine the value of price elasticity of demand
# of close Substitutes
Necessity v. Luxury
% of Income Spent on Good
Habit-Forming Goods
Time Period under consideration
Demand sometimes becomes more elastic over time because people are able to find close substitutes.

33. Types of Demand Elasticity
Price ($) 2 4 6 8 10 12
Quantity
Relatively elastic
Perfectly inelastic
Perfectly elastic
Relatively inelastic 14