1. What is Economics?
How do economists study the ways people make decisions on how to use their time, money, and resources?

2. Economic Choices
Responsible citizens make economic decisions everyday. We have to make these choices because we have limited resources.
Economics is the study of how people make decisions in a world of limited resources.
Scarcity
- Scarcity: the fact that we do not have enough resources to satisfy everyone’s needs and wants
Needs vs. Wants

3. Goods and Services
Goods: tangible objects that we use to satisfy our wants and needs
Examples of goods: pencil, candy bar, computer, car, etc.
Services: work that is performed for someone else.
Examples of Services: haircut, landscaping, babysitting, dry- cleaner, etc.

4. The Four Factors of Production
The 4 resources necessary to produce goods and services
1. Natural Resources: all of the “gifts of nature” that make production possible
2. Labor aka Human Resources: physical and mental efforts that people contribute to the production of goods and services
3. Capital/Capital Goods: tools, machinery, and goods used to make other things
4. Entrepreneurs: individuals who start new businesses, introduce new products, and improve management techniques

5. Production Possibilities Curve
The Production possibilities curves shows what things can possibly be produced by a business at a given time.
Points on the curve represent maximum possible combinations of two goods given resources and technology.
Points inside the curve represent underemployment or unemployment
Points outside the curve are unattainable at present
If we assume we have a set number of resources to produce goods, this model shows us that we are limited in the number of a certain good we can produce. When we choose to produce more of one good, we must give up production of the other.

6. Production Possibilities Curve-1 +1

7. Making Economic Decisions
Trade Offs: the alternative you face if you decide to do one thing rather than another.
You face trade-offs in deciding how to spend your time and money. Society faces trade-offs in determining how to distribute scarce resources.

8. Making Economic Decisions
Whenever you make a decision to spend money or time, you are costing yourself the opportunity to do many other things, but you could only have done one of those trade-offs.
Opportunity Cost: is the item you did not choose and is the next best alternative to the thing you actually chose.
The Production Possibilities Model shows the opportunity cost a society faces when deciding to produce one good over another.
“Guns vs. Butter” – do we invest more in defense or civilian goods?

9. Demand, Supply and Market Equilibrium
What are “demand” and “supply” and how do they work together to determine the prices of goods and services?

10. Demand

11. Demand Explains the amount people are willing to buy as prices change.
A demand schedule lists the number of a product a person is willing to buy depending on how much it cost.
A demand curve is a graph that shows the amount of a product that would be bought at all possible prices. From left to right, this curve moves down.
In the law of demand, quantity demanded and price move in opposite directions.
If price increases, demand decreases.
If price decreases, demand increases.
Market demand is the total demand of all consumers for a product or service.

12. Demand Schedule Demand Schedule for Wendy’s Frosties Price per Frosty
Quantity Demanded per day 2 4
1.50 8 1 13
.50 19
.25 25
Demand Schedule for Wendy’s Frosties

13. A demand schedule can be shown as points on a graph.
Demand Graph
A demand schedule can be shown as points on a graph.
The demand curve is the line that connects these points.

14. Law of Demand Diminishing Marginal Utility (DMU)
Utility: Power of a good or service to satisfy.
Total satisfaction rises with additional units purchased, but additional satisfaction diminishes.
People will buy until price exceeds satisfaction.

15. Normal and Inferior Goods
A normal good is one whose demand increases as people's incomes or the economy rise.
Inferior
An inferior good is an economic term that describes a good whose demand drops when people's incomes rise.

16. Changes in Demand
If demand increases, the demand curve shifts right. If demand decreases, the demand curve shifts left.
5 things can cause demand to change:
1. Buyers- Change in income of consumers
2. Income- Changes in consumer income
3. Tastes- Change in attitudes and tastes of consumers
4. Expectations- Change in consumer’s expectations
5. Related- Change in availability and prices of substitute and complementary goods.
Substitute Good: A good that can be used in the place of/instead of another good.
Complementary Good: A good that is used with another good.

17. Changes in Demand
Substitute Goods- a substitute is a product that can be used in the place for another
The price of the substitute good and demand for the other good are directly related
Coke Price , Pepsi Demand
Complementary Goods- a compliment is a good that goes well with another good
When goods are compliments, there is an inverse relationship between the price of one and the demand for the other.
Peanut Butter Price Jam Demand

18. Demand Elasticity – “Stretching Your Options”
If a change in the price of an item has a very big effect on the quantity demanded, then the demand is elastic.
Goods that have many competing brands are elastic.
Examples: cars, goods with substitutes, expensive items, purchases that can be postponed
If a change in the price of an item has little effect on the quantity demanded, then the demand is inelastic.
Goods that don’t have much competition tend to be inelastic
Examples: salt, sugar, turkey in late November or Frasier Firs in late December;
Oil has traditionally been inelastic but that fact appears to be changing recently.

19. Elasticity of Demand
Elasticity of demand: A measure of the responsiveness of quantity demanded to a change in price.
If a change in the price of an item has a very big effect on the quantity demanded, then the demand is elastic.
- Most goods that are not considered essential are demand elastic. People will buy a lot of candy if it is 10 cents per candy bar, but they will buy almost no candy if it is $2 per bar.
- Other examples: cars, goods with substitutes, expensive items, purchases that can be postponed
If a change in the price of an item has little effect on the quantity demanded, then the demand is inelastic.
- Goods that are considered essential tend to be inelastic Examples: salt, sugar, turkey in late November or Frasier Firs in late December;
- Oil has traditionally been inelastic but that fact appears to be changing recently.

20. Elastic and Inelastic Demand Curves
Price
Gasoline market
When the market price for gasoline rises from $1.25 to $2.00 a gallon, the quantity demanded in the market
falls insignificantly from 8 to 7 million units per week.
$2.00
$1.25
$1.00
In contrast, when the market price for tacos rises from $ to $2.00, quantity demanded in the market falls significantly from 8 to 4 million units per week. D
Quantity (gasoline) 1 2 3 4 5 6 7 8 9
Price
Taco market
$2.00
Because taco demand is highly sensitive to price changes, taco demand is described as elastic; because the demand for gas is largely insensitive to price changes, gasoline demand is described as inelastic.
$1.25 D
$1.00
Quantity (tacos) 1 2 3 4 5 6 7 8 9

21. Assume that apples are an inferior good
Assume that apples are an inferior good.  Also assume that apples and oranges are substitutes, and that apples and caramel are complements.  What will happen to the demand or quantity demanded for apples if the price of oranges decreases AND the income of the people who buy apples increases AND the price of caramel increases?  (Hint: shift one at a time but on the same graph).  

22. Supply

23. Supply The amount producers are willing to provide at various prices.
As price increases, supply increases.
As price decreases, supply decreases.
A supply curve shows the amount of a product that would be supplied at all possible prices in the market. From left to right, the supply curves moves up.
Law of diminishing returns: Adding units of a factor of production will increase output for a time. Eventually output will decrease.

24. Changes in Supply
Reevaluate- Companies have to decided what to produce and if they can make more money in other products
Interest- Changes in producer expectations
Government- Change in govt. policy: More govt. regulation (minimum wage, safety/environmental standards) increases costs, which lowers supply. Less regulation does the opposite.
“Haves”- Changes in costs of resources
Technology- New technology
Subsidies- Changes in taxes and subsidies: Taxes increase costs, subsidies lower them
Subsidy: payment to an individual or business for a specific action Ex: corn farming

25. A Change in Supply
Price (dollars)
If the market price for gasoline is $2.00 a gallon, the supply curve for gasoline S1 indicates Q1 units would be supplied. S2 S1
$2.00
If the price fell to $1.50, the quantity supplied would fall to Q2 units (where Q2 < Q1).
$1.50
If, somehow, the opportunity costs for gas manufacturers changed then the supply of gas would change.
$1.00
Consider the case where the cost of crude oil (an input in gasoline production) increases.
Quantity (units of gasoline per year)
The supply of gasoline at all potential market prices would fall. Now at $1.50, Q3 units are supplied (where Q3 < Q2 < Q1). Q3 Q2 Q1

26. Elasticity of Supply
How much does a change in price affect the amount supplied?
Supply Elastic: Producers offer many more goods as prices rise. Ex: goods that require little investment/money to increase production like candy.
Supply Inelastic: Producers don’t change amounts offered very much as price changes. Ex: goods that need a lot of money to increase production like oil.

27. Supply and Demand at Work
Supply and Demand work together to set prices.
If price falls, demand will increase and supply will decrease.
If price rises, demand will decrease and supply will increase.
Equilibrium price: Point where supply and demand meet.
Shortage and surplus:
When demand is greater than supply, a shortage occurs.
When supply is greater than demand, a surplus occurs.
Prices will rise in a shortage and fall in a surplus.
Price floor: Government set minimum price
Price ceiling: Government set maximum price

28. Corn Market Price Per Bushel (in $)
Quantity Demanded per Week (thousands)
Quantity Supplied per Week (thousands) 5 2 12 4 10 3 7 11 1 16

30. Market Equilibrium
A surplus is the amount by which the quantity supplied is higher than the quantity demanded.
1. A surplus signals that the price is too high.
2. At that price, consumers will not buy all of the product that suppliers are willing to supply.
3. In a competitive market, a surplus will not last. Sellers will lower their price to sell their goods.

31. Surplus 4

32. Market Equilibrium
A shortage is the amount by which the quantity demanded is higher than the quantity supplied
1. A shortage signals that the price is too low.
2. At that price, suppliers will not supply all of the product that consumers are willing to buy.
3. In a competitive market, a shortage will not last. Sellers will raise their price.

33. 4
Shortage

34. Market Equilibrium
When operating without restriction, our market economy eliminates shortages and surpluses.
1. Over time, a surplus forces the price down and a shortage forces the price up until supply and demand are balanced.
2.The point where they achieve balance is the equilibrium price. At this price, neither a surplus nor a shortage exists.
Once the market price reaches equilibrium, it tends to stay there until either supply or demand changes.
1. When that happens, a temporary surplus or shortage occurs until the price adjusts to reach a new equilibrium price.

35. Market Equilibrium 7

36. Trade Production Possibilities and Opportunity Cost Advantages
Absolute advantage- the ability to produce a good using fewer inputs than another producer (you can do more in a given time than someone else)
Comparative advantage- the ability to produce a good at a lower opportunity cost than another producer
Specialization
Focus your production where comparative advantage is found

38. Price Controls
The government sometimes regulates prices if they think the market will result in unfair prices.
- Price Ceiling: maximum price that can be charged- must be below the equilibrium to be effective
Ex: rent
- Price Floor: Minimum price than can be paid- must be above the equilibrium to be effective Ex: minimum wage

39. Prices as Signals
Prices are signals that help businesses and consumers make decisions.
1. WHAT  Producers focus on goods and services that consumers are willing to buy at prices that yield a profit.
2. HOW  To stay in business, a supplier must find a way to provide a good or service at a price consumers will pay.
3. FOR WHOM  Some businesses aim their products at a small # of consumers that will pay high prices, others at a large # of consumers that will pay a low price.
Characteristics of Price system
1. Prices are a compromise
2. Prices are flexible.
3. The price system provides for freedom of choice.
4. Prices are familiar.

40. Competition

41. Perfect Competition
Competition will exist if different businesses produce similar products.
Perfect Competition:
1. Large market
2. Similar product
3. Easy entry and exit
4. Information obtainable
5. No control over price
Requires a large amount of sellers and informed buyers.
Market price is equilibrium price.

42. Imperfect competition
Imperfect competition: One group can affect price.
Monopoly: One group controls the market.
1. Single seller
2. No substitutes
3. No entry
4. Control of market price
Suppliers can raise prices without losing business.

43. Monopoly types Natural: Control of resources.
Ex: Utilities
Geographic: Control of location
Technological: Patent on technology
Government: Created by the government. Illegal to enter.
Cartel: International form of monopoly (OPEC).

44. Imperfect competition barriers
Government regulations: Some goods and services are protected from duplication by the government.
Cost of getting started: Large amount of capital is needed to begin.
Ownership of raw materials: Companies control materials and do not sell to competitors.

45. Oligopoly Oligopoly: A few businesses in competition.
1. Domination of a few sellers
2. Barriers to entry
3. Identical or slightly different products
4. Some control of price.
Car manufacturers, oil companies, etc.

46. Monopolistic competition
1. Numerous sellers
2. Easy entry
3. Different products
4. Competition
5. Some control of price
Substitution and advertising are factors

47. Government policies
Antitrust laws are set up to control monopoly power and to promote competition.
1890 – gov’t passed the Sherman Antitrust Act that banned monopolies that prevented competition.
The government has used the Sherman Anti-trust Act several times to prevent a single business owner from controlling prices and products.
JP Morgan’s Northern Securities in 1904
John D. Rockefeller’s Standard Oil in 1911
AT&T in 1974
Microsoft in 2004

49. mergers One company joins with another.
Horizontal: Companies in the same business.
Ex: BellSouth/Cingular/SBC/AT&T
Vertical: Company joins with one it buys from.
Ex: Hog farm & trucking company
Conglomerate: Merger of un-related businesses.
Ex: GE – electricity, insurance, real estate, NBC

50. The Circular Flow of Economic Activity
Market: a location  or other situation that allows buyers and sellers to exchange a product
Factor Markets: where productive resources (labor, natural resources, capital, ideas) are bought and sold; where you earn $$
Product Markets: where businesses offer finished products for sale
Government Involvement
The Circular Flow Model shows how money and goods “flow” through the economy.  

52. Economic Systems
Traditional Economies: Decisions are made based on customs and traditions.
Capitalism (Market Economy): an economic system in which individuals have choice on how to use the Factors of Production (FoP). Buyers and sellers may freely interact with little government interference.
Command Economy (Communism): the government owns and decides how to use the FoP and makes all the decisions.
Socialism: an economic system where the community owns the FoP, and decisions are made through people working together for “The Common Good.”
Mixed: A mixture of any of the above economic systems.

53. Aspects of Capitalism
Consumer Sovereignty: The consumer is king; they are the ones who determine what will be produced because they determine what they want to buy.
Economic Freedom: Individuals and businesses have the freedom to decide what to produce or buy, and what job to have.
Private Property Rights: People and businesses have almost complete control of how to use their own property.  This gives us an incentive to work because we have control of what we gain by working.
Competition: Struggle between buyers and sellers to get best products at lowest prices.  Competition is good for consumers because it results in higher quality products and lower prices.
Profit Motive: individuals have the right to risk their property and money in order to make a profit.  If they do well, they get to keep what they make. If they do poorly, they will lose their money.
Voluntary Exchange: both buyers and sellers agree to any transaction that is made; no one is forced to buy or sell anything by the government.  
“Laissez faire” – absence of government involvement to ensure free competition in markets.