Supply and Demand

Demand - Is the quantities that people are willing and able to buy at various prices.
The Law of Demand - There is an inverse relationship between price and quantity demanded; as price decreases quantity increases.
A change in price causes a change in quantity demanded. (ΔQD)

What causes a change in demand?

1. Δ in buyers taste (advertising)
2. Δ in number of buyers (population)
3. Δ in income: Normal goods - goods that buyers buy more of when income rises; Inferior goods - goods buyers buy less of when income rises
4. Δ in price of related goods: Substitute goods - serve roughly the same purpose to buyers (coca cola and Pepsi) Complementary goods - consumed together (Gas and automobiles)
5. Δ in expectations (future)

Increase in demand = shift to the right
Decrease in demand = shift to the left

Δ = Change

Supply - is the quantities that producers or sellers are willing and able to produce or sell at various prices.

The Law of Supply - There is a direct relationship between price and quantity supplied; Price increases quantity increases.

A Change in price causes a change in quantity supplied.

What causes a change in supply?

1. Δ in weather
2. Δ in technology
3. Δ in taxes or subsidies ( money government gives) 
4. Δ in cost of production
5. Δ in number of sellers
6. Δ in expectations

Equilibrium - point at which the supply curve and demand curve intersect.

Point at which they intersect - economy is using all resources efficiently.

Shortage - QD > QS

Surplus - QS > QD

Price ceiling -government imposed limit on how high you can be charged for a product or service. (above the equilibrium spot. ex: minimum wage

Price floor - government imposed minimum on how low a price can be changed for on a product or service.

Fixed cost - a cost that does not change no matter how much is produced.

Variable cost - cost that fluctuates (to change) ex: gas

       Formulas

o   MC = New TC – Old TC

o   TC = TTC + TVC  or  ATC / Q

o   AFC = TFC / Q

o   AVC= TVC / Q

o   ATC = AFC + AFC or TC/Q

Elasticity

Elasticity of demand - tells how drastically buyers will cut back or increase their demand for a good when a price rises or falls.
Elastic demand - when demand will change greatly given a small change in price. 
"Wants" ex: Movie tickets  E>1
Inelastic - your demand for a product will not change regardless of price. 
"Needs" ex: milk, medicine, gasoline   E<1
Unitelastic: E=1
Calculate:

1. (new quantity - old quantity)/old quantity
2. (new price - old price)/old price
3. percent Δ in quantity / percent Δ in price

Unit 1 - Production Possibility

Macroeconomics Vs. Microeconomics

Macroeconomics - Is the study of the major components of the economy.
     ex: Inflation, GDP, and international trade
Microeconomics - Is the study of how households and firms make decisions and how they interact in  markets.
     ex: Supply and demand and market structures

Positive economics Vs. Normative economics

Positive economics - Claims that attempt to describe the world is as is: very descriptive. (fact based)
     ex: minimum wage laws causes unemployment
Normative economics - claims that attempt to prescribe how the world should be: very prescriptive in nature. (opinion based)
     ex: The government should raise the minimum wage

Needs Vs. Wants

Needs - Basic requirements for survival Wants - Desires of citizens: broader needs.

Scarcity Vs. Shortage

Scarcity - the most fundamental economic problem facing all societies.
-satisfying unlimited wants with limited resources
-permanent
Shortage - Quantity demanded is greater than quantity supplied.
-Temporary

Goods Vs. Services

Goods - tangible commodities
Consumer goods - intended for final use by the consumer.
     ex: Car and Chocolate bar
Capital Goods - items used in the creation of other goods such as factory machinery and trucks.
Services - Worked that is performed for someone else

Factors of production - 
     1. Land - Natural resources
     2, Labor - Work force
     3. Capital -
Human Capital: Knowledge and skills gained though education and experience.
Physical Capital: Human made objects used to create other goods and services.
     4. Entrepreneurship -  Innovator and risk taker.

Trade offs - Alternatives that we give up whenever we choose one course of action over another.
Opportunity cost - The most desirable alternative given up by making a decision.
Production possibility graph - Shows alternative ways to use resources.
- Each point shows a trade off.

Point A - Efficient but producing more capital goods.
Point B - Efficient and attainable.
Point C - Efficient but producing more consumer goods. 
Point D - Under-utilization and attainable but inefficient.
(Inside) Can be caused by a decrease in population, recession, war, famine, underemployment, or unemployment.
Point E - Unattainable
(Outside) Can be caused by economic growth, technology, and new resources.

Productive efficiency - (any point on the curve) Producing at the lowest cost and allocating resources efficiently.
- Full employment of resources
Allocating efficiency - Where to produce on the curve.

Production Possibilities Graphs key assumptions:

1. Two goods are produced
2. Full employment
3. Fixed resources
4. Fixed state of technology
5. No international trade