Supply and Demand

Elasticity of Demand is a measure of how consumers react to a change in price.

• Elastic
• Demand is very sensitive to a change in price.
• Product is not a necessity and there are available substitutes.
• Example: Soda, Steaks and Fur coats.
• E > 1

• Inelastic
• Demand not very sensitive to a change in price.
• Product is a necessity
• Few or no substitutes
• Customers buy no matter what.
• Example: Insulin and Gas.
• I < 1 

•  Unitary Elastic
• Perfect society and economy
• U = 1

1.  Step 1: Quantity = New quantity - Old quantity/Old quantity
2. Step 2: Price = New price - Old price/Old price
3. Step 3: PED = Percentage △ in quantity/Percentage △ in price
4. Total Revenue (TR) - total amount of money a firm receives from selling goods and services. Price x Quantity

• Equilibrium - It is the point where the supply curve and demand curve intersect
• Excess demand - It occurs when quantity demanded is greater than quantity supply, results in a shortage.
• Shortage - Consumers cannot get quantities of items they desire.

 

• Price ceiling - When the government puts a legal limit on how high the price of a product can be. Rent control.
• Excess Supply - Quantity supply > Quantity demanded this results in a surplus where producers have inventories that people can't get rid of.

 

• Price floor - lowest legal price a commodity can be sold at. Used by government to prevent from prices from being too low. 

If you need more info:
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Production Possibilities Graph (PPG)

• The line on the PPG is known as the frontier or the curve. 

• Production Possibilities Curve (PPC)
• When producing at the frontier efficiency occurs.
• When producing beneath the frontier under utilization is occurring.

• Production Possibilities Frontier (PPF)
• Efficiency - using resources in such a way as to maximize production of goods and services efficiency increases profits.
• Undervaluation - It is the opposite of efficiency is using fewer resources than an economy is capable of using.
• leads to a decrease in profits.

• 2 Types of Efficiency 
• Productive - Products are being produced in the least costly way. This is any point ON the production possibilities curve.
• Allocative - The products being produced are the ones most desired by society. This optimal point on the PPC depends on the desires of society.

• The law of increasing opportunity cost
• When resources are shifted from making one good or service to another the cost of producing the second item increases.

 3 Types of movement occur within PPC

 

Point B - attainable and efficient inside the curve

Point D - attainable and inefficient. Recession under utilization. Famine unemployment/underemployment of resources.

Point E - unattainable using current resources. Technology and Economic growth

• 4 Key Assumptions

1. Only 2 goods can be produced
2. Full employment outside points of resources
3. Fixed resources (factors of production)
4. Fixed technology

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Basic Concepts of Economics

• Macroeconomics vs. Microeconomics

• Macroeconomics - Study of economy as a whole
• Examples: International trade, inflation and minimum wage flaws.

•  Microeconomics - Study of individual or specific units of economy
• Examples: Households affect economy and Income taxes.

• Positive economics vs. Normative economics 
• Positive - Claims that attempt to describe the world as is. Very descriptive to nature and it collects/presents facts.
• Negative - Claims that attempt to prescribe how the world should be. Opinion based, what outta be should be.

• Needs vs. Wants
• Needs - Basic requirements for survival.
• Examples: Food, water and basic things

• Wants - Desires. Things you don't need for survival, can live without.

• Scarcity vs. Shortage
• Scarcity - Fundamental economic problem facing all societies. How to satisfy unlimited wants with limited resources.
• Shortage - Quantity demanded is greater than quantity supply.
• Quantity demand is when they don't have any of the items left.

• Goods vs. Services
• Goods - Tangible commodities. Something you can physically touch is tangible.
• Capital goods: items used in the creation of other goods
• Consumer goods: goods that are intended for final use by the consumer.

• Services - Work performed for someone.
• Examples: Barber shop, concert and education

• Factors of Production

1. Land - Natural resources
2. Labor - Work exerted
3. Capital - Human Capital and Physical Capital
4. Entrepreneurship - Human Capital: People acquire skills and knowledge through experience and education. Physical Capital: Machinery, tools, money and equipment. Entrepreneurship: They are risk takers and are innovative.

•   Trade-offs - It is an alternative that we sacrifice when we make a decision.
• Opportunity cost - The most desirable alternative given up as a result of a decision.
• Guns or Butter - I is a phrase but refers to the trade offs that nations face when choosing whether to produce more or less military or consumer goods.
• Things at the Margins - This is whether we are deciding whether to add or subtract an additional unit of some source.

If you need more info:
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