Unit 1 - Business Cycles (1-21-16)

BUSINESS CYCLES

Peak: highest point of real GDP

• lowest unemployment
• greatest spending

Expansion: where real GDP is increasing

• causes spending to increase
• unemployment decreases

Contraction/Recession: where real GDP declines for 6 months

• increased unemployment
• reduction in spending

Trough: lowest point of real GDP

• highest unemployment
• least spending

Unit 1 - Supply and Demand (1-19-16 to 1-20-16)

TABLES

Fixed Cost: a cost that does not change no matter how much is produced

• Rent, Mortgage, Insurance, Salary

Variable Cost: cost that rises or falls depending upon how much is produced

• Electricity

Marginal Cost: cost of producing one more unit of a good

• New total rev - Old total rev

FORMULAS

TC = TFC + TVC
ATC = AFC + AVC
AFC = TFC / Q
AVC = TVC / Q
ATC = TC / Q
TFC = AFC * Q
TVC = AVC * Q

(EXAMPLE of a table BELOW)

Equilibrium is the point at where the supply curve and the demand curve meet. This is where all resources are being efficiently used.

Excess Demand: when the quantity demanded is greater than the quantity supplied. This will result in SHORTAGES, where consumers cannot get the quantities of items that they desire.

Price ceiling creates a shortage.  A price ceiling occurs when the government puts a legal limit on how high the price of a product can be.  In order for a price ceiling to be effective, it must be set below equilibrium. 

Excess Supply: when the quantity supplied is greater than he quantity demanded.  This will result in a SURPLUS, where producers have inventories they cannot get rid of.

Price floor is the lowest legal price a commodity can be sold at. A price floor creates a surplus.  Price floors are used by the government to prevent prices from being too low. The most common price floor is the minimum wage.

Unit 1 - Supply and Demand (1-11-16 to 1-15-16)

Demand and Supply

Demand: quantities that people are willing and able to buy at various prices
"What causes a Δ in quantity demanded?" = Δ in PRICE

What causes a "Δ in demand"?

1. Δ in buyers taste (advertisement)
2. Δ in the # of buyers (population)
3. Δ in the price of related goods 

• Complementary = Car and Gas
• Substitute = Soda/Tea/Juice

      4. Δ in income

• Normal = as peoples income rises, demands for goods and services also rise
• Inferior = increase in income causes fall in demand

      5. Δ in expectations

Supply: quantities that producers or sellers are willing and able to produce at various prices
"What causes a Δ in quantity supplied?" = Δ in PRICE

What causes a "Δ in supply"?

1. Δ in weather (natural disaster, drought)
2. Δ in # of sellers
3. Δ in cost of production
4. Δ in technology
5. Δ in expectations
6. Δ in taxes or subsidies

Elasticity of Demand

• measure of how consumers react in Δ in price

Elastic Demand: demand that is very sensitive in Δ in price

• E>1
• product is NOT a necessity; there are substitutes
• ex.) Soda, Steaks, Candy, Fur Coats

Inelastic Demand: demand NOT SENSITIVE in Δ in price.

• E<1
• product is a necessity; few to no substitutes
• people will buy no matter what
• ex.) Gas, Salt, Insulin/Medication, Milk

Unitary Elastic Demand:

• E=1

Price Elasticity of Demand (PED)

Step 1: Quantity

• (New Quantity - Old Quantity) / Old Quantity = QUANTITY

Step 2: Price

• (New Price - Old Price) / Old Price = PRICE

Step 3: PED

• (% Δ in quantity demanded) / (% Δ in price) = PED

Unit 1 - Scarcity, Factors of Production, Production Possibilities Graph (1-5-16 to 1-8-16)

Macroeconomics vs. Microeconomics

Macro: study of the economy as a whole

• supply and demand
• international trade
• minimum wage 

Micro: study of individual or specific units of the economy

• market structures 
• business organizations 

Positive Economics vs. Normative Economics 

Positive: attempts to describe the world as is, very descriptive, collects and presents FACTS

Normative: attempts to prescribe how the world should be. OPINIONS

• "ought to be"
• "should be"

Needs vs. Wants

Needs: Basics requirement of survival

• water, food, shelter, clothing

Wants: Desire of citizens

• cars, candy, computers, cell phones

Goods vs. Services

Goods: Tangible commodities

• bought, sold, or produced 

1. Capital Goods: items used in the creation of other goods (trucks, factory machines) 
2. Consumer Goods: intended for final use by the consumer

Services: work that is performed for someone

• haircut, concert, school

Scarcity vs. Shortage

Scarcity: Most fundamental economic problem facing all societies; how to satisfy UNLIMITED wants with LIMITED resources. Always involves a choice.

Shortage: Quantity demanded is greater than quantity supplied

Factors of Production

1. Land: natural resources
2. Labor: work force
3. Capital: human and physical

• Human = skills(college, training). where did you get those skills?
• Physical = tools, machines, buildings

      4. Entrepreneurship: innovated, risk-taker, owning a business

Production Possibilities Curve/Graph (PPC/PPG)

Trade-offs: alternative that we give up when we choose one course of action over another
Opportunity-cost: next best alternative
Efficientcy: using resources in such a way as to maximize production of goods and services
Allocative Efficiency: products being produced are the ones that are most desired by society
Productive Efficiency: products being produced in the least costly way. (any point on the production possibility curve)
Underutilization: using fewer resources than an economy is capable of using

Production Possibilities Curve: shows alternative ways to use economy's resources
   (4) Assumptions:

1. Two goods
2. Fixed resources
3. Fixed technology
4. Full employment of resources

3 Types of Movement Occur within PPC

Inside PPC: resources unemployed, resources underemployed, and/or productive efficientcy. attainable, INEFFICIENT
Along PPC: attainable, but EFFICIENT
Shifts of the PPC: when resources and technology change

 

What causes the PPC/PPG to shift?

1. technology change
2. change in resources
3. change in labor force
4. economic growth
5. national disasters/war/famine
6. more education or training