Chap. 1 2 3 Flashcards
A science that studies humans & societies use resources to produce goods & service to satisfy wants/needs
Economics
Statement that can be verified with empirical data
Positive Statement
Statement based on person’s
belief or value
cannot be verified
Normative Statement
Scientific method to construct
Economic Theory
- Hypothesis
- Define Terms / State Assumptions
- Test w/ data
- Accept / Reject / Modify theory
Economics studies how major components of an economy interact
Macroeconomics
e.g. Unemployment / Inflation / Gov policies / Int rates
Economics studies outcomes of decisions by people/firms
Microeconomics
E.g. Supply & demand / Cost & price of good / Market structure / Monopolies
4 Economic Resources
-
Labour
Human mental & physical effort -
Land
Natural resource to produce goods & services -
Capital
Plant/Equipment/Building/Tools for production -
Enterprise
Human to innovate and take risks
Payments for Economic Resources
- Labour → Wages
- Land → Rent
- Capital → Interest
- Enterprise → Profit
The value of the
Next-Best Alternative
given up for
the other choice
Opportunity Cost
Products used by consumers to satisfy wants & needs
Only consumers buy
Consumer
Goods & Services
E.g. Pizza
PPE used to make goods for sale
Only firms & gov buy
Capital Goods
E.g. Machinery
2 Efficiencies
-
Productive Efficiency
Production of an output at Lowest Possible Avg Cost -
Allocative Efficiency
Production of combination of outputs that Best Satisfies Society & Consumers’ Demands
5 Methods of
Allocative Efficiency
- First come, first served
- Lottery
- Sellers’ preference
- Gov decree
- Market
Difference of
If-No-Trade and If-Traded
Benefit of Trade
3 Fundamental Questions for all economic societies
- What to produce
- How to produce (tech)
- For Whom to receive (distribution)
4 Types of Economies
-
Co-operative
Foraging, egalitarian, no hierarchy/leader/army
(Kibbutz) -
Command
Totalitarian (elite group) -
Customary
Traditional/Religious
Landowners (royalty/aristocracy/church) -
Competitive
Market
A graphical representation of combinations of
maximum output
that can be produced from available resources/tech
Production Possibilities Model
Assumptions:
1. Full employment
2. Best tech
3. Productive efficiency
Law of Increasing Costs
Economy’s
total production level of
particular item ↑
→ Per Unit Cost of
additional unit ↑
Heart of Economics
(3 factors)
Scarcity
Choice
Opportunity Cost
(COS)
Production Possibilities Model illustrates
Choice
Efficiency
Opportunity Cost
Unemployment
(CEOU)
Mechanism that allows buyers/sellers to exchange products/services
Market
Relationship between various
prices & quantities that
consumers/suppliers are willing/able to buy/produce
Demand/Supply
Motivation of consumers and producers in The Wealth of Nations - Adam Smith
Self-interest
Most important determinant of Demand
Price
Motivation of Supply
Profit
Demand/Supply Schedule contains
- Price per Case
- Quantity Demanded/Supplied
Reasons of
Downward Slopes
of Demand Curve
-
Income effect
Effect of a Price Change on Real Income, and on Quantity Demanded
商品價格對消費者真實可支配收入及需求量的影響 -
Subsitution effect
Effect of Change in Relative Prices of a Product and its Substitute
商品價格變化對其替代品需求量的影響
Cause of Movement along Demand/Supply Curve
Price Change
When
1. Prices ABOVE Equilibrium
2. Prices BELOW Equilibrium
- Surplus
- Shortage
Determinants of Demand:
Cause change in Demand
(Quantity Demanded at each price changes)
Factors Other than Price
1. Consumer Preferences
2. Consumer Incomes
3. Prices of Related Products
substitute/complimentary
4. Expectations of Future
(in Prices/Income/Availablity)
Expected future $ ↑
→ Sold ↑ now
5. Population Size / Income & Age Distribution
Assumed to be constant when drawn
When income rises, consumers
buy more __ products &
buy less __ products
Normal Products ;
Inferior Products
2 Types of
Related Products
-
Substitutes
Products can be substituted for each other.
Product price ↑ → Substitute demand ↑ -
Complements
Tend to be bought together.
Product price ↑ → Substitute demand ↓
Equilibrium price & quantity are determined by
Interaction between buyers & sellers
2 Equilibrium Outputs
Quantity Supplied &
Quantity Demanded
Determinants of Supply:
Cause change in Supply
(Quantity Supplied at each price changes)
-
Prices of Resources
Resource $ ↑ → Supply ↓ - Gov Taxes & Subsidies
Tax ↑ → Supply ↓
Subsidy ↑ → Supply ↑ -
Technology
Tech ↑ → Production Cost ↓ & Supply ↑ - Prices of Substitutes in Production
Product $ ↑ → Supply of Sub in Production ↓ - Future Expectation of Suppliers
Expected future $ ↓ → Supply ↑ -
Number of Suppliers
Suppliers # ↓ → Supply ↓
When Demand/Supply change together, the effect of Price/Quantity is
Indeterminate or
Inconclusive
When Demand ↑
& Supply ↑
Price __ Qty __
Price ? Qty↑
When Demand ↓
& Supply ↓
Price __ Qty __
Price ? Qty↓
When Demand ↑
& Supply ↓
Price __ Qty __
Price↑ Qty ?
When Demand ↓
& Supply ↑
Price __ Qty __
Price↓ Qty ?
3 Problems with Markets
- Markets adjust NOT quickly
- Markets results NOT equitable
- Competitve Markets NOT for some goods/srv.
Price Control
Gov regulates $
incl.
1. Price Ceiling
2. Price Floor
3. Quota
4. Taxes
incl. Carbon tax
5. Subsidies
per unit produced
promote economic/social policy
Price Ceiling
1. __ equil. $
2. cause
- < equil. $
- Shortage & black market
E.g. Rent
Price Floor
1. __ equil. $
2. cause
- > equil. $
-
Surplus
& gov buys it
E.g. min. wage/agricultural
How to Allocate Scarcity/Shortage
- Market
- Lottery
- First come, first serve
- Preference of producers
- Rationing by gov
Surpluses will be
- Stored
- Converted
- Sold abroad (Dumped at low $)
- Donated
- Destroyed
SCDDD
Quota
1. __ equil. $
2. cause
Restricting production output
- > equil. $
- Price ↑ without Surplus
How
1. Taxes
2. Subsidies
impact supplies
Supplies are
-
↓ by Taxes
⇒ Supp Crv ↑ -
↑ by Subsidies
⇒ Supp Crv ↓
