Intro to Economics Flashcards
Economic System
Decides what to make, how to make, and who gets it
- allocating resources to productions
-distribution of production with things created from resources
Scarcity
the issue which wants are unlimited and resources are limited (scarce).
Economics Definition
The study of how society’s scarce resources are allocated as well as it’s consequences.
Scarce Resource
Not enough to satisfy society’s wants and needs
Resources
Factors used to produce goods and services.
The Production Possibilities Curve (PPC)
a graph showing all the possible ways two goods can be produced
-shows scarcity and opportunity cost
Normative Analysis
Subjective thinking, “what should be valued?”
Positive Analysis
analytical thinking and reasoning using facts. Ideas are testable, cause and effect relationships.
Why is PPC downward slope?
Represents trade-offs
- producing more of one good will shift resources away from the production of another good
Opportunity Cost
- value of the NEXT best alternative
- “opportunity lost”
- What could have been done with time or other resources instead what was actually done
Why is PPC bowed out?
More of one good means that opportunity cost is increasing ** (fact check)
-different uses of resources to produce 2 different resources
Straight Line PPC
Resources or services between two goods are interchangeable **
Trade
exchange of goods, services, resources between another agent
Economic Growth
Increase in
- potential AND actual level of output of goods and services OVER TIME
Why would a PPC be bowed inward?
Decreasing opportunity costs
Comparative Advantage
Able to produce good at a LOWER opportunity cost than someone else
Absolute Advantage
Can produce more of a good with same amount of resources (compared to another)
Specialization
individual or country allocates most or all resources for a specific good or service
A country should SPECIALIZE the good it has a comparative advantage **
How to solve for comparative advantage
what you give up / what you produce =
lower opportunity cost*
How to solve for absolute advantage
Whichever country can produce more with data provided
Inferior Good
When Incomes increase the demand of good decreases
When income decreases the demand of good will increase
Supply Demand Graph Shift to Right
Decreasing *
Supply Decreases (graph)
Price increases and Quantity decreases
Law of Supply
Price and Quantity is positively related
Expectation of an increase in future prices
supply will decrease (producers will try to save supply to sell later)
Decrease in factors of production prices causes the supply to…
increase
Shifts a long the supply curve
Equilibrium Price
price when quantities demanded and supplied are equal
Surplus (AD/AS)
Quantity supplied is GREATER than Quantity demanded
Qs>Qd
Price level is more than equillibrium
Producers are motivated to lower prices in order to eliminate surplus
Shortage (AD/AS)
Quantity Demanded is GREATER than Quantity Supplied
Qd>Qs
Price level under equilibrium, so prices of good rises
Changes in Equilibrium
Supply increases
- Price decreases
- Quantity increases
NOTE:
There will be a surplus , price must fall until Quantity demanded and Quantity supplied are EQUAL
Changes in Equilibrium
Supply decreases
Demand increases
Price INCREASES
Quantity is unknown
(what is degree of shifts in demand/supply?)
Price of a factor of production DECREASES
- supply increases
(so that would mean price decreases)
How to find Equilibrium
Find price and quantity associated with intersection **
Changes in Equilibrium
Demand and Supply Increases
- Price is undetermined
- Quantity increases
When income increases the DEMAND of a inferior good…
(price and quantity)
Demand of good will DECREASE
- price and quantity will DECREASE
When Demand changes what is price and quantity relationship?
- positive relationship
- both will move same direction
What happened to lead PRICE increase and QUANTITY decrease when SUPPLY DECREASES
supply decreases will result a shortage, (Qs < Qd) at the previous price.
What happens to the PRICE and QUANTITY if Demand INCREASES and Supply DECREASES?
Price increases
Quantity is undetermined
- Supply decreases the price level goes up and quantity goes down
- Demand increases (price and quantity increase)
Quantity is opposite, we do not know what is going to happen
Changes in Equilibrium
Increase in demand?
Both price and quantity increase
What happens when there is a change of price to a complimentary good?
Change in price of complimentary good effects DEMAND **
FACTORS OF PRODUCTION
Land
- minerals & natural res.
Labor
- humans working
Capital
- tools, factories,
equipment
Entrepreneurship
- ability to manage a
business
ALL THESE HELP INPUT TO MAKE **
Agent
a decision made by (person or group)
Incentives
rewards or punishments followed after action
(An agent bases decision on incentives)
Economic Aggregates
-measuring the economic performance of an economy
- a summary of all markets
(unemployment rate, inflation rate, etc)
Capital
tools machinery or things that are already made to produce things
Efficiency (where on PPC?)
the full employment of resources in production.
-efficient combinations of output
(will be directly on PPC {the curve})
Inefficient use (where on PPC)
under-utilization of resources
underemployment of any of the factors of production (land, labor, capital, entrepreneur)
not so good combinations of production
(inside of the curve of the PPC)
Growth in PPC (where on PPC)
increase in economy’s ability to produce goods and services OVER TIME
(a shift OUT [–>] of PPC)
Contraction in PPC (where on PPC)
decrease in output {under-utilization of resources}
(point is further away** and interior of PPC)
Constant Opportunity costs (on PPC)
(straight line)
opportunity cost of good remains constant as output of good increases
Increasing opportunity costs ( on PPC)
opportunity cost of good increases as output of the good increases (PPC is bowed out from origin)
productivity (where on PPC)
ability to combine economic resources.
- an increase in productivity causes economic growth even with resources being the same
- (shift out of PPC)
what happens if a point is outside of PPC
its impossible
Opportunity Cost EQUATION
opportunity cost of each unit of good
X = (Y1 - Y2) / (X1 - X2) units of good Y
Demand
all the quantity of good or service a buyer WOULD BUY AT ALL PRICES
( the whole demand curve )
law of demand (why demand curve is downward)
there is a inverse relationship between good’s price and quantity consumers demand.
PRICE goes DOWN
People BUY MORE
change in quantity demanded
every point on the demand curve is quantity demanded (amount buyers are willing to purchase at price)
> MOVEMENT ALONG THE DEMAND CURVE
- change of price causes movement on same curve
change in demand
buyers are willing to buy A DIFFERENT quantity at all possible prices
- shift in demand curve
- change in the determinants of demand
determinants of demand
causes demand curve to shift
TONIE
Tastes
Other goods
Number of buyers
Income
Expectations
Normal good
buyers will demand more of this good when their incomes increase
Inferior good
buyers will demand when their incomes decrease
Substitute good
goods that replace each other
when price of good increases the demand for its substitute will increase
Complement good
goods that are bros
consumed together
when price of a good increases the demand for its complement decrease
Supply
curve showing all the possible quantities that sellers are WILLING and ABLE to produce
Law of Supply
direct relationship between goods price and quantity supplied
- price increases, quantity increases and vice versa
-upward sloping
Change in quantity supplied
the quantity supplied or what sellers are willing to SELL at a specific price,
MOVEMENT ALONG SUPPLY CURVE from change in good’s price
change in supply
a movement or shift in an ENTIRE SUPPLY CURVE from a NON PRICE DETERMINANTS
Determinants of supply (6)
non price factors that SHIFT THE SUPPLY CURVE
- number of sellers
- level of technology
- prices of inputs used to produce good
- amount of government regulation
- price of other goods sellers could produce
- expectations among producers of future prices
Changes in Equilibrium
Supply Decreases
Price increases
Quantity decreases
Changes in Equilibrium
Demand decreases
BOTH Price and Quantity decreases
Changes in Equilibrium
Demand decreases and supply increases
price decreases
quantity is undetermined **
Changes in Equilibrium
Demand and Supply decrease
Price is undetermined
Quantity decreases **
