Notes

ics
Every society that has ever existed has the same basic economic problem
No limit to human wants
There is a limited amount of resources unlimited wants facing limited resources = scarcity. Choices - needs - things required for survival
The study of the ways a society uses its available resources to satisfy its wants and needs
Nothing is free
No such thing as a free lunch
Trade-off and Opportunity Cost
Scarcity means that although we have boundless needs and wants, the resources are limited
Trade-off - having more of one thing usually means having less to another
In most trade-offs one rejected alternate is the best
Opportunity cost- The value of the most likely alternative given up as the result of a decision
Cost- Benefit principle - an individual should take an action if, and only if the extra benefits from taking the action are at least as great as the extra costs
Factors of Production
What is necessary to produce goods/services
Land - limited natural resources
Labor - workers who apply their skills, ability, efforts
Capital- any human made resource used to make other goods and services.

Adam Smith (1723 - 1790) - a Scottish economist and philosopher
*Smith is best known for his book An Inquiry into the Nature and Causes of the Wealth of Nations (1776)
*The Wealth of Nations scientifically described the basic principles of economics for the first time

Three important ideas from the Wealth of Nations:
Productivity and Wealth:
Labor becomes more productive as each worker becomes more skilled at a single job.
New Machinery and the division and specialization of labor would lead to an increase in production and wealth for a nation.
Wealth was the sum of the nation's goods produced by labor, regardless of who owned those good.
Invisible Hand:
Competition, together with the free market system, would act as an invisible hand that guided resources to their most productive use.
Individuals acting in their own self-interest, and with a minimum of government intervention, would bring about the greatest good for a society.
laissez-Faire:
From the French, literally meaning “let do” or “allow to do”.
The doctrine of Laissez-Faire means no government intervention in economic affairs.

2 Depression era regulation
Regulation of the U.S. Economy started in March, 1933 when Franklin Roosevelt became President
Roosevelt instituted 2 important regulations:
1. Securities and exchange commision (S.E.C.)- Regulates the stock market
2. FDIC (Federal Depository Insurance Corporation)- Government insures money deposited into banks up to 250,000

3 Key Economic Questions
Resources are scarce everywhere. As a result, every society must answer three key economic questions/
What goods and service should be produced?
Society chooses based on its needs and wants. Think about guns and butter.
How should goods and services be produced?
Ex. What fuel should be used to generate electricity?
Should education be public or private?
Many ways to produce goods and services, but all need L,L,C.
Who consumes goods and services?
How do people meet their needs for food and medical care.
Who drives a new car vs. wh takes the bus?
Who gets to go to college?
Usually decided by the distribution of income

Economic Systems
Traditional Economy
System based on:
Religion
Custom
Hereditary Allocation of Society’s Tasks - i.e. if your father was a farmer you are a farmer.
2. Strengths:
Everyone knows what role they play in society
Life is generally stable, predictable, and continuous
3. Weaknesses:
Discourages new ideas and ways of doing things
Usually found in underdeveloped areas; leads to stagnation
Examples: As many as 400 million indigenous people still use it. Especially in underdeveloped countries in South Africa, Africa, and Asia
***Used to be the ONLY system in the world
2. Command Economy
System based on:
Government Centralized Direction
Government Plan
Sets economic goals
Controls Production
Strengths:
Capable of dramatic change in a short time. I.e. Soviets pre-WWII, Nazi Germany, the U.S. during WWII, China before the Olympics, etc.
Weakness:
Does not meet wants and needs of consumers
***Examples: Nazi Germany, Soviet Union, China, Cuba, the U.S. during World War II
3. Market Economy
System based on:
The individual
Competition- When consumers buy a particular product, they are casting their dollar “votes” for the product. So consumers decide what will be produced.
Strengths:
Incredible variety of goods and services
Creates wealth
High degree of consumers satisfaction
Is able to adjust to change gradually
Weaknesses:
Rewards only productive resources. Many people are too young, too old, or too sick to work. Most efficient with a small amount of unemployment.
Must guard against market failures
Examples: The United States was/is the dominant market economy in the world. The market economy has become the main economic system in the world

General Economic Goals for the U.S.
Economic Freedom
Occupation

6. Price Stability
Inflation - A rise in the general level of prices which leads to more money needed to buy things
7. Economic Growth
Growth is necessary to meet everyone’s needs
No Growth = Recession

Introduction to Demand
Demand is the desire, ability, and willingness to buy a product
Demand is a Microeconomic is the part of economics that deals with behavior and decision making by small units, such as individuals and for,s
Economists treat the concept of demand in a formal manner. Demand is analyzed by listing prices and desired quantities in a demand schedule(chart). Hne the demand data is graphed it forms a demand curve
Demand schedule - a listing that shows the quantity demanded at all prices that might prevail in the market at a given time
Why do we use demand schedule? Economists want to see the market as a whole. They want to know the amount people will demand at each and every possible price.
Demand Curve - like the schedule it tells the quantity consumers will demand at each and every price, but the information is presented in a graph
A demand curve is always a downwards slope. Why? The law of demand
The Law of Demand - When price goes up, the quantity demanded goes down: when price goes down, the quantity demanded goes up (generally)

Change in Demand
Demand can change. It can go down. So economists show changes in demand on graphs (the demand curve)
When demand goes up(buyer wants to buy more each and every price). The demand curve shifts to the right. When demand goes down (buyers buy less at each and every price). The demand curve shifts to the left.


5 factors cause demand curves to shift:
Income- As a person’s income changes. He or she may buy more or less of a certain good.
Preferences- changes in preferences causes changes in demand
Prices of related goods-
When two goods are substitutes, the demand for one moves in the same direction as the price of the other. I.e. an increase in the price of butter would cause in increase in the demand for margarine.
When two goods are complements. The demand for one moves in the opposite direction of the price of the other. Complements are products used together. I.e. If the price of tennis rackets goes up. The demand for tennis balls goes down.
Number of buyers- a change in the number of buyers, either an increase or decrease can change demand.
Future prices- Buyer’s expectations of future prices can cause them to buy now or wait to buy. Both actions affect current demand

Questions: Changes in Demand and in quantity demanded
The price of gas hit $4 per gallon
Will demand for large SUVs increase, decrease, or stay the same? In which direction will the demand curve shift? Which of the five factors cause the shift?
The demand will decrease, the curve will go downward. Factors of related goods.

Smaller, sportier “crossover vehicles” hit the market and become the latest craze.
Will demand for large SUVs increase, decrease, or stay the same? In which direction will the demand curve shift? Which of the five factors cause the shift?
The demand will decrease, the curve will go downward. Factors of related goods.

Rising steel prices cause the prices of SUVs to rise.
Will demand for large SUVs increase, decrease, or stay the same? In which direction will the demand curve shift? Which of the five factors cause the shift?
The demand will decrease, the curve will go downward. Factors of related goods.

Government data show that the incomes of Americans are expected to rise faster than ever over the next year.
Will demand for large SUVs increase, decrease, or stay the same? In which direction will the demand curve shift? Which of the five factors cause the shift?
The demand will increase, the curve will go upward. Factors of income.

Words leaks to consumers that General Motors and Ford plan to offer big rebates on SUVs next month
Will demand for large SUVs increase, decrease, or stay the same? In which direction will the demand curve shift? Which of the five factors cause the shift?
The demand will increase, the curve will go upward. Factors of future prices

The government loosens immigration law, allowing millions of immigrants into the country.
Will demand for large SUVs increase, decrease, or stay the same? In which direction will the demand curve shift? Which of the five factors cause the shift?
The demand will increase, the curve will go upward. Factors of numbers of buyers.

Diminishing marginal utility
Diminishing means decrease
Marginal means additional 1 + 1 + 1 …
Utilities means satisfaction or usefulness
The Law of diminishing marginal utility: as a person consumes additional units of a good, eventually the utility gained from each additional unit of good decreases
When you reach the point where the satisfaction usefulness of a product is less than the price, you will stop buying

Elasticity of Demand
Elasticity measures how a price change has a significant affects the quantity of a particular good that people want to buy
Demand for a good can be elastic, inelastic, or unit-elastic
Elastic means that a price change has a significant impact on the quantity demanded. So consumers will only pay a small range of prices for elastic goods
Inelastic means that there is a minor change in quantity demanded when the price changes. So consumers will pay a large range of prices for inelastic goods. Consumers have few choices in the face of price increases

Elasticity of Demand: Elastic, Inelastic, or Unit-Elastic
Percentage change in quantity demanded / percentage change in price = Elastic demand (greater than 1) or Inelastic demand (less than 1) or Unit-Elastic demand (equal to 1)

Elasticity of Demand
Elasticity measures how a price change affects the quantity of a particular good that people want to buy
Demand for a good can be elastic, inelastic, or unit-elastic
Elastic means that a price change has a significant impact on the quantity demanded. So consumers will only pay a small range of prices for elastic goods.
Inelastic means that there is a minor change in quantity demanded when the price changes. So consumers will pay a large range of prices for inelastic goods. Consumers have few choices on the face of price increases
Unit-Elastic means that the impact of a price change is neutral

Determining Elasticity of Demand
If Qd went down 15% and P went up 10% then 15/10 = 1.5 = elastic demand
If Qd went down 5% and P went up 10% then 5/10 = .5 = inelastic demand
If Qd went down 10% and P went up 10% then 10/10 = 1 = unit-elastic demand
Qd = Quantity demanded P = Price

The 5 factors that determine the Elasticity of Demand?
Number of Substitutes- When there are few substitutes for a good, the quantity demanded is unlikely to change much if the price rises. Therefore, the demand for the good is likely to be inelastic
Luxuries versus necessities- Demand for necessities tends to be inelastic because people need those goods even if prices rises. Demand for luxuries tends to be elastic because people will often do without those goods if price rises
Percentage of income spent on the goods- If a good requires a large% of a person’s income, demand for it tends to be elastic. Demand for goods that require a small% of a person’s income tends to be inelastic.
Time- When consumers have little time to respond to a price change, demand is usually inelastic. When they have more time to respond, demand is usually elastic.
Narrowly defined markets vs. broadly defined markets- Narrowly defined markets tend to have more elastic demand than broadly defined market because it is easier to find close substitutes for narrowly defined goods.

Consider the following pairs of goods. Which would you expect to have the more elastic demand?
Diamonds or Water (Diamonds are luxuries and water is a necessity. Therefore, diamonds have the more elastic diamond)
Insulin and nasal dec (Insulin has no substitutes, but decongestant spray does. Therefore, nasal decongestant spray has the more elastic demand.
Food or Breakfast cereal (Breakfast cereal has more substitutes than does food in general. Therefore, breakfast cereal has the more elastic demand.
Gas over the course of a week or gas over the course of a year (The longer the time period, the more elastic the product will be.

Chapter 4 Work -
Chapter 4 Section 1 #3-7
3. What two qualities make up demand?
Price and quantity
4. According to the law of demand, what will happen when the price of a good increases?
The demand will go down
5. Under the substitution effect, what will happen when the price of a good drops?
If goods A and B are substitutes, an increase in the price of A will result in a leftward movement along the demand curve of A and cause the demand curve for B to shift out. A decrease in the price of A will result in a rightward movement along the demand curve of A and cause the demand curve for B to shift in.
6. What does a market demand show?
It shows the quantity demanded of the good by all individuals at varying price points.
7.What is a demand schedule called when it is represented as a graph?
Demand curve


Chapter 4 Section 2 #3-6
3.How is the ceteris paribus assumption related to demand curves?
It allows the demand curve to exist without variable other than price affecting it.
4.How does consumer's’ income affect the demand for normal goods?
The higher the income the more goods will be bought
5.Name at least three goods that could be bought as complements to hamburgers.
Buns, Cheese, Ketchup
6.List at least three goods that could be considered substitutes for movie tickets.
DVD, Netflix, Blu Ray


Chapter 4 Section 3 #3-7
3.What is elasticity of demand?
The way demand will change according to the price of the goods
4.If demand for a good is elastic, what will happen if the price increases?
The demand for the product will go down
5.If demand for a good is inelastic, how will a drop in price affect demand for the good?
The demand for the product will go up
6.Name three factors that determine a good’s elasticity.
Price, quantity, availability
7.Suppose demand for a product is elastic at a given price. What will happen to the company’s total revenue if it raises the price of hat product? Why?
They will lose money because people may not want to buy the product at the new price