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Table of Contents

OVERVIEW

• Economics : The study of how scarce resources are allocated among competing uses.
• Macroeconomics : The study of economic aggregates such as national production and the price level.
• Key Economic Questions Include :
  1. What is produced?
  2. How is it produced?
  3. Who gets what is produced?
• PRODUCTION POSSIBILITY FRONTIER: The alternative combinations of final goods and services that could be produced in a given time period with all available but limited resources and technology.
  1. Illustrates opportunity cost: Obtaining more production of one good requires a reduction in the production (lost opportunity) of one or more other goods.
  2. Law of increasing opportunity cost means that obtaining more of a good requires giving up ever larger amounts of the alternative good. This economy produces only two goods (X, Y). Points on the curve (A, B, C, D) represent different combinations of the two goods when all resources are used (full employment of resources). If the allocation is inside the curve, some resources are not used or used inefficiently.
     
     Explanation: This concave production possibilities frontier shows the law of increasing opportunity cost. Moving down the curve means this economy is producing more of X and less of Y. At point A, the economy produces 14 units of Y and zero X. At point B, 100 units of X are now produced. To do this, one unit of Y is given up. To produce the next 100 however, Y production drops from 13 to 10, meaning three units of Y are given up (point C). Finally, to produce an additional 100 units of X, 10 units of Y have to be given up(point D). It became more and more expensive to produce the same units of X.
  3. Expanding frontier: Increases in resources and technological advances.
• HOW CHOICES ARE MADE:
  1. Market mechanism: Market-determined prices solve surpluses and shortages, and owners allocate resources to take advantage of highest monetary rewards.
  2. Command economy: Central authority allocates resources to achieve goals.
  3. Mixed: Economy that uses both market and non-market signals to allocate goods, services and resources.

SUPPLY & DEMAND

DEMAND

• Demand Curve (Schedule): A curve (table) showingthe quantities of a good or service a consumer is willingand able to buy at alternative prices given constanttastes, incomes, related prices, and number of buyers.
• Law of Demand: Increase in price (P) causesdecrease in quantity (Q) demanded.
• Change in quantity demanded: Caused by own pricechange and results in movement along the demand curve.
• Change in demand: Change in tastes, price ofrelated goods, income, increase in number of buyers,expectation on prices and availability alter plannedconsumption at all prices, shifting the demand curve to the right (increase) or left (decrease).

SUPPLY

• Supply Curve: A curve (table) showing the quantitiesof a good or service a seller is willing and able to sellat alternative prices at a given cost of production determined by constant input prices, technology, and number of sellers.
• Change in quantity supplied: Caused by own pricechange and results in movement along the curve.
• Law of Supply: Increase in price (P) causes increase in quantity (Q) supplied.
• Change in supply: Change in cost of production,technology, price of other produced goods; number of sellers alters planned sales at all prices, shifting the supply curve to right (increase) or left (decrease).MARKET EQUILIBRIUM
• Equilibrium: When price is established wherequantity demanded (Pe) = quantity supplied (Qe).
• Properties of Equilibrium:
  1. P > Pe, surplus
  2. P < Pe, shortage
  3. P = Pe, stable
• Price Controls:
  1. Ceiling: Below equilibrium = shortage
  2. Floor: Above equilibrium = surplus

CHANGE IN EQUILIBRIUM

Supply IncreasePe Qe

Supply DecreasePe Qe

Demand IncreasePe Qe

Demand DecreasePe Qe

ECONOMIC AGGREGATES

• GROSS DOMESTIC PRODUCT (GDP): The total market valueof all final goods and services produced in a country in a given year.
• GROSS NATIONAL PRODUCT (GNP): The total market valueof all final goods and services produced by the countrys citizens in a given year.
• USGDP less earnings of foreigners in the U.S. plus earnings ofU.S. nationals abroad = USGNP.
• MEASURING AGGREGATE OUTPUT
  1. Value Added Concept = value of production less value ofmaterial inputs summed across firms
  2. Income Method = Wages and Salaries + Rent + Profits + Interest+ Adjustments
  3. Expenditure Method (Sum of expenditures on final goods andservices) = Private Consumption (C) + Gross Private DomesticInvestment (I) + Government Purchases (G) + Exports (X) Imports (M) = (C + I + G + X M)
• National Income Accounting:
  1. Net Domestic Product (NDP) = GDP less Capital ConsumptionAllowance
  2. National Income (NI) = N DP Indirect Business Taxes +Subsidies
  3. Personal Income (PI) = N I (Corporate Taxes + RetainedEarnings + Social Security Taxes) + Transfer Payments

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