Lecture Notes September 8, 2009 What kinds of questions does Economics address? What are principles of how people make decisions? What are the principles of how people interact? What are the principles of how the economy as a whole works? Principle 1: Peo
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1. Increases in total output realized when individuals specialize in particular tasks and
trade are known as:
A) the gains from trade.
B) the profits obtained from sales of a good or service.
C) marginal analysis.
D) a trade-off.
Q. If an economy has to sacrifice increasing amounts of good X for each unit of good Y
produced, then its production possibility frontier is:
A. bowed out form the origin (o)
B. bowed in toward the origin.
C. straight line
D. vertical line
If a country sp
Demand curve equations
2. Which of tegilf a supply curve is represented by the equation Q-10+20, what is its slope?
Supply: represents the behavior of sellers.
o A supply curve shows the quantity supplied at various prices.
Chpater 2) Economic models: Trade-offs and trade
Trade-offs: production possibility frontier. (PPF)
o To improve our understanding of trade-offs by considering a simplified economy
that produces only two goods.
o Shows the maximum quantity of one good
Chapter 1) What is economics?
Economy: a well-functioning system for coordinating productive activities that create the
goods and services people want and get them to the people who want them.
Economics: the social science that studies the production,
-Price ceiling: a legal maximum on the price of a good or a service.
(example: rent control)
The Budget Constraint: What the Consumer can afford
-People consume less than they desire because their spending is
The Elasticity of Demand
-Elasticity: a measure of the responsiveness of quantity demanded or
quantity supplied to one of its determinants
The Price Elasticity of Demand & Its Determinants
-Price Elasticity of Demand: A measure of how much the q
-Markets: a group of buyers and sellers of a particular good or service
-buyers determine the demand
-sellers determine the supply
What is competition?
-Competitive market: a market in which there are many buyers and many
sellers so that each ha
-Absolute advantage: the ability to produce a good using fewer inputs
than the producer
-Opportunity cost: whatever must be given up to obtain some item
-Comparative Advantage: the ability to produce a good at a lower
opportunity cost than anoth
The Economist As Scientist
-economists plays two roles
1. Scientists: try to explain the world
2. Policy advisors: try to improve it
-first, economists employ the scientific method
The Scientific Method: Observation, theory, and more obversation
Ten Principles of Economics
1. People face trade-offs
efficiency - the property of society getting the most it can from its
equality - the proprety of distributing economic prosperity uniformly
among the members of society
The Modern Mixed Economy
Every individual endeavors to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own s
Demand Curve: Downward sloping Supply Curve: Upward Sloping Equilibrium: The price that equates quantity supplied with quantity supplied Surplus: When quantity supplied is greater than quantity demanded Sellers try to increase sales by cutting price Cause
Competitive Market: One with many buyers and sellers, each has a negligible effect on price. Perfectly Competitive Market: All goods exactly the same (homogenous) Buyers and sellers so numerous that no one can affect market priceeach is a price taker
*Trade allows you to consume outside your PPF Absolute Advantage: The ability to produce a good using fewer inputs than another producer. -US has an absolute advantage in wheat: producing a ton of wheat uses 10 labor hours in the US vs. 25 labor hours in
Chapter 2 Production Possibilities Frontier (PPF): A graph that shows the combinations of two g oods t he economy can possibly produce given the available resources and the available t echnology. Example: Two goods: computers and wheat One resource: labor
Cost volume profit analysis
Margin of safety (def. and calc.)
Break even points (all calculations) dollars/units
projected income dollars/units
absorption vs. variable