CHAPTER 1 Economics social science concerned with how individuals, institutions & society make optimal (best) choices

s under conditions of scarcity. Economic Perspective economic way of thinking Elements: Opportunity Cost sacrifice to obtain more of one thing, society forgoes the opportunity of getting the next best thing Utility pleasure, happiness or satisfaction obtained from consuming goods or services Marginal Analysis comparisons of marginal benefits and marginal costs - marginal means extra, additional, change in Economists rely on Scientific Method: Observing behavior and outcomes Formulating hypothesis Testing the explanation by comparing the outcomes Accepting, rejecting & modifying the hypothesis Test the hypothesis against the fact Economic Principle statement about economic behavior; economy that enables prediction of the probable effects of certain actions 1. Generalizations economic principles are generalizations relating to economic behavior or to the economy itself 2. Other-Things-Equal Assumption (Ceteris Paribus) All variables except those under immediate consideration are held constant for a particular analysis. 3. Graphical Expression economic models are expressed graphically Models combined theories into representations Microeconomics part of economics concerned with individual units such as person, household, firm Macroeconomics examines either the economy as a whole or its basic subdivisions or aggregates Aggregate collection of specific economic unit treated as one unit Both microeconomics & macroeconomics contain positive and normative economics. Positive Economics focuses on facts & cause and effect relationship; (what is) Normative Economics incorporates value judgments about what economy should be like or what particular policy action should be recommended to achieve a desirable goal; (what ought to be) Economizing Problem the need to make choices because economic wants exceed economic means Individuals Economizing Problem 1. Limited Income 2. Unlimited Wants a) necessities b) luxuries Budget Line schedule or curve that shows various combinations of two products a consumer can purchase with a specific money income Societys Economizing Problem 1. Scarce Resources 2. Resource Categories (FACTORS OF PRODUCTION or inputs)

a) Land natural resources b) Labor physical & mental talents of individual c) Capital manufacture aids used in producing goods; tools and machinery Investment purchase of capital goods Money is not considered a capital because it is only a means of purchasing capital goods d) Entrepreneural Ability Functions: He takes the initiative to combine the resources. He makes strategic business decisions. He is an innovator. He is a risk bearer. CHAPTER 2 Economic Systems a particular set of institutions arrangements and a coordinating mechanism Polar Extremes: Command System (Socialism or Communism) government owns most property resources & economic decision making occurs through a central economic plan Central Planning Board makes nearly all decisions concerning the use of resources, composition, etc.. Market System ( Capitalism) private ownership of resources & the use of markets and prices to coordinate & direct economic activity Markets places where buyers & sellers come together Pure Capitalism (Laissez-faire Capitalism) governments role would be limited to protecting private property & establishing an environment appropriate to the operation of the market system Laissez-faire means let it be, keep government from interfering with the economy Characteristics of a Market System 1. Private Property private individuals & firms own most of the property; the right of private property, coupled with the freedom to negotiate binding legal contracts, enables individuals & businesses to obtain, use & dispose of property resources as they see fit 2. Freedom of Enterprise & Choice a) Freedom of Enterprise ensures that entrepreneurs & private businesses are free to obtain & use economic resources b) Freedom of Choice enables owners to employ or dispose of their property and money 3. Self-interest motivating force 4. Competition basis of competition is freedom of choice exercised Requirement: Two or more buyers & two or more sellers acting independently Freedom of sellers & buyers to enter or leave markets 5. Markets & Prices coordinating mechanism of capitalism Market institution that brings buyers & sellers into contact Price amount assigned to a commodity 6. Technology & Capital Goods encourages extensive use & rapid development of complex capital goods; tools, machinery, largescale factories, transportation, marketing 7. Specialization use of resources of one individual to produce one or a few goods or services a) Division of Labor human specialization

Specialization makes use of differences in ability. Specialization fosters learning by doing. Specialization saves time. b) Geographical Specialization works on regional or international basis 8. Use of Money is a medium of exchange Barter swapping goods 9. Active, but Limited, Government final characteristic of market system in modern advance industrial economies. Five Fundamental Questions What will be produce? How will the goods and services be produce? Who will get the output? How will the system accommodate change? How will the system promote progress? a) Technological Advance provide strong incentive for technological advance and enables better products and processes to supplant inferior. b) Capital Accumulation provides the resources necessary to produce those goods through increase dollar votes for capital goods. Circular Flow Model creates continuous, repetitive flows of goods and services, resource and money. Resource Market the place where resources or the services of resource suppliers are bought and sold. CHAPTER 3 Demand schedule or a curve the shows the various amounts of a product that consumers are willing and able to purchase; shows the quantities of a product that will be purchased at various possible prices, other things equal. Demand Schedule single consumer purchasing bushel of corn Law of Demand other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demand falls, inverse relationship between price and quantity demanded Three Explanations 1. The law of demand is consistent; people ordinarily do buy more of a product at a low price than at a high price. Price is an obstacle that deters consumers from buying. 2. Each buyer of a product will derive less satisfaction from each successive unit of the product consumed. 3. We can also explain the law of demand in terms of income and substitution effects. a.) Income effect -- indicates that a lower price increase the purchasing power of the buyers money income, enabling the buyer to purchase more of the product than before b.) Substitution effect suggest that at lower price buyer have the incentive to substitute what is now a less expensive product for similar product that are now relatively more expensive Demand Curve downward slope reflects the law of demand Market Demand adding the quantities demand by all by all consumers at each of the various possible price

 Change in Demand a change in the demand schedule or graphically, a shift in the demand curve Change in Quantity Demanded movement from one point to another point on a fixed demand curve Determinants of Demand 1. Taste a favorable change in consumers taste (preference) for a producta change that makes the product more desirable 2. Number of Buyers an increase in the number of buyers in a market is likely to increase product demand; a decrease in the number of buyer will probably decrease demand 3. Income rise in income causes an increase in demand; the demand for such product declines as their incomes fall a.) Normal goods (Superior Demand) -- products whose demand varies directly with money income b.) Inferior Goods goods whose demand varies inversely with money income 4. Price of Related Goods a change in the price of a related good may either increase or decrease the demand for a product a.) Substitute Goods one that can be used in place of other goods b.) Complementary Goods -- one that is used together with another goods c.) Unrelated Goods goods are not related to one another 5. Consumers Expectations a newly formed expectation Supply schedule or curve showing the various amounts of a product that producers are willing & able to make available for sale at each of a series of possible prices during a specific period Law of Supply as prices rises, the quantity supplied rises; as price falls, the quantity supplied falls Price represents revenue to a supplier which serves as an incentive to produce or sell a product Marginal Cost the added cost of producing one more unit of output (e.g. labor) Supply Curve upward slope of the curve reflects the law of supply Market Supply horizontally adding the supply curves of the individual producers Change in Supply change in the schedule & shift of the curve Change in Quantity Supplied movement from one point to another on a fixed supply curve

Determinants of Supply 1. Resource Price higher resource price raise production cost reduces profits; lower resource price reduce production and increase profits 2. Technology Improvements in technology enable firms to produce units of output with fewer resources 3. Taxes & Subsidies an increase in sales or property taxes will increase production costs & reduce supply; subsidies are taxes in reverse, if the government subsidizes the production of a good, it in effect lowers the producers costs & increase supply

4. Prices of Other Goods the higher prices of other goods may entice producers to switch production to those other goods to increase profits; substitution in production 5. Producer Expectation changes in expectations about the future price of a product may affect the producers current willingness to supply that product 6. Number of Sellers the larger the number of suppliers, the greater the market supply; the smaller the number of firms in the industry, the less the market supply Market Equilibrium Equilibrium Price the price where the intentions of the buyers & sellers match Equilibrium Quantity quantity demanded & quantity supplied at the equilibrium price Surplus excess of supply; drives price down Shortage excess of demand Price Floor minimum price set by the government to aid producers; produce product surplus Price Ceiling maximum price set by the government to help consumers; produce product shortage