U1: Basic Economic Concepts

● Macroeconomics studies affects the whole economy, such as: inflation, price levels, gross domestic product (GDP), rate of economic growth, national income, and changes in unemployment.

We analyze the economy as a whole, on a macro level

Opportunity Cost

In life and macroeconomics, when we choose to do something (for example watch a movie for 2 hours), we lose 2 hours of time that could be spent on homework. We chose the alternative best opportunity for ourselves.

● Trade offs: In a trade off, we lose all other options.

Our choices lead to the loss of some opportunities, but there is sometimes a gain from these choices.

4 Factors of Production

● Land

● Labor

● Capital

● Entrepreneurship

○ Capital goods: Goods made not directly for consumption; for example, the straw to drink a soda, the oven to bake cookies for sale.

○ Human goods: Human skills that benefit production; for example, education, companies require workers to have a high school diploma because greater knowledge and skill will increase the level of production.

Production Possibility Frontier (Curve)

The PPF displays how there is an unlimited amount of wants for a limited amount of goods

Types of PPF

Increasing Opportunity Cost, Constant Opportunity Cost & Decreasing Opportunity Cost

Comparative Advantage

The ability to produce the same product(s) at a higher level of efficiency.

In the table above we compare the production of cars to bikes. We can view this graph as 2 ratios:

● 10 : 5 → 2 : 1

● 8 : 2 → 4 : 1

○ When producing cars county A will give up 1 bike to make 2 cars, and country B will give up 4 cars to make 1 bike. Therefore, Country A has the comparative advantage in producing bikes.

○ In producing bikes, Country A will give up 2 cars to make 1 bike, and country B will give up 4 cars to make 1 bike. Therefore, country B has the comparative advantage in producing cars.

Absolute Advantage: The greater number of the amount produced in the production of cars, country A has the absolute advantage

Supply and Demand

Law of Demand

The price and quantity demand of goods and services are inversely related to each other. When the price of a product increases, the demand for the product will decrease. For example, when the price of cupcakes triple because of a shortage of flour, the demand for cupcakes will decrease because of the increase in price.

Law of Supply

The price and quantity supplied of a good are directly related to each other. When the price of a good increases, the suppliers increase the supply of that good in the market. When the price of cupcakes rise, the suppliers will produce more of that good because less people may be buying the cupcakes. (meaning there will be more cupcakes left to buy at the store)

Shifters of Supply

● Cost of inputs

● Change in productivity/Technology

● Number of sellers

● Government Action Taxes

● Government Action Subsidies

● Government regulations

● Expectation of future profit

Shifters of Demand

● Number of consumers

● Change in tastes & preferences

● Change in income

● Change in the price of substitute goods

● Change in the price of complementary goods

● Future expectations

As price increases, quantity increases.

(more expensive cupcakes = more on the shelf and more left to buy)

As price decreases, quantity decreases.

(decrease price on cupcakes = more bought and less supply in store)

Example of Shifting

● Equilibrium: Market supply and demand balance each other and as a result, the prices become stable.

Key

UMP - Unemployment

PL - Price level

MB - Market basket

G&S - Goods and services

PV - Present value

FV - Future value

RGP - Real gross domestic product

AD - Aggregate demand

SRAS - Short-run aggregate supply

LRAS - Long-run aggregate supply

SRPC - Short-run phillip’s curve

LRPC - Long-run phillip’s curve

PPC - Production possibilities curve

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