1 Economics, so far I. Opportunity Cost a. What it is: what is given up b. Our first assumption is that resources money, time, land, etc are LIMITED. c. THUS we make choices. And every choice has an opportunity cost i. For example, if from on Thursday you are in econ, your opportunity cost is what else you could be doing with that time, like sleeping or a different class. d. Application: Production Possibility Frontiers (PPF) i. Countries make choices too. ii. Illustrated on PPF iii. Two types: Constant Opportunity Costs How do we know? Each time we add 20 wheat units from point A to B to C, we lose exactly 20 units of barley Straight line Why? Transferable resources anything that can grow wheat can grow barley Increasing Opportunity Costs How do we know? Each time we add 20 wheat units from point A to B to C..to E, we lose more and more computers. Curved Line Why? NOT perfectly transferable resources need different resources (land, labor, machines, buildings) for wheat and computers
2 II. Graphing See graphing handout from week 1 III. Economic Systems a. What it is: Each country must answer: i. What it will make ii. How it will be made iii. And who gets it b. Answers can range from Command Central committee or government answers all three questions MIXED Government supplies some goods: libraries, schools, roads Private sellers supply some goods: clothes, housing, lattes Market Private sellers and buyers make individual decisions that answer all three questions c. Because many goods are discovered, made and distributed in the private market, we study markets. IV. Markets a. What it is: The coming together of Supply (sellers) and Demand (buyers) to arrive at equilibrium price and quantity. b. The market will adjust to equilibrium in response to surpluses or shortages aka the invisible hand Sellers incentive to lower the price to decrease surplus Demanders have incentive to bid the price up
3 V. Price Changes a. There are lots of events that cause demand and supply curves to shift thus causing the equilibrium price to change. SUPPLY DEMAND Supply Increase Supply Decrease Demand Increase Demand Decrease + Technology Improvement Technology Setback (Regulations) + Lower Input prices Higher Input prices (raw materials, Bad Weather labor) + Good Weather + More firms Fewer firms + More income + More people + Increase in Tastes or Preferences + Price of a substitute goes up + Price of a complement (use with) good goes down - Incomes fall - Fewer people - Decrease in tastes or preferences - Price of a substitute falls - Price of a complement good increases Price falls Quantity increases Price rises Quantity decreases Price rises Quantity increases Price falls Quantity decreases b.
4 c. Sometimes demand and supply shift at the same time Either price or quantity will be predictable, but the other will be undetermined unless we know the exact amount of the shifts Supply INCREASE, Demand DECREASE Both INCREASE Quantity increases Price undetermined Price down Quantity undetermined Supply DECREASE, Demand INCREASE Both DECREASE Quantity decreases Price undetermined Price up Quantity undetermined
5 VI. Elasticity a. What it is: How responsive quantity is to a price change b. When price goes up, we know quantity demanded (along the demand curve) will decrease but by how much? ANSWER: Depends on how much the good is needed. Necessities, No substitutes, addictive INELASTIC An increase in price and consumers will only buy a little less Not needed, Many alternatives, not addictive ELASTIC An increase in price and consumers will buy a lot less Steeper Flatter Why we care? Can impact total revenue. Total revenue is value of all sales or Selling price * number sold Inelastic Elastic P causes Total Revenue P causes Total Revenue P causes Total Revenue P causes Total Revenue
6 VII. Price Controls a. Assumption: Market is efficient and may be fair b. Sometimes sellers or buyers think the market price is unfair. They will ask (and sometimes get) a price control c. Types: Price Ceiling Max price charged Requested by Buyers/Demanders Price Floor Minimum Price sold at Requested by Sellers/Suppliers Results: Shortage (under produced) Black market as buyers bid up the price for the few available Quality decrease Examples: Rent Control Gas prices during/after hurricanes Results: Surplus (under consumed) Black Market as sellers cheat and sell under the price floor Examples: Minimum wage Price supports for agricultural products Both are inefficient causing either under production or under consumption compared to the market equilibrium quantity.