The science that studies the choices of people trying to satisfy their wants in a world of scarcity. Tangible Intangible

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1 economics Chapter 1 The science that studies the choices of people trying to satisfy their wants in a world of scarcity. economic system The way in which a society decides what goods to produce, how to produce them, and for whom goods will be produced. Tangible Intangible Wants tangible Able to be felt by touch. intangible Not able to be felt by touch.

2 microeconomics The branch of economics that deals with human behavior and choices as they relate to relatively small units an individual, a business firm, or a single market. macroeconomics The branch of economics that deals with human behavior and choices as they relate to the entire economy. opportunity cost The most highly valued opportunity or alternative forfeited when a choice is made. resource Anything that is used to produce goods or services. In economics, resources are also called factors of production. land All the natural resources found in nature. Water Minerals Animals Plants Forests labor The physical and mental talents that people contribute to the production of goods and services.

3 capital Produced goods that can be used as resources for further production. Such things as factories, machines and farm equipment. entrepreneurship The special talent that some people have for searching out and taking advantage of new business opportunities and for developing new products and new ways of doing things. rent The payment to the resource land wages The payment to the resource labor. interest The payment to the resource capital. scarcity The condition in which our wants are greater than the resources available to satisfy those wants.

4 rationing device A means for deciding who gets what portion of the available resources and goods. Chapter 2 free enterprise An economic system in which individuals (not government) own most, if not all, the resources and control their use. socialism An economic system in which government controls and may own many of the resources. profit The amount of money left over after all the costs of production have been paid. Exists when total revenue exceeds total costs. total cost The average cost (or expense) of a good times the number of units of the good sold.

5 excludable public good A public good that individuals can be excluded (physically prohibited) from consuming. nonexcludable public good A public good that individuals cannot be excluded (physically prohibited) from consuming. Chapter 3. law of demand demand The willingness and ability of buyers to purchase a good or service. quantity demanded The number of units of a good purchased at a specific price.

6 law of diminishing marginal utility demand curve A graphical representation of the law of demand.

7 demand curve A graphical representation of the law of demand. 2 Factors That Can Cause the Curve to Shift Change along a curve Curve Shifts Left (Decrease) Curve Shifts Right (Increase) Factors That Cause Shifting Curves

8 1. Income A change in income can cause an increase or decrease in quantity demanded If Income goes up increases for a normal good. decreases for an inferior good. remains constant for a neutral good. If Income goes down decreases for a normal good. increases for an inferior good. remains constant for a neutral good. normal good A good the demand for which rises as income rises and falls as income falls. inferior good neutral good A good the demand for which falls as income rises and rises as income falls. A good the demand for which remains unchanged as income rises or falls.

9 2.Preferences 3. s of Related Goods Substitutes Complements substitute for substitute A similar good. With substitutes, the price of one and the demand for the other move in the same direction. Pepsi is a substitute for CocaCola. When the price of CocaCola goes up, demand for the substitute (Pepsi) goes up. for substitute complement Pepsi is a substitute for CocaCola. When the price of CocaCola goes down, demand for the substitute (Pepsi) goes down. A good that is consumed jointly with another good. With complements, the price for one and the demand for the other move in opposite directions.

10 Ski Boots and Ski Masks are complements of Skis. Ski Boots and Ski Masks are complements of Skis. When the price of skis go up, the demand for boots and masks go down When the price of skis goes down, the demand for boots and masks go up 4. Number of Buyers 4. Number of Buyers As the number of buyers in an area increase, the demand curve will shift to the right. As the number of buyers in an area decrease, the demand curve will shift to the left. But if demand changes by more than the price increases or decreases, demand is elastic. elasticity of demand

11 elastic demand The type of demand that exists when the percentage change in quantity demanded is greater than the percentage change in price. goes up by 10%, goes down by 20%. 10% up 20% down goes down by 5%, goes up by 15%. down 5% 15% up inelastic demand The type of demand that exists when the percentage change in quantity demanded is less than the percentage change in price. goes down 50%, demand increases only 25%. goes up 30%, demand decreases only 10%. 50% down up only 25% up 30% down only 10%

12 unit elastic demand goes up 7%, demand goes down 7% The type of demand that exists when the percentage change in quantity demanded is the same as the percentage change in price. price demand goes down 45%, demand goes up 45%. price demand Determinants of Elasticity of 1. Number of Substitutes 2. Luxuries versus Necessities 3. Percentages of Income Spent on the Good 4. Time 1. Number of Substitutes The demand for goods with many substitutes is likely to be elastic. A good such as bread has many substitutes. If the price goes up on one brand, there are many others to choose from. 1. Number of Substitutes Whereas, a good such as heart medication would have fewer substitutes. If the price were to go up, demand would likely remain high. A good with few substitutes would likely be inelastic.

13 2. Luxuries versus Necessities 2. Luxuries versus Necessities Luxuries are goods that people don t need to survive. for luxuries is more likely to be elastic. for necessities such as food is more likely to be inelastic. 3. Percentage of Income Spent on 3. Percentage Good of Income Spent on the Good Restaurants 20% of income Buyers are more responsive to price changes in goods on which they spend a larger percentage of their income. Candy 1 % of income 4. Time As time passes, consumers have greater opportunities to change quantity demanded in response to price change, the more elastic the demand. The less time you have to respond to price changes, the more inelastic the demand.

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