3 demand quantity demanded The willingness and ability of buyers to The number of units of a good purchased at a specific price. purchase a good or service.
4 law of diminishing marginal utility
9 demand curve A graphical representation of the law of demand.
10 demand curve A graphical representation of the law of demand.
11 2 Demand Factors That Can Cause the Demand Curve to Shift
12 Change along a curve
13 Demand Curve Shifts Left (Decrease)
14 Demand Curve Shifts Right (Increase)
15 Factors That Cause Shifting Demand Curves
16 1. Income A change in income can cause an increase or decrease in quantity demanded
17 If Income goes up Demand increases for a normal good. Demand decreases for an inferior good. Demand remains constant for a neutral good.
18 If Income goes down Demand decreases for a normal good. Demand increases for an inferior good. Demand remains constant for a neutral good.
19 normal good A good the demand for which rises as income rises and falls as income falls.
20 inferior good A good the demand for which falls as income rises and rises as income falls.
21 neutral good A good the demand for which remains unchanged as income rises or falls.
23 3. Prices of Related Goods Substitutes Complements
24 substitute A similar good. With substitutes, the price of one and the demand for the other move in the same direction.
25 Price Demand for substitute Pepsi is a substitute for CocaCola. When the price of CocaCola goes up, demand for the substitute (Pepsi) goes up.
26 Price Demand for substitute Pepsi is a substitute for CocaCola. When the price of CocaCola goes down, demand for the substitute (Pepsi) goes down.
27 complement 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.
28 Ski Boots and Ski Masks are complements of Skis. When the price of skis go up, the demand for boots and masks go down Demand Price
29 Ski Boots and Ski Masks are complements of Skis. When the price of skis goes down, the demand for boots and masks go up Price Demand
30 4. Number of Buyers As the number of buyers in an area increase, the demand curve will shift to the right.
31 4. Number of Buyers As the number of buyers in an area decrease, the demand curve will shift to the left.
32 But if demand changes by more than the price increases or decreases, demand is elastic.
33 elasticity of demand
34 elastic demand The type of demand that exists when the percentage change in quantity demanded is greater than the percentage change in price.
35 Price goes up by 10%, Demand goes down by 20%. Price 10% up Demand 20% down
36 Price goes down by 5%, Demand goes up by 15%. Demand 15% up Price down 5%
37 inelastic demand The type of demand that exists when the percentage change in quantity demanded is less than the percentage change in price.
38 Price goes down 50%, demand increases only 25%. Price 50% down Demand up only 25%
39 Price goes up 30%, demand decreases only 10%. Price up 30% Demand down only 10%
40 unit-elastic demand The type of demand that exists when the percentage change in quantity demanded is the same as the percentage change in price.
41 Price goes up 7%, demand goes down 7% price demand
42 Price goes down 45%, demand goes up 45%. demand price
43 Determinants of Elasticity of 1. Number of Substitutes 2. Luxuries versus Necessities 3. Percentages of Income Spent on the Good 4. Time Demand
44 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.
45 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.
46 2. Luxuries versus Necessities 2. Luxuries versus Necessities Luxuries are goods that people don t need to survive. Demand for luxuries is more likely to be elastic. Demand for necessities such as food is more likely to be inelastic.
47 3. Percentage of Income Spent on 3. Percentage of Income Good Spent on the Good Buyers are more responsive to price changes in goods on which they spend a larger percentage of their income. Internet 2% Rent 40% of income
48 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.
49 law of supply A law stating that as the price of a good increases, the quantity supplied of a good increases, and when the price of a good decreases, the quantity supplied of a good decreases.
50 supply curve A graph that shows the amount of a good sellers are willing and able to sell at various prices.
51 What Factors Cause Supply Curves to Shift? 1. Resource Prices 2. Technology 3. Taxes 4. Subsidies 5. Quotas 6. Number of Sellers 7. Weather (in some cases)
52 land 1. Resource Prices Drop labor capital When there is a reduction in any of the costs in the factors of production, there is a shift to the right on the supply curve.
53 2. Advancement in technology The ability to produce more output with a fixed amount of resources, reducing per-unit cost.
54 per-unit cost The average cost of a good. For example, if $400,000 is spent to produce 100 cars, the average, or per-unit cost is $4,000.
55 3. Taxes When there is an increase in taxes, overall cost of doing business increases, suppliers are less motivated and there is a shift to the left on the supply curve. When there is a decrease in taxes, cost of doing business decreases and suppliers are more motivated to produce and supply more goods.
56 subsidy A financial payment made by government for certain actions.
57 4. Subsidies When the government pays a producer subsidies, overall costs are reduced. The supply curve shifts right. When the government stops paying subsidies, costs increase and the supply curve shifts to the left.
58 quota A legal limit on the number of units of a foreign-produced good (import) that can enter a country.
59 5. Quotas When the government imposes a quota, the quantity supplied is reduced and the curve shifts to the left. When the government removes a quota, the supply increases and the supply curve shifts to the right.
60 6. Number of Sellers If the number of sellers increase, probably because of high profits, supply increases and the supply curve shifts to the right. If the number of sellers decrease, the supply decreases and the supply curve shifts to the left.
61 7. Weather (in some cases) Bad weather reduces supply by destroying crops. Unusually good weather can increase the supply
62 A Change in Supply versus a Change in Quantity Supplied
63 equilibrium The condition of being at rest or balance. Equilibrium in a market exists when the quantity of a good that buyers are willing and able to buy is equal to the quantity of the good that sellers are willing and able to produce and offer for sale. (Quantity demanded equals quantity supplied).
64 equilibrium quantity The quantity of a good that is bought and sold in a market that is in equilibrium.
65 equilibrium price The price at which a good is bought and sold in a market that is in equilibrium.
66 shortage The condition in which the quantity demanded of a good is greater than the quantity supplied. Shortages occur only at prices below equilibrium price.
67 surplus The condition in which the quantity supplied of a good is greater than the quantity demanded. Surpluses occur only at prices above the equilibrium price.
68 surplus The condition in which the quantity supplied of a good is greater than the quantity demanded. Surpluses occur only at prices above the equilibrium price.
69 cooperative A business that provides services to its members and is not run for profit. Usually a cooperative is formed when a group of persons (the members) want to pool their resources to gain some benefit that they, as individuals could not obtain.
70 Total Revenue Total revenue equals the price of the good sold times the number of units of a good sold. Example: $5 price x 1000 units sold = $5,000 in total revenue
71 CEO Chief Executive Officer Top officer of a corporation
72 Supply and Demand in the Labor Market There are those who demand labor (employers). There are those who supply labor (employees)
73 wage rate The price of labor.
74 If the quantity supplied of labor is greater than the quantity demanded for labor, there is a surplus of labor and the wage rate falls.
75 If the quantity demanded of labor is greater than the quantity supplied for labor, there is a shortage of labor and the wage rate rises.
76 Equilibrium Wage Rate When labor supply and demand are in balance the equilibrium wage rate is paid.
77 minimum wage law A federal law that specifies the lowest hourly wage rate that can be paid to workers.
78 Effect of a raise in minimum wage When wages go up, employers are less willing and able to purchase labor. Employers tend to lay off workers or hire less workers than they did before the minimum wage went up.
79 Money Wages versus Real Wages Real wage = Money wage/cpi CPI = Consumer Price Index
80 closed shop An organization that hires only union members.
81 Taft-Hartley Act An act, passed by congress in 1947 by the U.S. Congress, which made the closed shop illegal and gave states the right to pass right-towork laws.
82 union shop An organization that requires employees to join the union within a certain period after being hired.
83 Union shops are legal in many states.
84 strike A work stoppage called by members of a union to place pressure on an employer.
85 right-to-work law A state law that prohibits the practice of requiring employees to join a union in order to work.
86 24 States Have passed Right-to-Work Laws as of text publication* * as of 2017, 28 states have passed right to work laws
87 Neither working nor looking for work.
88 unemployment rate The percentage of the civilian labor force that is unemployed.
89 Money Benefits versus Nonmoney Benefits
90 Antitrust Law Legislation passed for the purpose of controlling monopoly power and promoting competition
91 Public Utility Commissions Public utility commissions regulate the price that natural monopolies can charge.
92 EPA Environmental Protection Agency Government agency responsible for regulating the amount of pollution that businesses may put into the air and waterways
93 externality A side effect of an action which affects the wellbeing of third parties
94 Negative Externality An adverse side effect of an action that is felt by others
95 Example: Homeowner lets his front yard get overgrown with weeds and leaves junk cars to rust in front of his house. Negative Externality:: Next door neighbor is unable to get a good price for selling his home because neighborhood seems rundown.
96 Positive Externality A beneficial side effect of an action that is felt by others
97 Example: Erica keeps bees as a hobby. Positive externality: The orchard next door is pollinated by bees and is more productive.
98 barter economy An economy in which trades are made in goods and services instead of money
99 transaction costs Costs associated with the time and effort needed to search out, negotiate, and consumate an exchange
100 Functions of Money A medium of exchange A unit of account A store of value
101 Medium of Exchange Anything generally acceptable in exchange for goods and services
102 Unit of Account A common measurement in which values are expressed
103 Unit of Account Values expressed in US$ House $500,000 Car $35,000
104 Money in a P.O.W. Camp = 10 cigarettes = 20 cigarettes
105 Store of Value Something with the ability to hold value over time
106 Money Supply The total supply of money in circulation
107 The U.S. Money Supply consists of: Currency Checking Accounts Traveler s Checks
108 Currency consists of: Coins issued by the United States Treasury Paper money (Called Federal Reserve Notes) issued by the Federal Reserve System
109 Demand Deposit A deposit which can be withdrawn in currency or by writing a check
110 1 The Federal Reserve Central bank of the US, created by congress
111 Federal Reserve System includes: Board of Governors Twelve Federal Reserve Banks Federal Open Market Committee (FOMC)
112 Board of Governors 7 Members, appointed by the President for 14-year terms One is designated Chairman by President for 4-year term Chairman Jerome Powell
113 Twelve Federal Reserve District Banks
114 Functions of the Fed 1. Control the money supply 2. Supply the economy with paper money 3. Hold Bank Reserves 4. Provide Check Clearing Services 5. Supervise Member Banks 6. Serve as the Lender of last resort
115 Federal Funds Rate Bank A borrows $1 Million from Bank B. The rate of interest that Bank A charges is called the Federal Funds Rate Bank A Bank B
116 Tool 3 Discount Rate Bank A borrows $1 Million from the Fed. The rate of interest that the Fed charges is called the Discount Rate Bank A Fed
117 gross domestic product (GDP) The total market value of all final goods and services produced annually in an economy.
118 Why final goods? GDP includes final goods and services A final good is a good sold to the final user. An intermediate good (ex. hamburger bun which is put together with a hamburger to be sold as a final product) Intermediate goods are not included to avoid double counting.
119 double counting Counting a good more than once in computing GDP.
120 Difference Between GNP & GDP
121 GDP includes goods produced within the U.S., no matter who produces them. GDP vs. GNP
122 GNP includes goods produced by U.S. citizens and companies no matter where in the world they are produced. GDP vs. GNP
123 inflation An increase in the price level or average level of prices.
124 Calculating the CPI Percentage Change in CPI = CPI in later year -- CPI in earlier year CPI in earlier year X 100
125 demand-side inflation An increase in the price level that originates on the demand side of the economy. AS 1 P 2 P 1 AD 1 AD 2
126 supply-side inflation An increase in the price level that originates on the supply side of the economy.
127 Business Cycle
128 recession A slowdown in the economy marked by real GDP falling for two consecutive quarters.
129 Fiscal Policy (Government) Expansionary Fiscal Policy Objective: To increase total spending in the economy to reduce the unemployment.
130 Fiscal Policy (Government) Contractionary Fiscal Policy Objective: To reduce total spending in the economy to reduce inflation.
131 crowding out The situation in which increases in government spending lead to reductions in private spending.
132 Complete Crowding Out When increases in government spending causes a dollar for dollar decrease in private spending. Government spends $2 Million more Private spending decreases by $2 Million
133 crowding in The situation in which decreases in government spending lead to increases in private spending.
134 Complete Crowding In When decreases in government spending causes a dollar for dollar increase in private spending. Government spends $2 Million less Private spending increases by $2 Million
135 Monetary Policy (The Fed) Expansionary Monetary Policy Objective: To increase total spending in the economy to reduce the unemployment rate.
136 stagflation The occurrence of inflation and high unemployment at the same time.
137 stop-and-go, on and off monetary policy An erratic monetary policy. The money supply is increased, then decreased, then increased, and so on.
138 Proportional, Progressive and Regressive Income Taxes Proportional Income Tax Taxes due from each taxpayer are proportional to how much one makes. Someone making 10 times as much as another would pay 10 times the tax. Progressive Income Tax People pay at a higher rate as their income increases. Regressive Income Tax People pay at a lower rate as their income levels rise.
139 Budget Deficits & Surpluses If the government spends only as much as it takes in in revenue, it is operating on a balanced budget. If the government spends more than it takes in in total revenues, the government has to borrow the difference and that amount is added to the National debt. If the government spends less than revenues, it can either reduce the national debt or return the surplus to the taxpayers in the form of a rebate.
140 Adam Smith on Self Interest A natural characteristic of all people It is our self-interest that prompts us to work hard, take risks, and in the end benefit others through our activities If people want to serve their own interest, they have to serve others first The butcher, the brewer, the baker
141 Adam Smith on Competition Competition keeps prices down and quality up
142 stock A claim on the assets of a corporation that gives the purchaser a share in the corporation.
143 Wall Street The stock exchanges where stocks are traded are generally referred to as Wall Street.
144 Patent A patent is a protection that is given an inventor, which lasts 20 years. During that time, no other manufacturer may infringe on that protection.
145 Copyright A copyright is the protection granted to the owner of a published work. This protection lasts for the owner s lifetime plus 70 years.