Choice and Scarcity & Supply and Demand (ch.1 / ch.2)
Choice and Scarcity & Supply and Demand (ch.1 / ch.2) ECON 22060-007
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This 6 page Bundle was uploaded by Julia kelley on Sunday October 4, 2015. The Bundle belongs to ECON 22060-007 at Kent State University taught by Curtis Reynolds (P) in Spring 2015. Since its upload, it has received 31 views. For similar materials see Principles of Economics: Microeconomics in Economcs at Kent State University.
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Date Created: 10/04/15
Microeconomics CHOICE AND SCARCITY SUPPLY AND DEMAND CHOICE AND SCARCITY De nitions 1 Model simplification of the real world I Important for understanding complex concepts in everyday life Model 1 for scarcity I Decision making 0 Imagine there are only two goods to choose between I each require some input of limited resources 2 scarcity a limited amount of resources a there is a tradeoff in production 3 tradeoff the more resources you direct toward source A the less you can put toward source B Example I two exams one day econ and biology 0 have to choose one to study more for I the one you study more for you will do better on tradeoff o Graphed in table I Compares the difference in spending more time on one subject than the other 4 PI39OdllCtiOl l Possibilities frontier 3 A graphed line that compares the difference in numbers between two decisions Explanation for example 0 In this case goods are points on tests and resources are time available to study I Goods scores for either biology or micro I Resources hours to study for both 0 Tradeo 5 Opportunity COSt Giving up goods scores on test for use of resources hours to study a CC cost gain 9 Example Studying more for micro and less for biology A to B 139 CC 90 80 biology score cost Microeconomics CHOICE AND SCARCITY SUPPLY AND DEMAND 10 30 033 biology 70 40 micro score gain c Example of opposite Studying more for biology and less for micro B to A i 0C 70 40 micro 30 10 3 micro 90 80 biology Another way to remember Opportunity cost slope rise cost run gain amp inverse runrise Notes on Increasing opportunity cost I Whether you go up or down on the graph you are increasing just for different decisions I There are never decreasing opportunity costs 6 Ef ciency a IF all points are on line then points on PPF curve are ef cient because all resources hours are being used Any points inside of the curve are inef cient not using all resources hours c Any points outside of curve are not possible lack of resources 7 Trade and specialization a Two agents trading with each other for mutual bene t Microeconomics CHOICE AND SCARCITY SUPPLY AND DEMAND b Trade one agent produces something that they are specialized in and trades it to someone who would rather spend their time on gaining money or another good to trade it for the first good Example i Tuvalu amp Figi 1 Tuvalu a 100 acres of land b 2 sheers of corn per acres c 1 house per acre 2 Figi a 80 acres b Can only produce 0125 sheers of corn per acre c 05 houses per acre 8 Absolute advantage any country that can produce more per resource a Absolute advantage looks at output b does not think about opportunity cost Example continued Tuvalu has an absolute advantage over Figi for 1 Houses 2 Corn 9 Comparative advantage Looks at quantity over quality amp time opportunity cost a tradeoffs look at comparative advantage and not absolute advantage back to example Tuvalu s opportunity cost for producing corn is better 1 Cost gain for corn 1 house 05 house because house is the cost Microeconomics CHOICE AND SCARCITY SUPPLY AND DEMAND Fiji s opportunity cost for producing corn 2 Cost gain for corn 05 house 4 house house is cost 0125 corn Tuvalu s opportunity cost for producing houses 3 Cost gain for house 2 corn 2 corn because corn is the cost 1 house Fiji s opportunity cost for producing houses is better 4 Cost gain for houses 0125 corn 025 corn corn is cost 05 house This is where a tradeoff comes in 5 Specialization whoever specializes in making a product based on opportunity cost should produce it and trade it with someone who specializes in making something else i Example a Tuvalu should produce and trade corn better OC b Fiji should produce and trade houses Better OC i Doesn t matter who can do both matters who can do what m 6 free trade notes i American economists favor domestic GDP Microeconomics CHOICE AND SCARCITY SUPPLY AND DEMAND ii When international products amp services drop or raise their price and offer to America iii Americans drop or raise their prices to force Americans to buy domestically b Arguments against free trade i Globally beneficial but domestically hurtful ii Domestic workers may lose job if country expands into other global industries iii Working conditions affect choices made domestically 1 May be cheaper to produce offer more jobs in another country 2 Morals and laws differ country to country this changes Where countries choose to produce in SUPPLY AND DEMAND 1 Law Of Supply The law of supply states that price and quantity supplied have a positive relationship 0 When the price of a good is low quantity supplied is low 0 When the price of a good is high quantity supplied is high 0 A change in the prices causes a movement along the supply curve 0 Factors that affect supply 1 Technology 2 Future expectations of prices can they produce it in the future 3 Price of inputs 4 Number of rms 0 Supply curve 0 Assume the market is competitive 0 No company strategies 0 All firms the same 2 Law Of Demand The law of demand states that price and quantity demanded have a negative relationship 0 When the price of a good is high quantity demanded is low 0 When the price of a good is low quantity demanded is high 0 A change in price causes a movement along the demand curve 0 Factors that affect demand 1 Consumer information 2 Consumer preferences 3 Consumer expectation will it be there 4 Number of consumers in market Microeconomics CHOICE AND SCARCITY SUPPLY AND DEMAND 5 Consumer income normal goods inferior goods 6 Price of related goods substitute goods complimentary goods 0 Demand curve 0 Not what actual market price is 0 Helps determine price 0 Important demand amp quality demanded are not the same thing DEFINITIONS 3 Normal gOOd when consumer incomes are up the demand increases IE brand items 0 Demand curve shifts to the right when income increases 4 Inferior good when consumer income increases the demand decreases IE off brand items 0 Demand curve shifts to the left when income decreases 5 Complimentary goods when the price goes up for one and the demand goes down the demand for the other goes down IE gas and cars cookies an milk 6 Substitute goods when the price for one goes up and the demand goes down the demand for a competitor s good goes up IE coke VS Pepsi 7 Equilibrium when the graph is at P amp Q supply is equal to demand 1 P is always on right price 2 Q is always on bottom quantity 0 Shortage when there is more demand than there is supply below P 1 Price goes up to allow supply to increaseprice of production 0 Surplus when there is more supply than there is demand above P 1 Price comes down to allow demand to increase Relationship between price demand and supply 0 Shift to right increase in demand 0 Shift to left decrease in demand 0 Price only affects quantity on graph does not affect demand or supply
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