Econ 2005 Notes Week 2
Econ 2005 Notes Week 2 ECON 2005
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This 6 page Class Notes was uploaded by Dhairya Surana on Saturday September 3, 2016. The Class Notes belongs to ECON 2005 at Virginia Polytechnic Institute and State University taught by Steve Trost in Fall 2016. Since its upload, it has received 24 views.
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Date Created: 09/03/16
Econ 2005 Notes – Week 2 (whatisgivenup) How to calculate opportunity cost: (whatis produced) o Ex: Bob the Builder can either build 2 houses or 4 playgrounds What is the opportunity cost of building a house? Given up: playgrounds (4) Produced: houses (2) 4Playgrounds Opportunity cost of building a house = 2Houses = 2 playgrounds What is the opportunity cost of building a playground? Given up: houses (2) Produced: playgrounds (4) 2Houses Opportunity cost of building a house = 4Playgrounds = 1/2 houses o NOTE: The unit for opportunity cost is always based on what is given up If one person/group has a comparative advantage in producing one good, then the other person/group has the comparative advantage in producing the other good Division of labor: People specializing in different parts of a task to complete that task faster (Ex: Assembly line) Economic Questions: Questions that every economy must answer o What gets produced? o How is it produced? o For whom to produce? Production Possibilities Frontier (PPF): A graph that shows what goods an economy can produce if it uses all of its resources (assuming that the economy only produces 2 goods) Machine Food Slope of PPF: marginal rate of transformation Why is the slope curved? Not all inputs are equally good. For example, as more food is produced at the expense of machines, the inputs that are better suited to producing machines are instead transferred to making food. The opportunity cost increases along the slope of the PPF. Economic Growth: Increase in output (PPF shifts up and to the right) Things that shift the PPF: o Size/health/skill of labor force o More resources o More output (capital shock) o New technology o Laws, business practices, ideologies Ex: Communism vs. Capitalism The more that is invested in capital today, the more output will be produced tomorrow o Reason why rich countries remain rich and poor countries remain poor o Rich countries can invest more in capital, but poor countries cannot Rich Country PPF Capit Capit al al Consumpti Consumpti A lot of economic growth Poor Country PPF Capit Capit al al Consumpti Consumpti Very little or no economic growth Basic Types of economies: o Traditional (tradition determines economic activity) o Command (government decides prices, production, etc.) Government answers all 3 economic questions o Lassiez-faire/Market (no government regulation) Based on private ownership Market: where/how buyers and sellers interact Based on price theory (prices coordinate market) o NOTE: In the real world, there is no such thing as a pure traditional, command, or market economy (all economies are mixed) Ex: US Economic aspects: Traditional: tipping Command: roads, military, welfare, etc. Market: consumer electronics Why don’t pure market economies exist? o Goods are not always produced at the lowest level o Income is not distributed equally o Unemployment and inflation occurs o Market failure NOTE: The government is needed to monitor these issues Economies of Scale: how firms produce at a lower cost (producing on a mass scale tends to lower the average cost) Demand: the relationship between the price and quantity of a good o It is represented by the entire line or curve: Pric e Quantity Quantity Demanded: Amount that consumers are willing and able to buy at a certain price o It is represented by a point on the demand line/curve o Changes in price will lead to changes in the quantity demanded (point will move along the demand line/curve) Law of Demand: Price and quantity demanded are inversely related o Represented by downward sloping demand line/curve Why is the law of Demand valid? o Substitution Effect: As the price of a good increases, people buy other products Ex: As Blu-Ray discs become more expensive, people buy DVDs instead o Income Effect: As the price of a good increases, people buy less of that good Demand Schedule: A table that shows the price of a good and the quantity demanded at that price Reserve Price: the price at which a consumer cannot or will not pay Market Demand: demand that is derived from the combination of individual demand curves Things that shift the demand (entire line/curve): o Change in consumer income o Change in price of other products Substitutes: goods that can replace others Ex: Pepsi and Coke, Honda and Toyota, iPhone and Galaxy, etc. Complements: goods that go together Ex: DVD and DVD player, car and gas, bikes and helmets, etc. o Change in consumer tastes (fashion, new knowledge, etc.) o Change in consumer predictions about future prices If people think a certain good will be cheaper in the future, they will refuse to buy it now (the same is true for the opposite) o Change in the number of consumers Normal goods: As income increases, so does the demand (direct relationship) o Ex: any type of produce, meat, etc. Inferior goods: As income increases, demand decreases (inverse relationship) o Ex: anything at a dollar store NOTE: Demand and Quantity Demanded are two separate things
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