Unit One

1. Macroeconomics vs. Microeconomics
• Macroeconomics is the study of the major components of the economy and deals with the functioning of the economy as a whole.
• Microeconomics is the study of how households and firms make decisions and how they interact in markets.
• The two fields may seem different, but they both compliment each other and with certain situations, find themselves overlapping one another.
2. Positive economics vs. Normative economics
• Positive economics is fact based and are claims that attempt to describe the world as is. For example: The Australian stock market has boomed in recent years.
• Normative economics is opinion based and claims that attempt to describe how the world should be. For example: The government should raise minimum wage.
3. Needs vs. Wants (Scarcity vs. Shortage)
• Needs: Basic requirements for survival (Ex: Food, Water, Shelter)
• Wants: Desires of the citizens which are often broader than their needs. (Shopping, TV)
• Scarcity: Most fundamental economic problem facing all societies. Satisfying unlimited wants with limited resources. Is permanent. (Ex: Clean water, oil)
• Shortage: Quantity demanded is greater than the quantity supplied. Is temporary. (Ex: no juice at Walmart for the day)
4. Goods vs. Services
• Goods: Tangible commodities
• Consumer goods: goods intended for final use by the consumer (Ex. Chocolate, Ladies goodies)
• Capital goods: Items used to produce another good
5. Factors of Production
• Land (Territory over which rule is exercised)
• Labor (Physical: Manmade objects to make other goods)
• Capital (Wealth in form of money)
• Entrepreneurshipb  (Innovative and a risk taker)
6. Trade offs
• Alternatives given up when choosing one possible good over another.
7. Opportunity Cost
• The most desirable alternative lost by making a decision
• No matter what we do, there will always be an opportunity cost. 
• For example, choosing to watch a Disney movie over studying for your AP Economics test the very next day. Because you chose to watch a Disney movie, you gave up the decision to study.
• Free lunch isn't actually free
• There will always be opportunity costs
8. Guns or Butter
• Based on the decision between either Military spending or Agriculture.
9. Production Possibilities Graph

• Production Possibilities Frontier (PPF)/ Production Possibilities Curve (PPC)
• Shows alternative ways to use an economy's productive resources. 
• What does each point represent?
• Points on the line are efficient (A & B)
• Points outside the line are unattainable (C)
• To become unattainable, there would need to be an advancement in technology or economic growth of some form.
• Points inside the line are inefficient and underutilized (D)
• Can be due to unemployment, underemployment, war, famine or a decrease in population 
• Points on both the inside and on the line are attainable (A, B & D)
• Key Assumptions
1. Two goods are produced
2. Fixed resources (land, labor, capital,)
3. Fixed state of technology
4. No international trade
5. Full Employment
• Full employment (FE): There is no 100% employment and is not 100% productive
• FE ~ 40% unemployment ---- FE ~ 80% factory capacity
10. Demand
• The quantities that people are willing and able to buy at various prices.
• The Law of Demand states there is an inverse relationship between price and quantity demanded. In other words, as price increases, quantity decreases and vice versa.
• A change in quantity demanded is caused by a change in prices. What else causes a change in demand?
• Change in buyers taste (advertising)
• Change in buyers (population)
• Change in income
• Normal goods: Goods buyers buy more of with an increase in income
• Inferior goods: buy less when income rises
• Change in price of related goods
• Substitute goods: serve roughly the same purpose to buyers
• Complimentary goods: goods often consumed together (Shoes & Socks!)
• Change in expectations
11. Supply
• The quantities that producers/sellers are willing and able to produce/sell at various prices
• The Law of Supply states there is a direct relationship between price and quantity. As quantity increases, price decreases.
• A change in quantity supplied is caused by a change in prices. What else causes a change in supply?
• Change in weather
• Change in technology
• Change in cost of production
• Change in taxes or subsidies (money provided by the govt.)
• Change in number of sellers
• Change in expectations.
12. Equilibrium
• Point at which the supply curve and the demand curve intersect. At this point, the economy is using all of its resources efficiently
13. Surplus
• Quantity Supplied > Quantity Demanded
14. Shortage
• Quantity Supplied < Quantity Demanded
15. Price Ceiling

• Government imposed price control on how high a price can be charged for a product or service.
16. Price Floor
• Government imposed price control on how low a product or service can be charged.
17. Calculating Supply Problems
• Totals Revenue = P x Q
• Marginal revenue
• Additional income from selling one more unit of a good
• Fixed Cost
• Cost that does not change no matter how much is produced 
• Ex; Rent, Mortgage, Insurance
• Variable Cost
• Fluctuates and changes
• Based on how much is produced
• Ex; Electric, gas and phone bills
• Important formulas include
• MC = (new TC - old TC)
• TC = TFC + TVC
• AFC = TFC/Q
• AVC = TVC/Q
• ATC = AFC + AVC ------ OR ------ TC/Q
18. Finally, Business Cycles!
• Main 4 phases
• Expansionary (Growth): Real output in the economy is increasing, unemployment rate is declining
• Peak: Real output is at its highest point
• Contractionary phase: Real output is decreasing, unemployment rate is rising. 
• The average cycle is 6 years
• A bulk of the cycle is in the growth stage
• asts anywhere from 14 months to a year
19. Price elasticity of demand: Tells how drastically buyers will cut back or increase their demand for good when prices rise or fall.

• Elastic demand: When demand changes greatly due to a change in price (your wants--- E>1
• Inelastic demand: Demand won't change even if price changes (Substitute: gas, milk, salt, your needs--- E <1
• Unit elastic: E= 1 (The perfect ideal situation)

1. For calculating % change in quantity: new quantity - old quantity / old quantity
2. % change in price: new price - old price / old price
3. Price elasticity % demand (PED): % change in quantity / % change in price