Chapter 1: Essentials of Economics​(chapter 1 essentials of…)

● Economics: The study of how to best allocate scarce resources among competing uses
or the study of decision-making.

Types of Economics:

1. Microeconomics: Studies the behavior of individuals and firms; focuses on small-scale,

such as household spending, business production, and price effects on consumers.
2. Macroeconomics: Studies the economy as a whole; focuses on large-scale factors
such as interest rates, GDP, and unemployment.

● Scarcity: Occurs when our desires for goods and services exceed our capacity to
produce them.
● Opportunity Cost: The next-best alternative that is forgone; sometimes referred to as
an opportunity lost and is subjective.

3 Basic Economic Questions:

1. What to produce?
2. How to produce?
3. For whom to produce?
● Production Possibilities Curve (PPC): A curve that illustrates the maximum potential
output combinations of goods and services an economy can produce, showing trade-offs
and opportunity costs.
○ Efficient points: On the curve.
○ Inefficient points: Inside the curve.
○ Unattainable points: Outside the curve.

● Factors of Production:
○ Land: Natural resources.
○ Labor: Human effort (physical and mental).
○ Capital: Equipment, buildings, and human skills.
○ Entrepreneurship: Innovation and risk-taking.
● Goods: Tangible items satisfying human wants.
● Services: Intangible activities satisfying human wants.

Economic Systems:

1. Market Mechanism: Use of market prices and sales to signal desired outputs.
2. Central Planning: Government decides allocation of resources (e.g., North Korea).
 3. Mixed Economies: Combines market and government decisions.
● Market Failure: Occurs when markets produce a wrong mix of output, inefficient
production, or inequitable income distribution.

Chapter 2: U.S. Economy​(ch 2)

● Gross Domestic Product (GDP): The total value of final goods and services produced
within a nation's borders during a specific time period.
○ Nominal GDP: Measured in current prices.
○ Real GDP: Inflation-adjusted GDP.
○ Per Capita GDP: GDP divided by the population, indicating average economic
output per person.
● Economic Growth: An increase in real GDP, expanding production possibilities and
improving living standards.
● Social Welfare: GDP is not a complete measure of well-being; other factors like health,
security, and social justice matter.

Components of GDP:

1. Consumption: Expenditures by consumers.

2. Investment: Business expenditures on new plants and equipment.
3. Government Spending: Excludes transfer payments.
4. Net Exports: Exports minus imports.
● Factors of Production:
○ Capital Intensive: U.S. production uses a high ratio of capital to labor inputs.
○ Human Capital: Knowledge and skills possessed by the workforce.

Types of Businesses:

1. Corporations: Owned by shareholders.

2. Partnerships: Owned by a few individuals.
3. Proprietorships: Owned by one individual.
● Income Distribution: The way total income is distributed among households. Income
mobility is common, meaning people often move up or down the income ladder.

Chapter 3: Supply and Demand​(ch 3)

● Market: Any place where goods and services are bought and sold.
○ Factor Markets: Where factors of production are bought and sold.
○ Product Markets: Where finished goods and services are bought and sold.
Market Participants:

1. Consumers: Maximize satisfaction.

2. Businesses: Maximize profits.
3. Government: Maximize societal welfare.
● Demand: The ability and willingness to buy specific quantities of a good at different
prices, ceteris paribus (all else being equal).
○ Law of Demand: As price falls, quantity demanded increases (inverse
relationship).
○ Demand Curve: Graphical representation of the relationship between price and
quantity demanded.
● Supply: The total quantity of a good that sellers are willing and able to sell at different
prices.
○ Law of Supply: As price increases, quantity supplied increases.
○ Supply Curve: Graphical representation of the relationship between price and
quantity supplied.
● Equilibrium: The point where quantity demanded equals quantity supplied, determining
the market price.
○ Surplus: Quantity supplied exceeds quantity demanded (above equilibrium
price).
○ Shortage: Quantity demanded exceeds quantity supplied (below equilibrium
price).
● Shifts in Demand/Supply: Caused by changes in non-price factors (e.g., tastes,
income, technology).

Government Intervention:

1. Price Ceiling: A maximum price set by the government (e.g., rent control).
2. Price Floor: A minimum price set by the government (e.g., minimum wage).

Chapter 4: Consumer Demand

1. Demand: The ability and willingness to buy specific quantities of a good at alternative
prices in a given time period, ceteris paribus.
2. Determinants of Demand:
○ Tastes: Desire for a particular good or service.
○ Income: The purchasing power of consumers.
○ Expectations: Anticipations of future income, prices, and tastes.
○ Other Goods: Availability and prices of substitutes and complements.
○ Number of Consumers: The total demand in the market.
3. Utility: The pleasure or satisfaction obtained from a good or service.
4. Total Utility: The total amount of satisfaction obtained from consuming a product.
5. Marginal Utility: The additional satisfaction obtained from consuming one more unit of a
good or service.
 6. Law of Diminishing Marginal Utility: The marginal utility of a good declines as more of
it is consumed over a given time period.
7. Law of Demand: As the price of a good falls, the quantity demanded increases, ceteris
paribus, due to diminishing marginal utility.
8. Demand Curve: A curve illustrating the quantities of a good that a consumer is willing
and able to buy at different prices in a given time period.
9. Price Elasticity of Demand: The percentage change in quantity demanded divided by
the percentage change in price.
10. Elastic Demand (E > 1): Consumer response is large relative to the price change.
11. Inelastic Demand (E < 1): Consumers are less responsive to price changes.
12. Unitary Elastic Demand (E = 1): The percentage change in quantity demanded is equal
to the percentage change in price.
13. Total Revenue: The amount of money received from product sales, calculated as Price
× Quantity Sold.
14. Determinants of Price Elasticity:
○ Necessities vs. Luxuries: Demand for necessities is inelastic; for luxuries, it is
elastic.
○ Availability of Substitutes: More substitutes lead to higher price elasticity.
○ Price Relative to Income: High-priced goods relative to income tend to have
elastic demand, while low-priced goods have inelastic demand.
15. Substitute Goods: When the price of a product increases, the demand for its
substitutes rises.
16. Complementary Goods: When the price of a product increases, the demand for its
complements decreases.

Chapter 5: Supply Decisions

1. Supply: The ability and willingness to sell specific quantities of a good at alternative
prices in a given time period, ceteris paribus.
2. Factors of Production: Resource inputs used to produce goods and services (e.g.,
land, labor, capital, and entrepreneurship).
3. Production Function: A technological relationship expressing the maximum quantity of
a good attainable from different combinations of factor inputs.
4. Marginal Physical Product (MPP): The change in total output associated with one
additional unit of input.
5. Law of Diminishing Returns: As more of a variable input is added to a fixed input, the
marginal physical product of the variable input will eventually diminish.
6. Short Run: A period in which some inputs cannot be changed.
7. Long Run: A period long enough for all inputs to be varied.
8. Total Cost: The market value of all resources used to produce a good or service.
9. Fixed Costs: Costs of production that do not change when the rate of output is altered.
10. Variable Costs: Costs of production that change with the rate of output.
11. Average Total Cost (ATC): Total cost divided by the quantity produced.
12. Marginal Cost (MC): The increase in total costs associated with producing one more
unit of output.
13. Production Decision: The selection of the short-run rate of output (with existing plant
and equipment).
14. Investment Decision: The decision to build, buy, or lease plant and equipment, typically
a long-run decision.
15. Economic Cost: The value of all resources used to produce a good or service; includes
both explicit and implicit costs.
16. Accounting Cost: Explicit dollar outlays made by a producer.
17. Economic Profit: The difference between total revenue and total economic costs,
including both explicit and implicit costs.
18. Policy Perspectives: Strategies to increase productivity, such as investing in labor
(education and training) and capital (improving technology and resources).