DEMAND, SUPPLY AND MARKET EQUILIBRIUM.

Demand.

- The quantities people are willing and able to buy at various quantities.

The Law of Demand.

- This states that there is an inverse relationship between price and quantity demanded.

What Causes a "Change in Quantity Demanded"?

- Change in price.

What Causes a "Change in Demand"?.

1) Change in buyer's taste (advertisement).

2) Change in the number of buyers (population).

3) Change in the price of related goods.

    - Complimentary Goods (go together).

    - Substitute Goods.

4) Change in income.

    - Normal Goods (increase in income that causes an increase in demand). 

    - Inferior Goods (increase in income that causes a fall in demand).

5) Change in expectations (looking at the future). 

Supply

- The quantities that producers or sellers are willing and able to produce at various prices.

The Law of Supply

- This states that there is a direct relationship between price and quantity supplied.

What Causes a "Change in Quantity Supplied"?

- Change in price.

What Causes a "Change in Supply".

1) Change in expectations.

2) Change in the number of suppliers.

3) Change in weather.

4) Change in the cost of production.

5) Change in taxes or subsidies.

6) Change in technology.

Supply Shifts to the Left

1) Cost of production increases.

2) Technology decreases.

3) Taxes increase.

4) Subsidies reduce.

5) Number of sellers decrease.

6) Weather decreases.

Supply Shifts to the Right

1) Cost of production reduces.

2) Technology increases.

3) Taxes are lowered.

4) Subsidies increase.

5) Number of sellers increase.

6) Good weather.

A price ceiling is placed on corn:

A price floor is placed on steak:

ELASTICITY OF DEMAND

- It is a measure of how consumers react to a change in price.

Elastic Demand

- Demand that is very sensitive to a change in price. E>1

- The product is not a necessity and there are available substitute.

- Ex; soda, T-bone and steaks.

Inelastic Demand

- Demand that is not very sensitive to a change in price. E<1.

- The product is a necessity and there are few substitute, therefore people will always buy.

- Ex; gas and medicine

Unit/ Unitary Demand.

- E=1.

Price Elasticity of Demand (PED)

Step 1: Quantity.

          New quantity - Old quantity/ Old quantity.

Step 2: Price

          New price- Old price/ Old price.

Step 3: PED

          % change in quantity demanded/ % change in price.

Costs of Production

Total Revenue

- The total amount of money a firm receives from selling goods and services.
- P.Q

Fixed Cost

- A cost that does not change no matter how much of a good is produced.
- Ex; mortgage, insurance, rent and salary.

Variable Cost

- A cost that rises or falls depending on how is produced.
- Ex; electricity bill.

Marginal Cost

- The cost of producing one more unit of a good.
- New TC - Old TC.

Formulas

TFC + TVC = TC.
AFC + AVC =ATC.
TFC / Q = AFC.
TVC / Q = AVC.
TC / Q = ATC.
TFC = AFC (Q).
TVC= AVC (Q).

PRODUCTION POSSIBILITIES CURVE

Production possibilities curve (PPC)

- It shows alternative ways on how to use a country's resources.

4 Assumptions of a PPC

- Two Goods (resources are used to produce one or both of only two goods).

- Fixed Resources (quantities of land, labor, capital and entrepreneurship do not change).

- Fixed Technology (information and knowledge, society has about the production of goods and services is fixed).

- Technical Efficiency.

 

1) Efficiency.

   - using resources in such a way to maximize the production of goods and services.

2) Allocative Efficiency.

   - products being produced are the ones that are most desired by the society.

3) Productive Efficiency. 

   - products are being produced in the least costly way and this is any point on the PPC.

4) Under-utilization.

   - using fewer resources than the economy is capable of using.

What Causes PPC/PPF To Shift

1) Technological Change.

2) Change in Resources.

3) Economic Growth.

4) Change in Labor Force.

5) Natural Disasters/ War/ Famine.

6) More Education.

AP MACROECONOMICS UNIT 1

BASIC ECONOMIC CONCEPTS

Macroeconomics vs Microeconomics

Macroeconomics: study of the economy as a whole.

- minimum wage.

- international trade.

- supply &demand.

Microeconomics: study of individual of specific unit of the economy.

-market structures.

Positive economics vs Normative economics

Positive economics: claims the attempt to describe the world as it is.

- collects and present facts.

Normative economics: claims the attempt to prescribe how the world should be (opinion).

- "ought to be"

- "should be"

Needs vs Wants

Needs: basic requirements for survival.

- food, water, shelter and clothing.

Wants: desire of citizens.

Goods vs Services

Goods: tangible commodities always (bought, sold or produced).

- capital goods (items used in the creation of other goods such as factory machines and trucks).

- consumer goods (goods that are for final use by the consumer).

Services: work performed for someone.

- can be touched or felt.

Scarcity vs Shortage

Scarcity: trying to satisfy unlimited wants with limited resources. 

- the most fundamental economic problem that all societies face. 

Shortage: where quantity demanded is greater than quantity supplied.

Factors of Production

Resources required to produce goods and services.

1) Land (natural resources).

2) Labor (workforce).

3) Capital.

- physical capital ( tools, machinery, factories).

- human capital (skills, knowledge or talents).

4) Entrepreneurship.

- innovative.

- risk taker.

Trade-offs

Trade-offs: alternatives that we give up whenever we choose one course of action over another.
-Opportunity Costs: next best alternative.