Market Economy Flow Chart

Unit 2 - Jan 31 (Circular Flow)

Circular Flow Model represents the flow of money, goods, and services.

• Factor Market - market where factors of production is bought and sold. (Resources)
• Ex: Volunteering - labor
• Product Market - market in which goods and services are bought and sold. (Goods)
• Ex: Getting a haircut.

Economics Actors

1. Firms - a business or organization that produces goods/services for sell. 
2. Households - a person or group of people that share an income.

Type of Markets

1. Traditional : All family members have the same occupation.
2. Communist : Run by others
3. Free Market : Make all the decisions themselves. (Hong Kong)
4. Mixed Market : Some decisions are made by the government and some are made by the people. (U.S.)

Introduction to the Business Cycle

Graph 2 - Business Cycle

E - Expansion
P - Peak
C/R - Contraction/Recession
T- Trough

Notes

• One cycle is from trough to trough.
• The average cycle is 6 years.
• Recession lasts about 14 months.
• The bulk of a cycle is the growth stage.
• Peaks and Trough are meaningless because we never know we are in one until it's over.
• If a recession loses more than 10% of real GDP, then it is a depression.
• Trough means the end of a recession.

Demand and Supply Graphs Practice

Market : Corn

1.) Surgeon General  announces corn causes cancer. (Decrease)

 2.) State government raises property taxes on farmland. (Decrease)

3.) Excellent weather means bumper crops for Midwestern farmers. (Increase)

 4.) Famous TV chief uses cream corn on new recipe. (Increase)

Demand and Supply Graphs

Original Demand and     Supply Graph

Price Ceiling & Price Floor Graph

Price Floor - Sets a minimum amount to be paid for a good or service. It stops prices from dropping to equilibrium. It can create a surplus, and happen above equilibrium. In absence of the floor, prices would go down, increasing the quantity demanded and decreasing the quantity supplied until they are equal.  

• Ex. : Minimum wage.

Price Ceiling -  Sets a maximum price that could be legally charged for good or service. It stops prices from rising to equilibrium. It can create a shortage, and happen below equilibrium.  In absence of the ceiling, prices would go rise, reducing the quantity demanded and increasing the quantity supplied until equilibrium is reached.  

• Ex. : Rent control.

Supply Formulas

1. Total Revenue  = Price x Quantity 
2. Marginal Revenue  = New TR - Old TR 
3. Total Cost  = Total Fixed Cost + Total Variable Cost
4. Marginal Cost  = New TC - Old TC 
5. Average Fixed Cost  = TFC / Q  
6. Average Variable Cost = TVC / Q 
7. Average Total Cost  = AFC + AVC 
                                  =TC / Q 

Elasticity of Demand Practice Problems

Example 1.) Katherine advertises to sell cookies for $4 a dozen. She sells 50 dozen, and decides that she can charge more. She raises the price to $6 a dozen and sells 40 dozen. What is the elasticity of demand? Assuming that the elasticity of demand is constant, how many would she sell if the price were $10 a box?

Example 2.) Yesterday, the price of envelope was $3 a box, and Julie was willing to buy 10 boxes. Today, the price has gone up to $3.75 a box, and Julie is now willing to buy 8 boxes. Is Julie's demand for envelopes elastic or inelastic? What is Julie's elasticity of demand?

Unit 1 - Jan 17

Elasticity of Demand - A measure of how consumers react to a change in price.

• Elastic Demand - Demand that is very sensitive to a change in price. Greater than 1.
• Substitute and luxury goods.
• Ex. : Cars, sodas, and meat 
• Inelastic Demand - Demand that is not very sensitive to a change in price. Less than 1.
• Few substitute and a necessity.
• Ex. : Gas, insulin, and water.
• Unitary Demand - Equal to 1.

How to Calculate Price Elasticity of Demand.

• Step 1 : Change in quantity.
• (new - old) / old
• Step 2 : Change in price.
• (new - old) / old
• Step 3 : P.E.D = change in quantity.
• step 1 / step 2 

Determinant of Demand & Supply

Supply and Demand

Practice PPGs

1. The economy has the ability to produce at which point or points? 
_ B & A

2. At which point can the economy not currently produce? _ C

3. Which point represents the economy max productivity on tubas? _ A

Improvement & Growth : Outside the curve 

1. Investment in tools for future uses.
2. Educate leaders to reduce risks.

War, famine, unemployment : Inside the curve

1. Aging of the labor force.
2. Nation have a shortage of food. 

Understanding Production Possibilities Curve Better

Unit 1 - Jan 10

Law of Increasing Opportunity Cost

• When resources are shifted from making one good/service to another.
• The cost of producing the second item increases.
• Occurs because not all resources are equally suited for the production of all goods and services. 

4 keys assumption of the possibility graph.

1. Only 2 products can be produced.
2. Full employment of resources.
3. Fixed resources - Land, labor, and capital.
4. Fixed technology.

Production Possibility Graph

Point A- Inside the curve, attainable but inefficient. Caused by war, famine, and unemployment.

Point B & C - On the frontier, attainable but efficient. 

Point D - Outside the curve, unattainable. Caused by technology and economic growth.

Graph 1 - Production Possibility Graph

Unit 1 - Jan 9

Factor of Production

1.     Land- natural resources.

2.     Labor- work force.

3.     Capital- 1.)Human Capital- knowledge and skill a worker gain through experience and education. 2.)Physical Capital- human made object used to create other goods and services.

4.     Entrepreneurship- risk-takers and inventive.

Opportunity Cost- the most desirable alternative given up by making a decision. 

Production Possibilities Graph (PPG)-  show all alternative ways to use resources. The graph as a whole.

Production Possibilities Frontiers (PPF) &Production Possibilities Curve (PPC) are the same.

Productive Efficiency vs. Allocative Efficiency

• Productive Efficiency- produce resources at the lowest cost. Any points on the curve.
• Allocative Efficiency- combination most desire by society, where to produce on the curve.

Unit 1 - Jan 8

Macroeconomics- The study of the major component of the economy.

Ex.) Inflation, GDP, unemployment, supply & demand.

Microeconomics-  The study of how households and firms make decisions and they interact in market.

          Ex.) Supply & demand and market structure.

Positive vs. Normative

• Positive- attempt to describe the world as it is (Fact). 
• Ex.) Minimum wage causes unemployment.
• Normative- attempt to prescribe how the world should be.
• Ex.) Government should raise money....

Wants vs. Needs

• Wants- desire of citizens.Broader than our need.
• Needs- basic requirement for living.

Scarcity vs. Shortage

• Scarcity- most fundamental economic problems that all society faces. Satisfy unlimited wants with limited supplies.
• Shortage- situation in which quality demand is greater than quality supplied.

Goods vs. Services

• Goods- tangible commodity.
• Consumer goods- intended for final use by consumers.
• Capital goods- items used in the creation of other goods (Machinery).
• Services- work that is performed for someone else.