Ch 2

Product Possibilities model

• Linear ppc

• Concave ppc

• Constant opportunity cost

• Increasing opportunity cost

• Circular flow model

Linear PPC- Illustrate constant opportunity cost.

Constant Opportunity Cost- all resources were equally efficient in all uses.

Law of increasing opportunity cost- the phenomenon of increasing unit cost as an ecoomy increases its production of a commodity.

Concave PPC- illustrates increasing opportunity cost.

Productive efficiency- economy cannot increase its production of commodity without reducing its production of some other commodity.

Production inefficiency- its possible to produce more of one commodity without producing less of some other commodity.

AN INCREASE IN THE QUANTITY OR QUALITY OF RESOURCES, OR AN INCREASE IN TECHNOLOGY, SHIFTS THE P-P CURVE OUTWARD.

Cost Benefit approach- an analysis in decision making that involves the comparison of costs and benefits.

Production possibility schedule (P-P)- a table showing various combinations of goods and services that can be produced with full utilization of all resources and a given state of technology.

Production possibilities curve(p-p)- a graph showing all combinations of goods and services that can be produced if all resources are fully employed and technology is constant.

Circular flow- an economic model that shows the flow of resoucres goods and income between sectors of the economy.

CH3

MARKET MODEL OF SUPPLY AND DEMAND

• Market equilibrium

• Surplus/Shortage

• Invisible hand

• Determinants of Demand

• Determinants of Supply

DEMAND

Demand – the various quantities of a good or services that people are willing and able to buy at prices during a specific period.

Demand schedule- a table showing the inverse relationship between price and quantity demanded.

Quantity demanded- the quatity that people will be willing and able to buy at a specific price.

AS THE PRICE OF GOODS AND SERVICES FALLS, THE QD INCREASES; AS THE PRICE RISES, QD DECREASES.

3 Explanation that effects the price goes up and qd goes down:

Market- Size Effect- caused by a change in the number of buyers in the market as a result of a change in price.

Real income effect- purchasing power.

Substitution effect- people switching to or from a product as its price changes.

Demand curve- a downward- sloping curve showing the inverse realationship between price and quantity demanded.

MAIN FACTORS THAT AFFECT THE DEMAND :

INCOME

PRICE OF RELATIVE GOODS

TASTES AND PREFERENCES

EXPECTATIONS

POPULATION

Normal goods- demand increases as income increases and for which demand falls as income falls.(blue ray movies, laptop, computers and vacation pachages).

Inferior goods- demand increases income falls, demand decreases income increases.(macaroni and cheese( instead of reastaurant dinner), beans(instead of meat), used clothing (instead of new clothes)).

Substitude-good that can be used in place on another. (Lemon and lime, sugar and honey, butter and margarine, tea and coffe)

Complements- goods that are consume (used) together. (auto and gasoline, computers and flash drives, coffe and cream)

Demand shifters- non price determinants that shift the demand curve.

THE FACTORS THAT SHIFT DEMAND CURVE(DEMAND SHIFTERS)

RIGHT:

Income rices(normal good), price of complement falls, increase in preference, price rise expected, increase in population.

LEFT:

Income rices (inferior goods), price of substitute falls, Fall in income expected.

SUPPLY

Supply- the various quantities of a good or services that sellers are willing and able to offer for sale at various prices during a specific period.

Supply schedule- a table showing the direct relationship between price and quantity supplied.

Law of supply- direct relationship among price and qs

Supply curve- an upward- sloping curve showing the direct relationship between price and QS.

AS THE PRICE FALLS, QUANTITY OFFERED FOR SALE DECREASES, PRICE RISES QS INCREASES.

MAIN FACTORS AFFECT THE SUPPLY:

NUMBER OF PRODUCERS

PRICES OF RELATED PRODUCTS

TECHNOLOGY

EXPECTATIONS

COST OF INPUTS

Substitutes in production- goods that are produces as alternatives to each other(lettuce and tomatoes( a farmer can produce one of the other on the same land), and lather bags and belts(same type of resources)

Complements in production of joint products- gods such that the production of one implies the production of the other.(beef and hides are a classical example)

THE FACTORS THAT SHIFT SUPPLY CURVE(SUPPLY SHIFTERS)

RIGHT:

Number of sellers increases, technology increases, favorable weather, lower interest cost.

LEFT:

Price of Joint product falls, Price rice expected, unfavorable weather, higher wages.

Market condition- the relationship between QD and QS

Qd>Qs= shortage exists

Qd<Qs= surplus exists

Qd=Qs – the market is in equilibrium.

Equilibrium quantity- the quantity traded at the equilibrium price.

WHENEVER A SURPLUS EXISTS IN THE MARKET. IT WILL EXERT DOWNWARD PRESSURE ON THE PRICE.

SHORTAGE EXISTS, IT WILL AN UPWARD PRESSURE ON THE PRICE.

An increase in demand causes shortage that rices the price.

A decreases in demand causes a surplus that lowers the price.

An increase in supply causes surplus that lowers the price

An increase in demand and an increase in supply of the same size leave the price unchanged but increase the quantity.

A decrease in demand and decrease in supply= price unchanged but reduce the quantity.

A relatively large increase in demand and relarively small increase in supply rice both price and quantity.

The increase in supply is greater that the increase in demand= price falls but quantity increases.

Demand UP and supply DOWN equally= Price UP but quantity remains.

Demand Down and supply Up equally= price DOWN but quantity remains.

CH4