ECON

UNIT 1
Ch. 1 Learning targets
Define economics and understand the concept of scarcity and limited resources. pg 2
Economics is part of the social sciences, and seeks explanation of real events. It is the study f
how people allocate their limited resources to satisfy their unlimited wants. How people make
choices.
Resources are things that have value, and are used to produce goods and services to satisfy
the wants of people. Limited resources can be classified as time, money, etc.
Ultimately the purpose is to explain choices
Distinguish the difference between microeconomics and macroeconomics. pg 3
Microeconomics is the part of the economic analysis that studies decision making undertaken
by individuals (or households) or by firms. It is like looking through a microscope to focus on the
small parts of our economy. If the government establishes a new health care regulation, how
people react to the regulation would be microeconomics.
Macroeconomics is the part of economic analysis that studies the behavior of the economy as a
whole. It deals with economy wide phenomena such as changes in unemployment, in the
general price level, and in national income. It deals with aggregates, or totals- such as total
outputs of an economy.
Understand the importance of rationality in economic analysis. pg 6
We assume individuals do not intentionally make decisions that would leave themselves of
worse. This is the rationality assumption. Economics looks at what people actually do in life with
their limited resources.
Explain the importance of models. pg 8
Economic models or theories are simplified representations of the real world used to help
understand, explain, and predict economic phenomena in the world. Usually models have to be
tested by examining what has already happened in the world.
No model can completely capture every relationship that exist. The model should only capture
the essential relationships that are sufficient to analyze the particular problem or answer a
particular question with which we are concerned.

Every model or theory is based on a set of assumptions. Assumptions define the array of
circumstances in which our model is most likely to be applicable.
Understand the role of assumptions in economic models. pg 9
Ceteris Paribus assumption means other things constant or other things equal. Its the
assumption that nothing changes except the factor or factors being studied.
One of the most important factors in determine which product to buy is the price compared to
the price of the other products. Other factors may influence the decision such as taste, religion,
beliefs, but they must be held constant to analyze.
Understand the concept of behavioral economics and bounded rationality. pg 10
Behavioral economics examines consumer behavior in the face of psychological limitations and
complications that may interfere with rational decision making. What people say they may do
and what they actually can be quite different.
Bounded rationality is proponents of behavioral economics suggest that traditional economic
models assume that people exhibit three unrealistic characteristics:
1. Unbounded selfishness. People are interested in their own satisfaction.
2. Unbounded willpower. Choices always consistent with long term goals.
3. Unbounded rationality. They are able to consider every relevant choice.
So bounded rationality is the hypothesis that people are nearly, but not fully, rational, so they
cannot examine every possible choice available to them but instead use simple rules of thumb to
sort among the alternatives that happen to occur to them.
Distinguish the difference between positive and normative economics. pg 11-12
Positive economics is an analysis that is strictly limited to making either purely descriptive
statements of scientific predictions, for ex if a then b. It is a statement of what is. No judgment
just facts.
Normative economic is when are values are interjected as judgements about economic policies,
relates to whether outcomes are good or bad. A statement of what ought to be.
Know how to construct a graph. pg 19
It is a visual representation between variables. Any table can be converted into a graph which
represents the list of variables.
Distinguish the difference between direct and inverse relationships. pg 19
Direct relationship is a relationship between two variables that is positive, meaning that an
increase in one leads to an increase in the other.

Inverse relationship is a relationship between two variables that is negative, meaning as one
variable increases the other will decrease.
Derive the slopes of linear and non-linear lines. pg 23-24
Slope of a linear line is defined as the change in y over the change in x, the incline of the curve
Slope of a non-linear line is defined as the slope of the tangent, to calculate additional
information will be needed.

Ch. 2 Learning Targets

Define and understand of the concept of scarcity. pg 29
Whenever individuals cannot obtain everything the desire simultaneously, they must make
choices. Choices occur because of scarcity.
Scarcity is the most basic concept in all of economics. It means that we do not ever had enough
of everything, including time, to satisfy our every desire. It exists because human wants always
exceed what can be produces with the limited resources and time nature makes available.
Scarcity is not a shortage.
Explain and distinguish between the factors of production. pg 29-30
Production can be defined as virtually any activity that results in the conversion of resources into
products that can be used for consumption.
Resources used in productions are called factors of production. Can be used interchangeably
with resources. These factors include:

Land- encompasses all the nonhuman gifts of nature, including timber, water, fish, minerals,
and the original fertility of land. It is often called natural resources.

Labor- the human resource, which includes productive contributions make by individual who
work

 Physical capital- consist of the factories and equipment used in production. Also includes
improvements to natural resources such as irrigation ditches.

Human capital- the economic characterization of the education and training of workers.
Whenever a workers skills increase, human capital has been improved.

Entrepreneurship- is the component of human resources the performs the functions of

organizing, managing, and assembling the other factors of production to create and operate
business ventures. Without entrepreneurship hardly any business organizations could
continue to operate.

Understand the difference between wants and needs and the concept of economic
goods. pg 30
Goods are defined as all things from which individuals derive satisfaction or happiness.
Economic goods are a subset of all goods- they are scarce goods, about which we must
constantly make decisions regarding their best use. By definition, the desired quantity of an
economic good exceeds the amount that is available at zero price.
Wants and needs are not the same thing. And needs are objectively undefinable. There is no
way to determine whether or not someone needs something. When using the term need people
generally mean something they want.
Explain the idea of opportunity cost. pg 31-32
The value of the next best alternative is described as opportunity cost. The opportunity cost of
any action is the value of what is given up- the next highest ranked alternative- because a
choice was made. Only can be made individually based upon a persons situation. Doesn't
include all alternative.
In economics cost is always a forgone opportunity.
Graph the production possibilities curves. pg 33-36
It is a curve that shows the possibilities available for increasing the output of one good or
service by reducing the amount of another.
HAVE TO LOOK IN BOOK
Discuss the idea of efficiency and inefficiency. pg 36
The PPC can be used to define the notion of efficient. If it is on the curve then it is efficient if it is
below the curve then inefficient.
An economy is productive efficient whenever it is producing the maximum output with given
technology and resources. Getting the most out of what you have.

Inefficiency point is any point below the PPC, at which the use of resources is not generating the
maximum possible output.
Understand the idea of increasing additional cost. pg 36-37
When people take more resources and apply them to the production of any specific good, the
opportunity cost increases for each additional unit produced.
The law of increasing additional cost states the fact that opportunity cost of additional units of a
good vernally increases as people attempt to produce more of that good. This accounts for the
bow shape of the PPC.
When increasing the output of a particular food, producers use less suitable resources than
those already used in order ti produce the additional output. The cost of producing more units
increases.
Discuss economic growth and the trade-off between consumption and capital goods. pg
38-39
To have more consumer goods in the future, we must accept fewer consumer goods today,
because resources must be used in producing capital goods instead of consumer goods.
Capital goods enable use to produce more consumer goods. Things that can be made o help
production go quicker helps the consumer.
Explain absolute and comparative advantage. pg 41-42
Comparative advantage is the ability to perform an activity at a lower opportunity cost. Basically
do your job. Just because you can do something doesn't mean your opportunity cost is lower
than the person whose job it is to do that thing.
Absolute advantage is the ability to do more given a set quantity of resources. The ability to
produce the same quantity of a good using less resources. Absolute is irrelevant in how you will
allocate your time.
Only comparative advantage matters in time management.
Discuss specialization, division of labor and trade between nations. pg 42-43
Specialization is becoming very good at one thing and focusing on that to be your thing.
Division of labor is when everyone has a specific task, and does that task repeatedly, to get the
job done quicker to be able to produce more supply.

If a nation finds a better method of making a good than we can in the us then makers of that
good will try to make it harder for the good to enter the us. When nations specialize though
through comparative advantage the standard of living throughout the world increases.

Ch. 3 Learning Targets

Explain the law of demand. pg 52
Dean refers to the quantities of specific goods or services that individuals will purchase at
various prices, other things being constant.
The Law of Demand says that when the price of a good goes up, people buy less of it, other
things constant. When the price of the good goes down, people will buy more of hit, other things
constant.
It tells us that the quantity demanded of any commodity is inversely related to the price.
Discuss the difference between money prices and relative prices. pg 53
The relative price is the price in terms of another commodity. The price that you pay in dollars for
the good at any point in time is the money price.
Money prices change doing different time periods. So to actually make comparisons you must
find the relative price.
How to calculate relative price: Divide the commodity of an item for a year by the commodity of
another item in the same year and compare to another that you ova done the same calculations.
Understand the difference between changes in the quantity demanded and changes in
demand. (2 learning targets) pg 54-61
A demand curve is negative sloping to show how as price increases quantity demanded
decreases, this is part of the demand schedule.
The market demand is combining two or more buyers in the market by adding the quantity
demanded at each price, this shows the market demanded.
Determinants of demand are called ceteris paribus conditions:
1 Income- an increase in income will lead to an increase in demand, rightward shift
4. Taste and preferences- a change in favor of the good will lead to a rightward shift.

5. Price of related goods: Substitutes and Complements- Substitutes can be consumed to

satisfy same basic wants (butter and margarine), Complements is referred to goods typically
consumed together, when something happens to one the opposite will happen to the other
6. Expectations- How people expect the price of a good to be in the future will prompt them to
buy more or less of the good without a change in current money price.
7. Market size (number of potential buyers)- an increase in the number of potential buyers at
any given price shifts the market demand curve outward.
Demand is the schedule of planned rates of purchase depending on the ceteris paribus
conditions, when one of those changes there will be a change in demand to right or left.
A quantity demanded is a specific quantity at a specific price, represented by a single point on
the demand curve. When price changes, quantity demanded changes according to the law of
demand, and there will be a movement along the demand curve from one point to another.
A change in a goods own price leads to a change in quantity demanded for any given demand
curve, other things constant. This is a movement along the curve.
A change in any of the ceteris paribus conditions for demand leas to a change in demand. This
causes a shift of the entire curve.
Explain the law of supply. pg 62
The supply of any good or service it the amount that firms will produce and offer for sale under
certain conditions during a specified time period.
The Law of Supply states that at higher prices, a larger quantity will generally be supplied than
at lower prices, other things constant. At lower prices, a smaller quantity will generally be
supplied than at higher prices, other things constant.
A direct relationship between price and quantity supplied.
Producers are willing to make more of a product if it is sold at a higher price rather than lower.
Understand the determinants of supply. pg 62-67
The supply schedules is a table relating prices to the quantity supplied at each price. It is a set
of planned production rates that depends on the price of the product.
The supply curve is the graph of the representation of the info from the table, usually positive.
The market supply curve is adding the quantity supplied by two or more suppliers for the same
good at the same price.

If something besides price changes then it will alter the willingness of the supplier to produce the
good, we will see a change by an entire shift in the curve.
Ceteris paribus conditions for changes in supply:
1 Technology and productivity- If a better production technique is made then the production
cost will decrease causing a shift of supply to the right. A larger quantity produced at every
price.
8. Cost of inputs used to produce the product- If one or more of input prices fall, the the supply
curve will shift to the right because the production will cost less.
9. Price expectations- A change in the price expectation for a future relative price of a product
can affect the producers willingness to supply. If they anticipate higher prices in the future
they may hold off on supply for a bit causing the supply at this exact time to decrease.
10. Taxes and subsidies- Certain taxes, such as per unit tax, are an addition to production cost,
reducing the supply. A per unit subsidy however would do the opposite, this is like a gift
and the production will be rewarded for using the product causing more supplied.
11. Number of firms in the industry- If the number of firms increases, then the supply increases,
and vise versa.
Distinguish between changes in the quantity supplied and changes in supply. pg 67-68
Movement along the curve occurs only when the price changes, A shift occurs when a ceteris
paribus condition occurs.
A change in price leads to a change in the quantity supplied, other things constant. This is a
movement alongtheu curve.
A change in any certs paribus condition for supply leads to a change in supply. This causes a
shift of the curve (left or right).
Understand the process of determining market equilibrium quantity and equilibrium
price. (2 learning targets) pg 69-71
When there is neither excess quantity demand nor quantity supplied then we have hit market
clearing price- it clears the market of all the excess quantities demanded or supplied.
Consumers are able to get all that they want at that price, and suppliers are able to sell all they
want at that price.
No movement in equilibrium price unless demand or supply changes. It is a stable point. Any
point not at equilibrium is unstable and will not persist.

Shortages are when there is more demanded then can be supplied. When the line of the
demand is further right then the line of supply. Not the same thing as scarcity.
Surpluses is when we make more than is demanded. When the supply line if further to the right
than the demand line.
In the case of shortages, consumers competing for the good will drive up the price; in the case
of surpluses, sellers compete for limited quantity demanded by driving prices to equilibrium.

Ch. 4 Learning Targets

Discuss the essential features of the price system. pg 81-82
In a price system, or market system, relative prices are constantly changing to reflect changes in
supply and demand for different commodities. It signals to what is relatively scarce and what is
relatively abundant. Provides info as to what should be bought and what should be produced.
It features a voluntary exchange, acts of train between individuals that make both parties to
trade subjectively better off.
Transaction costs are defined as the costs associated with finding out exactly what is being
transacted as well as the cost of enforcing contracts. Ex: costco, computers, banks have
reduced transaction costs. In general the more organized the lower transaction cost.
Middlemen specialize in lowering transaction costs. Whenever products are not sold directly to
final consumer, then by definition, there is a middleman. Farmers sell to distributors who sell to
people.
Evaluate the effects of changes in demand and supply on the market equilibrium price
and quantity. (2 learning targets) pg 82-84
It is possible to predict what will happen too equilibrium price and quantity when demand or
supply changes.
As demand increase, the clearing price, and quantity increase. or vice versa.
Supply curve increases, equilibrium price falls, equilibrium quantity increases. or vice versa.
When both demand and supply increase, the equilibrium quantity rises. Price cannot be
determined.

When demand decrease but supply increases, the price will fall. The quantity cannot be
determined. If demand increase and supply decrease then price rises.
Markets do not acquire equilibrium immediately after a change. There is time for adjustment.
Understand the various methods of rationing. pg 86-87
The synchronization of decisions by buyers and sellers that leads to equilibrium is called the
rationing function of prices. Prices are indicators of relative scarcity at any equilibrium price the
market clears.
There are other ways than just price to ration goods, such as:
1 Rationing by waiting- Whoever is willing to wait in lie the longest to obtain the good that is
being sold at less than the market clearing price. The have a higher opportunity cost since
time is valuable, but in the end saving money by waiting in line. EX: waiting in line for food,
movie tickets. This is a first come first serve basis.
12. Rationing by random assignment or coupons- Random assignment is used to help even out
people who are going places, such as kids in a class randomly being assigned that class.
Coupons were used during wartime, these coupons allowed people to buy specified
quantities of rationed foods. To purchase food they had to pay a specified price and give up
a coupon.
Rationing via the price system leads to the most efficient use of available resources.
Explain the effects of price ceilings. pg 87-88
The rationing function is prevented when governments impose price controls. Price controls are
either in price ceiling- max price that be allowed in exchange, or price floor- min price allowed in
exchange.
If the price ceiling is below the market clearing price then there will be a shortage. Price will
want to rise to go back to equilibrium but price ceiling prevent this from happening because it is
a set price.
This results in nonprime rationing devices, which are all methods used to ration scare goods
that are price controlled. Whenever the price system is not allowed to work, nonprime rationing
devices will evolve to ration thee affected goos and services. Waitlist and lines are nonprime
rationing devices.
Effective price ceilings will tend to lead to black market. A black market is a market in which the
price controlled good is sold at an illegally high price through various methods.
Discuss the economics of rent control. pg 89-90

Rent control is a system under which the local government tells building owners how much they
can charge their tenants for rent.
Rental prices serve three functions
1 to promote efficient maintenance of existing housing and to simulate the construction of new
housing
13. to allocate existing scarce housing among competing claimants
14. to ration the use of existing housing by current demanders
Rent controls interfere with all three
Rent controls discourage the construction of new rental units. Rents are the most important
long-term determinant of profitability, and rent control depresses that.
When rental rates are held below equilibrium levels, property owners cannot recover the
maintenance through higher rents.
The restrict tenant mobility. If a family wants to move into a smaller apartment often times their
rent will spike even if the new apartment is smaller.
Rent control can be raised if a tenant leaves so often times landlords make the living unpleasant
to hopefully push the people out to raise the rent ceiling. It causes a lot of legal issues.
The big losers from rent ceilings are the property owners. Also low-income individuals.
Upper income people benefit the most. They are paying low rates even though they can afford
more.
Explain the effects of price floors. pg 91
Another government control is price floors or quantity restrictions. Usually applied to wages and
agriculture.

Understand agricultural price supports. pg 91-92

The government chooses a price for the product to ensure that the price never falls below the
support level.
Often times there leads to a surplus. The government then has to buy this surplus, then either
stores the surplus or sells it to forge in countries at a greatly reduced price under the food peace
program.
The larger the farm the bigger the benefit it is for the farmers.

Understand the economics of minimum wage. pg 93-94

Minimum wage it the lowest hourly wage rate that firms may legally pay their workers.
Proponents favor it to ensure low income people have a higher standard of living. Opponents
counter it because higher min wages can cause increased unemployment.
If a higher wage is imposed then there is less workers demanded. Some now become
unemployed.
When the minimum wage is higher than equilibrium wage, on one hand it boosts the wage
earnings of those people who obtain employment. On the other hand it it causes unemployment.
Discuss the various types of government-imposed quantity restrictions on markets. pg
95
Ban of ownership on trading of a good. Selling organs, illegal drugs, cant start a new hospital.
Imposes import quotas on variety of goods. An import quota is a supply restriction that prohibits
the importation of more than a specified quantity of a particular good in one year period.