Definitions Sections 1 and Section 2

Section 1

Positive Economics

Examines matters of economics that can be proven to be right or wrong by looking at facts.

Normative economics

Examines matters of economics that are based upon opinion and so are hard to be proven to be right or wrong.

MicroeconomicsIs the study of the individual markets and decisions by

individual households and firms

Macroeconomicsis the study of the economy as a whole.

ScarcityIs a term used for a limited availability of recourses

Free market economyWhen the productions are privately held by individuals and

firms

Opportunity costIs the sacrifice made In the next best alternative.

Type of goodFree good

Involve no opportunity cost

Capital Good

Use consumption goods in the future

Consumption Good

bought for final consumption

Factors of Production

-Land-natural resources

-Labor-human resources

-Capital- man maid aids to production-Entrepreneurship- this is the ability to combine

Production possibility Curve (PPC)

Shows the maximum combination of goods and services which can be produced given the existing levels of

resources.

0

Economic development

Concept involving improvement in standards of living, reduction in poverty, improved health, and improved education

Sustainable development

Is the economic development that meets its needs of the present without compromising the ability of the future generation to meet their needs.

A

B

Economic Growth

Shift in Production

Actual output

The production of goods and services in the economy achieved in a certain period of time

Potential output

The possible production that would be achieved if the available factors were employed.

Actual Growth

When unemployed factors of production are brought into use

Potential grown

When the quantity or quality of factors of production within an economy increases

Economic Growth

growth of real output in an economy

Section 2

Market Where consumers and producers come together to establish a price

where each are happy with for a good or service.

Demand

Is the willingness and ability to purchase a quantity of a good or service at a certain price over a given time of period

Law of demand

States as the price of good or service rises, the actual quantity demanded decrease.

Demand curve

Is a representation of the law of demand.

D

0

D2

Supply

Is the willingness and ability of a producer to produce a quantity of a good or service at a certain price over a certain period of time

Law of supply

states that as a price of a good rises, the quantity supplied will increase as well.

Supply Curve

is the curve of representation between the price and quantity supplied

S1S2

P1

P2

Q1Q2

Shift in Supply

Equilibrium price

Is the market clearing price; demand is equal to supply

EQUAL

D

S

Maximum price

Aka ‘ceiling price’ is the set price by the government, in which sellers are not allowed to rise the price above.

0

Demand

Supply

E1

P3$1.50

P1$5.00

Price

QuantityQ1

Legal

Illegal

Shortage

Price Ceiling on Gasoline

Minimum price

Aka ‘floor price’ is set by the government, in which the price is not allowed to be bellow a certain price.

Buffer stock scheme

Sets a maximum and minimum price in the market to stabilize prices.

D

S

Minimum price

Illegal

Legal

Equilibrium Point

ELASTICIES

Price elasticity of demand (PED) Is the measure of the responsiveness of the quantity demanded of a good or service to a

change in its price

P rice e las tic ity o f d em an d =P ercen tag e ch an g e in q u an tity d em an d ed

P ercen tag e ch an g e in p rice

Price Elastic demand

Means that the change in the price of the good or service will cause a larger change in the quantity demanded

D

PED > 1

Q1Q2

P1

P2

10%

5%Price

Quantity

Price Inelastic demand

Means that a change in the price of the good or service will cause a small change in the quantity demanded.

D

Q1

Q2

10%

P1

P2

20%

PED < 1

Quantity

Price

Income Elasticity of demand (YED)

Is a measure of the responsiveness of demand for a good to a change in income.

A Normal good

Has a positive income elasticity of demand. As income rises, demand increases

Inferior goods

Have a negative income elasticity of demand. As income rises, demand decreases.

Price elasticity of supply (PES)

Is a measure of the responsiveness of the quantity supplied of a good or service to a change in its price

Indirect tax

Is an expenditure tax on a good or service

Incidence (burden)

tax refers to the amount of tax paid by the producer or the consumer.

Cross elasticity of demand (XED) Measure of the responsiveness of the demand for a good or

service to a change in the price of a related good

Substitute goods

Is goods that can be used instead of another such as coke and Pepsi. Substitute good has positive cross elasticity of demand

Complement goods

Goods which are used together, such as calculator and batteries. Complement goods have negative cross elasticity of

demand.

THEORY OF THE FIRM

Fixed cost Are costs of production that do not change with the level of the output.

Eg. Land

Fixed Cost Graph

Cost

Quantity

F

Variable costsAre costs of production that vary with the level of output

Eg. Labor, Material

F

Cost

Quantity

Total costAre the total costs of producing a certain level of output

fixed costs plus the variable cost

Average cots Is the average total costs of production per unit.

Marginal costs Is the additional costs of producing an additional unit of

output

Short runPeriod of time in which at least one factor of production

is fixed

SPAC1

SPAC2

SPAC3

SPAC4

SPAC5

SPAC1

SPAC2

SPAC3

SPAC4

SPAC5

The long runIs the period of time in which all factors of production are variable

Law of diminishing average returnAs extra units of a variable factor are applied to a fixed

factor, the output per unit of the variable factor will eventually diminish

Diminishing Return

Quantity

Cost

Law of Constant ReturnAs extra units are added, the increase in outputs will be

equal to the increase in costs

Law of Constant Return

Quantity

Cost

Law of diminishing marginal returns

As extra units of a variable factor are applied to a fixed factor, the output from each additional unit of variable

factor will eventually diminish

Law of diminishing marginal Return

Quantity

Cost

Economies of scale Are any fall in long run unit costs that come about as a result of a firm

increasing its scale of production

Diseconomies of scaleAre any increase in long run unit costs that come about as a result of a

firm increasing its scale of production.

Total revenue Is the aggregated revenue gained by a firm from the scale of a particular

quantity of output.

Average revenueIs the total revenue received divided by the number of units

sold. Usually the price is equal to average revenue.

Cost

Quantity

A= D

Marginal revenueIs the extra revenue gained from selling an additional unit

of a good or service

A = D

Mr Quantity

Cost

Normal profitsAre the amount of revenue needed to cover the total costs of

production, including the opportunity costs.

Mc

Mr Quantity

CostAC

A = D

Abnormal profitsAre any level of profit that is greater than the required to

ensure that a firm will continue to supply its existing good or service.

Mc

Quantity

CostAC

A = D

Abnormal Profit

Profit maximizing level of output

the level of output where marginal revenue is equal to marginal costs.

Shut down price

Is the price where the average revenue is equal to average variable costs. Below this price, the firm or company will

shut down in the short run.

The break even price

Is the price where average revenue is equal to the average total cost.