Part I: Introduction
● Scarcity means that society has limited resources and therefore cannot produce all the
goods and services people wish to have.
● Economics - the study of how society manages its scarce resources
● Economists study:
○ How people make decisions
○ How they interact with one another
○ The forces and trends that affect the economy as a whole
● Positive = descriptive analysis, making predictions “I think a tax would…”
● Normative = prescriptive, SHOULD statements about how things should be or what is
better/ worse”. “I think taxes sucks and it should be repealed”
● Capital = physical capital = physical things used for production like computers and
machine equipment
○ Financial capital = funds used to pay for factors of production
○ Human capital = specialized skills or knowledge that workers have developed
that are useful for production
Models
● Production possibilities
● Circular flow
,Supply and Demand
Demand
● Market = group of buyers and sellers for some good or service
● Quantity demanded Qd = amount of good that buyers want to buy
○ Depending on factors but most importantly price
○ Law of demand→ Price UP = Q Demand DOWN
● Demand = relationship that explains how Qd relates to various determinants
○ Qd is a number whereas Deman is a relationship (with curves, schedules,
equations)
● Determinants of demand
○ Price
○ Tastes
○ Related goods
○ Income
○ Buyers
○ Expectations
● Income rise and demand increase = the good is a normal good
● Income rise and demand decreases = the good is an inferior good
● Substitutes = higher price for X → more demand for Y, then they are substitute goods
● Complements = higher price for X → less demand for Y, then they’re complements
Supply
● Reservation price = the maximum you would pay for (a marginal unit of) something
● Quantity supplied Qs = amount of good that sellers want to sell under some
circumstances
● Law of supply = Price UP = Q. supply UP
● Determinants of supply
○ Price
○ Scale (number of sellers)
○ Input costs
○ Technology
○ Expectations
Equilibrium
● Surplus = too much supply than what is demanded → price goes down
● Shortage = short on supply, more demand → prices go up
● P=Q is stable so there is no pressure to change
, Comparative statics
● Comparative statics = compare 2 equilibriums
○ This is a powerful tool to understand patterns in markets
● Steps:
1. Draw a diagram with original equilibrium
2. Which shifts? (maybe both)
3. Draw a new diagram and interpret
Chapter 5: Elasticity & It’s Application
Elasticity
● Price elasticity of demand
● Midpoint method of elasticity formula
● Unit elastic: Ed =1
● Perfectly inelastic: Ed = 0
● Perfectly elastic = infinite
● Scarcity means that society has limited resources and therefore cannot produce all the
goods and services people wish to have.
● Economics - the study of how society manages its scarce resources
● Economists study:
○ How people make decisions
○ How they interact with one another
○ The forces and trends that affect the economy as a whole
● Positive = descriptive analysis, making predictions “I think a tax would…”
● Normative = prescriptive, SHOULD statements about how things should be or what is
better/ worse”. “I think taxes sucks and it should be repealed”
● Capital = physical capital = physical things used for production like computers and
machine equipment
○ Financial capital = funds used to pay for factors of production
○ Human capital = specialized skills or knowledge that workers have developed
that are useful for production
Models
● Production possibilities
● Circular flow
,Supply and Demand
Demand
● Market = group of buyers and sellers for some good or service
● Quantity demanded Qd = amount of good that buyers want to buy
○ Depending on factors but most importantly price
○ Law of demand→ Price UP = Q Demand DOWN
● Demand = relationship that explains how Qd relates to various determinants
○ Qd is a number whereas Deman is a relationship (with curves, schedules,
equations)
● Determinants of demand
○ Price
○ Tastes
○ Related goods
○ Income
○ Buyers
○ Expectations
● Income rise and demand increase = the good is a normal good
● Income rise and demand decreases = the good is an inferior good
● Substitutes = higher price for X → more demand for Y, then they are substitute goods
● Complements = higher price for X → less demand for Y, then they’re complements
Supply
● Reservation price = the maximum you would pay for (a marginal unit of) something
● Quantity supplied Qs = amount of good that sellers want to sell under some
circumstances
● Law of supply = Price UP = Q. supply UP
● Determinants of supply
○ Price
○ Scale (number of sellers)
○ Input costs
○ Technology
○ Expectations
Equilibrium
● Surplus = too much supply than what is demanded → price goes down
● Shortage = short on supply, more demand → prices go up
● P=Q is stable so there is no pressure to change
, Comparative statics
● Comparative statics = compare 2 equilibriums
○ This is a powerful tool to understand patterns in markets
● Steps:
1. Draw a diagram with original equilibrium
2. Which shifts? (maybe both)
3. Draw a new diagram and interpret
Chapter 5: Elasticity & It’s Application
Elasticity
● Price elasticity of demand
● Midpoint method of elasticity formula
● Unit elastic: Ed =1
● Perfectly inelastic: Ed = 0
● Perfectly elastic = infinite
