No Bull Economics Lessons

Macroeconomics & Microeconomics Concepts You Must Know

Unit 1: Top 10 Basic Economic Concepts to Know (Macro/Micro)



Unit 1: Top 10 things you must know for the first unit of economics class. This overview is geared toward college-level principles of Macro and Micro courses and students enrolled in AP Economics & IB classes. Top 10 Basic Concepts covered in this video: #1. Scarcity, #2. Opportunity Cost, #3. Production Possibilities Curve, #4. Law of Increasing Cost, #5. Absolute vs. Comparative Advantage, #6. Diminishing Marginal Utility, #7. Supply and Demand, #8. Shortage vs. Surplus, #9. Shifts in Demand and Supply, #10. Dual Shifts of Demand and Supply.

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1.1 Scarcity, Resources, & Opportunity Costs (Macro/Micro)

 
Learning objectives:
1. Students will be able to define Economics.
2. Students will be able to explain the economic problem of scarcity.
3. Students will be able to list and explain the 4 factors of production.
4. Students will be able to identify the resource payments for the factors of production.
5. Students will be able to determine an opportunity cost.
6. Students will be able to explain how the studies of Macroeconomics and Microeconomics differ.

1.2 Production Possibilities Frontier (Macro/Micro)


Learning objectives:
1. Students will be able to understand the simplified assumptions of an economy's production possibilities curve.
2. Students will be able to explain the concept of productive efficiency and how it relates to the production possibilities frontier.
3. Students will be able to illustrate unemployment using a PPC.
4. Students will be able to explain why it is possible for an economy to produce beyond its PPC in the present.
5. Students will be able to show economic growth using a PPC.
6. Students will be able to explain how the shape of a PPC reflects opportunity cost.

1.3 Comparative Advantage and Trade (Macro/Micro)

 
Learning objectives:
1. Students will be able to explain what a straight-line production possibilities frontier indicates. 
2. Students will be able to determine which economy has an absolute advantage in production. 
3. Students will be able to calculate the opportunity cost of producing a good using a straight-line PPF.
4. Students will be able to determine which country has a comparative advantage.
5. Students will be able to determine what good an economy will specialize in the production of and Export / Import. 6. Students will be able to determine whether an economy will benefit from a trade.

1.4 Circular Flow Model (Macro/Micro)


Learning objectives:
1. Students will be able to explain how the factor market is different from the product market.
2. Students will be able to identify the flows in product and factor markets.
3. Students will be able to show what households provide businesses in the factor market.
4. Students will be able to understand how businesses incur costs in the factor market.
5. Students will be able to explain the role of the government in the expanded version of the circular flow model.

1.5 Supply and Demand (Macro/Micro)


Learning objectives:
1. Students will be able to explain why the demand curve downward sloping.
2. Students will be able to explain why the supply curve upward sloping.
3. Students will be able to identify a temporary surplus in a market.
4. Students will be able to identify a temporary shortage?
5. Students will be able to determine how a market will respond to a surplus or shortage.

1.6 Shifting Supply and Demand (Macro/Micro)


Learning objectives:
1. Students will be able to list and explain the determinants (shift factors) of demand.
2. Students will be able to determine what will happen to the price and quantity of good Good B when the price of substitute Good A increases.
3. Students will be able to list and explain the determinants of supply.
4. Students will be able to determine what will happen to market price and quantity when resource prices increase.
5. Students will be able to explain possible outcomes supply and demand curves shift at the same time.

1.7 Price Ceilings (Macro/Micro)

Learning objectives:
1. Students will be able to illustrate an effective price ceiling using supply and demand models.
2. Students will be able to explain the effects of a price ceiling in a given market. 
3. Students will be able to identify the changes in consumer surplus and producer surplus that result from a ceiling price. 
4. Students will be able to discuss how government price controls lead to misallocations of economic resources and create deadweight loss.

1.8 Price Floors (Macro/Micro)

Learning objectives:
1. Students will be able to illustrate an effective price floor using supply and demand models.
2. Students will be able to explain the effects of a price floor in a given market. 
3. Students will be able to identify the changes in consumer surplus and producer surplus that result from a floor price. 
4. Students will be able to discuss how government price controls, such as price floors, lead to misallocations of economic resources and create deadweight loss.

Basic Economic Concepts Review Sheet

  • Economics is the study of how people or societies satisfy wants with limited or scarce resources. 
  • Scarcity is the condition where unlimited human wants face limited resources
  • There is no such thing as a free lunch
  • Three basic questions: What must we produce?  How should we produce it?  For whom should we produce?
  • Macroeconomics is the study of the economy as a whole (forest)
  • Microeconomics is the study of individual parts of the economy (trees).
  • Factors of Production:  Land (Natural Resources), Labor (Human Capital), Capital (Tools, Machinery, Plant), and Entrepreneurs (Risk-Taker who combines land, labor, and capital) produce goods and services. Also known as economic resources, economic inputs, or scarce resources.
  • Goods are items that satisfy an economic want.
  • Consumer goods (iPods, LCD TVs, Barbie Dolls) are final goods purchased by households (consumers).
  • Capital goods (Machinery, Robots, Hammer) are goods purchased by businesses to produce consumer goods.
  • Durable goods last more than 3 years (Car, Washer, Dryer) and can be repaired.  These goods suffer most during recessions.  
  • Nondurable goods generally last less than 3 years (Lettuce, Pens, Looseleaf paper, Coffee).
  • Services (Haircut, Legal advice, Surgery, Painting) are work performed for someone and are intangible.   
  • Value is worth expressed in dollars and cents.  To have value it must also have utility, a good's or services capacity to provide satisfaction.  Wealth is the accumulation of goods that are tangible, scarce, useful, and transferable to another person.
  • Circular Flow Model:  The flow of inputs and money through the factor market and flow of goods/services through the product market.  
  • Productivity is a measure of the amount of output produced by the amount of inputs within a certain time.  Investing in capital improves productivity and leads to economic growth.
  • Trade-offs are the alternative choices people face in making an economic decision.  
  • Opportunity Cost is the cost of the next best alternative among a person's choices (Do I chat on FaceBook all night or do my economics homework?)
  • Production Possibilities Curve: A PPC or Production Possibilities Frontier is a simplified economic model that illustrates the concept of opportunity cost.  We assume an economy can use their resources to produce only two goods. Resources and technology are fixed, and the economy can never produce outside of the PPC (Point X) in the present. If the economy is currently producing at a point on the PPC (Point E) then it is experiencing full employment.  However, if the economy is producing at a point inside the PPC (Point U), then there are resources that are currently unemployed.
  • When the PPC shifts out (to the right), economic growth has occurred.  The factors that lead to growth are increased quantity and quality of resources, increased productivity, improved technology, and better education and training.
  • Law of Increasing Costs:  Explains why the PPC is bowed outward (concave) from the origin. To produce more of one good, an economy must sacrifice ever-increasing quantities of the other good.
  • Constant Opportunity Cost PPC occurs when the PPC is a straight line.  The opportunity cost of producing an additional good remains the same. 
  • Absolute Advantage is when one country can produce more of a good than the other country.
  • Comparative Advantage considers the opportunity cost and shows how everyone gains through trade.  If a country can produce a good at a lower opportunity cost then it has the comparative advantage.
  • Economic Goals:  Freedom, efficiency, equity, security, employment, price stability, and growth.
  • Traditional Economies Roles and economic decisions are defined by custom.  Everyone knows which role to play.  Discourages new ideas which leads to lower standard of living (poor health, poor education).
  • Command Economies:  Central authority determines the WHAT, HOW, and FOR WHOM to produce.  Allows for quick change with basic services at low cost but consumer needs may not be met.
  • Market Economies:  Producers and consumers determine the three questions.  In a market transaction consumers cast their "dollar votes."  Market economies can adjust to change, have a high degree of individual freedom and small degree of government involvement, have a high variety of goods and services, and high degree of consumer satisfaction.  It cannot meet every person's basic needs and the people face a high level of personal uncertainty.  There is also the prospect of economic failure.  A few examples include US, Canada, and Japan.  
  • Consumer Sovereignty:  Consumers rule! Remember "dollar votes?"
  • Law of Demand: An inverse relationship between price and quantity demanded. When the price of a good changes then quantity demanded changes (point-to-point movement along the curve).
  • Determinants of Demand: These are the non-price determinants or shift factors of the entire demand curve; Consumer tastes and preferences, Number of buyers or market size, Income, Prices of substitute goods, Prices of complementary goods, and Future price expectations.
  • Inferior Good: As income increases demand for an inferior good (Chef Boyardee, Ramen noodles) decreases (shifts left).
  • Normal Good: As income increases demand for a normal good (Steak) increases (shifts right).
  • Law of Supply: A direct relationship exists between price and quantity supplied.  As P increases QS increases; a change in price will lead to a change in quantity supplied (point-to-point movement along a supply curve).
  • Determinants of Supply:  These are the shift factors for the supply curve; Resource prices (lower costs increase supply), Technology, Productivity, Taxes (reduce the incentive to produce) & subsidies (are incentives to produce more), Price expectations (if prices expected to fall in future, supply increases in the present), and Prices of goods that use the same production techniques (Cucumbers and Watermelon).
  • Market Equilibrium or market clearing price is the point where the demand and supply curves meet. A surplus occurs when the price is greater than equilibrium (QS > QD) and a shortage occurs when the price is less than equilibrium (QD > QS).
  • Price floors and price ceilings are price controls (limits) that can be set by the government. 
  • Effective price ceiling is a maximum legal price that must be set below the equilibrium price (leads to a shortage of the good).
  • Effective price floor is a minimum legal price that must be set above the equilibrium price (leads to a surplus of the good).
  • Sole Proprietorship:  Business run by one person.  They are the smallest, but most numerous and profitable types of businesses.  Advantages: Easy start-up, easy management, owner gets all profits, business itself pays no income taxes (only business owner's personal income is taxed), psychological satisfaction of owning a business, and easy to close.  Disadvantages: Owner has unlimited liability, hard to raise financial capital, might be difficult to hire personnel or stock enough inventory, owner might have limited managerial experience, hard to attract qualified employees, limited life, and business dies when owner dies or sells the business.
  • Partnerships:  Business jointly owned by two or more persons.  They are the least numerous and has the second smallest proportion of sales and net income.  Advantages: easy start-up, easy management, no special taxes on partnership, easier to raise financial capital, larger size, and easier to attract skilled employees.  Disadvantages: Partners responsible for acts of all the partners, limited life if a partner leaves, and potential for partner conflicts.
  • General Partnership:  All partners are involved in the management and sales.
  • Limited Partnership:  At least one partner is not involved in management - That partner may have helped to finance the business.
  • Corporations:  A business organization recognized by law as a separate legal entity with all the rights of an individual.  They receive a charter (permission from government) to create a corporation that includes details of stock ownership.  Investors who buy common/preferred stock are the owners of the firm.  Advantages: Ease of raising capital, professionals may run the firm, owners have limited liability, business life is unlimited, and easy to transfer ownership.  Disadvantages: A charter is expensive, ownership and management are separated so shareholders have little say in running the business, corporate income is taxed twice, and subject to government regulation.

Unit 1 Student Wiki

Scarcity: The central economic problem that limited economic resources are never sufficient to satisfy unlimited wants. Causes societies to answer the following questions: what to produce, how to produce, and for whom to produce? (Bianca L.) 

Economic Resources: The four basic economic resources - or factors of production - are land, labor, capital, and entrepreneurship. The resource payment for land is rent; labor is wage; capital is interest; entrepreneurship is profit. (Craig M.)

Opportunity Cost: Alternative forgone in decision making; a trade off. It is the next best alternative. (Bianca L.) 

Production Possibilities Frontier: Shows the combinations of two goods or services that can be produced in an economy. On the curve, there is full productive effiency and employment. Because of the law of increasing opportunity costs, the curve is bowed outward from the origin. A straight-line production possibilities frontier indicates constant opportunity costs. (Erin C.) 

Law of Increasing Opportunity Cost: To get more of one good, one gives up ever increasing quantities of another good. Causes production possibilities curve to be bowed outward. (Bianca L.) 

Absolute Advantage: The economy that can produce more of a good (output) has the absolute advantage. (Bianca L.) 

Comparative Advantage: The economy that can produce a good at the lowest opportunity cost has the comparative advantage. It should specialize in the production of that good or service. Often leads to trading where all parties can benefit. (Bianca L.) 

Terms of Trade: Favorable if the Imports/Exports exceed the opportunity cost of the export.

Barrier to trade: Government induced restrictions on international trade. For example a tariff. (T. Kim)

Law of Demand: An inverse relationship exists between price and quantity demanded. As prices fall, quantity demanded rises. As price rises, quantity demanded falls. (Bianca L.) 

Change in Demand vs. Change in Quantity Demanded: A change in Demand shifts the entire Demand curve, whereas a Change in Quantity Demanded moves from point to point on the demand curve. (Ray I.)

Shift Factors of Demand: Tastes and preferences, Income (normal goods vs. inferior goods), market size, expectations of prices, and prices of related goods (substitutes and compliments). (Binaca L.) 

Law of Supply: A direct relationship exists between price and quantity supplied. As price rises, quantity supplied rises. As price falls, quantity supplied falls. (Bianca L.) 

Change in Supply vs. Change in Quantity Supplied: A change in supply is a complete shift of the supply curve caused by one or more factors (RATNEST); a change in quantity supplied is a point-to-point movement along the supply curve caused by changes in price level. (Eleanor K)

Shift Factors of Supply: Resource prices, alternative output price changes, technology and productivity, number of sellers, expectation of future prices, subsidies to suppliers, and taxes on suppliers. (Bianca L.) 

Market Equilibrium: Where the supply curve is equal to the demand curve. (Bianca L.) 

Shortage: There are less quantities supplied than quantities demanded. Usually temporary as the price will naturally rise to market equilibrium. (Bianca L.) 

Surplus: The quantity supplied is greater than the quantity demanded. Usually temporary as market forces will cause the price to fall back to market equilibrium. (Bianca L.) 

Price Ceiling: Price control established by the government with the intent to help low income consumers. In order for it to be effective, the ceiling price must be below equilibrium. This can lead to long-term shortages. (Bianca L.) 

Price Floor: Price control established by the government with the intent to help low income produces. It must be placed above market equilibrium to be effective. This can lead to a long-term surplus. (Bianca L.)

This is part of a wiki project completed by Mr. Medico's students / Not responsible for typographical errors

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