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John Carroll University
John Carroll University
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The study of how best to allocate scarce resources among competing uses.
The most desired goods and services that are foregone in order to obtain something else.
-The highest valued alternative that is sacrificed for the chosen alternative.
Factors of Production
Resource inputs used to produce goods and services.
The Four Resources for Factors of Production
Lack of available resources to satisfy all desired uses of those resources.
-Central problem of economics.
Production Possibilities Curve
Depicts the alternative combinations of goods and services that can be produced given the quality and quantity of the factors of production.
Expenditures on (production of) new plant and equipment (capital) in a given time period, plus changes in inventories.
An increase in output (real GDP).
-An expansion of production possibilities outward.
Distribution based on need rather than work effort may result in less work effort.
-There is less output to distribute.
-The size of the pie may get smaller.
The Market Mechanism
The use of market prices and sales to signal desired outputs (or resource allocations).
-Market sales and prices send a signal to producers about what mix of output consumers want.
The doctrine of "leave it alone," or nonintervention by government in the market mechanism.
The government decides what goods are produced, at what prices they are sold, and who gets them.
-This mechanism of choice is associated with Karl Marx.
An imperfection in the market mechanism that prevents optimal outcomes.
Costs (or benefits) of a market activity borne by a third party.
-The difference between the social and private costs (or benefits) of a market activity.
The study of aggregate economic behavior, of the economy as a whole.
The study of individual behavior in the economy, of the components or pieces of the larger economy.
The assumption that nothing else is changing.
-It is an important part of "thinking like an economist".
Gross Domestic Product (GDP)
The total value of final goods and services produced in a country during a given period of time.
-It is a summary of a nation's output measured by the Bureau of Economic Analysis- part of the commerce department.
The value of GDP measured in current dollars.
-Because of inflation, it is useless to compare this from one year to another.
The inflation-adjusted value of GDP or the value of output measured in constant prices.
-These inflation adjustments delete the effects of rising prices by valuing output in constant prices.
Per Capita GDP
Total GDP divided by total population: average GDP.
-It is an indicator of how much output each person would get if all output were divided evenly among the population.
-In 2009 it was approximately $49,000- more than five times the world average.
An increase in output (real GDP), or an expansion of production possibilities.
The major uses of total output
Three types of consumer goods
Expected to last three years.
-They tend to be big-ticket items like cars, appliances and furniture
-Purchases are often cyclical, that is, very sensitive to economic trends.
Items that are bought frequently.
-They include clothes, food and gasoline.
The largest and fastest-growing component in consumption.
-Over half of all consumer output consists of medical care, entertainment, utilities and other services.
Expenditures on (production of) new plant and equipment (capital) in a given time period, plus changes in business inventories.
The plant, machinery, and equipment that are produced for use in the business sector.
Payments to individuals for which no current goods or services are exchanged.
-Examples: Social Security, welfare and unemployment benefits
Goods and services sold to foreign buyers.
Goods and services purchased from foreign sources.
Production processes that use a high ratio of capital to labor inputs.
Output per unit of input, e.g., output per labor hour.
The knowledge and skills possessed by the work force.
Our continuing ability to produce the goods and services that consumers demand also depends on our agility in reallocating resources from one industry to another.
Corporations, Partnerships and Proprietorships
Three different legal organizations:
Owned by many individuals who owns shares of (stock in) the corporation and have limited liability.
Owned by a small number of individuals who share liability.
Owned by one individual with sole liability.
-The quantity and quality of resources owned
-The price that those resources command in the market
In a market economy, an individuals income depends on:
-Capitalists would continue to accumulate wealth, power and income
-All capitalists are rich, all workers are poor.
Karl Marx believed that:
-Labors share of output has risen greatly over time -Differences w/in the labor and capitalist classes have become more impt than diffs bw the classes
Marx's predictions of how output would be distributed turned out to be wrong in two ways:
Personal Distribution of Income
The way total personal income is divided up among households or income classes.
A tax system in which tax rates rise as incomes rise.
-An example is federal income tax.
-Makes after-tax incomes more equal than before-tax incomes.
A tax system in which tax rates fall as incomes rise.
-Examples include Social Security payroll taxes and state and local sales taxes.
-Tends to make the after-tax distribution of income less equal
Four groups of market participants:
Any place where goods are bought and sold and includes the interaction of all buyers and sellers.
Any place where factors of production (land, labor, capital and entrepreneurship) are bought and sold.
Any place where finished goods and services (products) are bought and sold.
The direct exchange of one good for another, without the use of money.
-Requires a seller who wants whatever good is up for exchange.
Market transfers require two sides:
The ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus (other things being equal).
The ability and willingness to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus (other things being equal).
A table showing the quantities of a good consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus.
-Demand is an expression of buyer intentions- of a willingness to buy- not a statement of actual purchases.
A curve describing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus.
-Does not state actual purchases, rather only what consumers are willing and able to purchase.
Law of Demand
The quantity of a good demanded in a given time period increases as its price falls, ceteris paribus.
-There is an inverse or negative relationship between price and quantity demanded, ceteris paribus.
Determinants of Demand
-Tastes (desire for this and other goods)
-Income (of the consumer)
-Other goods (their availability and price)
-Expectations (for income, prices, tastes)
-Number of buyers
Movements Along a Demand Curve
A response to price changes for that good.
Shifts of the Demand Curve
Only occur when the determinants of demand change.
The total quantities of a good or service ppl are willing and able to buy at alternative prices in a given time pd
-The sum of individual demands
-Determined by the # of potential buyers and their respective tastes, incomes, other goods and expectations
The Market Demand Curve
A picture of the total quantities demanded by all consumers within a market at different prices.
Determinants of Supply
-Factor (or resource) costs
-Taxes and subsidies
-Number of sellers
Law of Supply
The quantity of a good supplied in a given time period increases as its price increases, ceteris paribus.
-There is a direct or positive relationship between price and quantity supplied, ceteris paribus.
Only one price and quantity are compatible with the existing intentions of both buyers and sellers.
-The price at which the quantity of a good demanded in a given time period equals the quantity supplied.
Occurs at the intersection of the supply and demand curves.
-There is only one.
-The market will naturally move toward this price.
Collective actions of sellers and buyers create an equilibrium price.
-The equilibrium price and quantity reflect a compromise between buyers and sellers.
-No other compromise yields a quantity demanded that is exactly equal to the quantity supplied.
Equilibrium price is determined by the collective behavior of many buyers and sellers.
-Adam Smith coined the term.
Surplus or Shortage
Emerge whenever the market price is set above or below equilibrium.
The amount by which the quantity demanded exceeds the quantity supplied at a given price.
-Occurs when the selling price is lower than the equilibrium price.
-Sellers supply less than buyers demand at the current price.
The amount by which the quantity supplied exceeds the quantity demanded at a certain price.
-Occurs when the selling price is higher than the equilibrium price.
-Sellers supply more than buyers demand at the current price.
Upper limit (maximum price) imposed on the price of a good or service.
Lower limit (minimum price) imposed on the price of a good or service.
The three predictable effects of price ceilings:
-They increase quantity demanded
-They decrease quantity supplied
-They create a market shortage
The three predictable effects of price floors:
-They increase quantity supplied
-They decrease quantity demanded
-They create a market surplus
A government intervention that fails to improve economic outcomes.
A government imposed price floor may create:
-A wrong mix of output
-An increased tax burden
-An altered distribution of income
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