Unit+One

=Unit One=

__A. Scarcity: the nature of economic systems__
Scarcity is when people's desires and wants exceed the amount of resources available. It means that we do not have the resources to fufill those desires and needs. An example of this was this Christmas with the Wii situation. Every child in America desired a Japanese- made Wii, but there were not enough to go around. People were buying them on Ebay for hundreds of dollars more than they were worth and still not everyone got one. This is a scarce good. Not enough to go around. Things that cause scarcity are the factors of production, along with insufficient technology or limits in skilled workers. The production possibilities curve is determined by scarce resources. The inefficient use of resources (less that full employment, waste of land) will cause the economy to work below its production possibilities frontier. The graph to the right is an example of a production possibilities curve between food and computers. If the PPF was inside the curve, the economy would be making its scarce goods, or economic goods, even scarcer.Goods that are not scarce, such as sand or salt water, are free goods. Due to the scarcity of goods, it becomes necessary for society to choose how the scarce goods are allocated. An example of this is diamonds. Because diamonds are scarce, we choose how much is distributed to everyone. In a market economy, the way to achieve this is trade but other ways it is done by centralized command, tradition, or community democracy. 1. Opportunity Costs Scarcity causes trade-offs (since not everyone can have a good, they have to choose a different good), and trade-offs result in opportunity costs. Opportunity cost is what must be given up when you choose something. For example, if a student chooses to go back to school to earn his or her master's degree, the cost of the tuition and fees is roughly 30,000 dollars (it's an expensive school). One also has to consider the income he or she would have been making during that time he or she went to school. If the student was making 60,000 dollars a year and went back to school for two years, the opportunity cost would be 120,000 dollars. 2. Production Possibilities Curves A production possibilities curve is a graph that shows the amount of to goods an economy can produce with scarce resources. The curve shows the maximum amount of a good that economy can produce for the amount of another good. It illustrates the possibilities for a firm or company to produce for two goods. It also demonstrates the trade-off of choosing one good over another. The graph to the right shows how much wine compared to grain an economy can effectively produce. The more wine it can produce results in less grain that it can produce. The more grain it can produce results in less wine is can produce.

__B. Specialization, Trade, and Comparative Advantage__
What is specialization? It allows a person, business, or nation to specialize in a certain activity that they do best, instead of striving for self-sufficiency. What's so great about it? It allows for a greater variety of goods and services to be available at a lower cost. It also allows for increased output by giving people the chance at becoming better at what they do. Trade helps people exchange what they have for what they want. It also facilitates economic growth, because it allows for specialization. **Specialization** allows a person to specialize in creating something that they are most efficient in making and then trading the products they make for things that they have a higher opportunity cost in making. A person has a **comparative advantage** when he or she has a lower opportunity cost in producing a good or a service than another person. **Opportunity cost** is what one gives up, when choosing to do one thing over the other. For example: you have two cupcakes in front of you. One is chocolate, the other vanilla. When you choose the chocolate one, your opportunity cost is the vanilla cupcake. When you choose the vanilla cupcake, your opportunity cost is the chocolate cupcake. Specialization, comparative advantage, and opportunity cost, they are all some of the basic ideas behind free trade and the World Trade Organization (WTO). Here's a link that talks about the **Heckscher-Ohlin Trade Theory**, which basically discusses the reasons why two countries should specialize and trade with one another. http://nobelprize.org/educational_games/economics/trade/ohlin.html

1. Determining Comparative Advantage with input information NOTE: input information refers to the resources ( i.e. time, money, etc) that are put into performing a certain task, such as baking cupcakes. Here is an example, since that is the best way to try and explain this. Suppose you have two countries: the US and Japan. Now suppose you have two tasks: making airplanes and cars. US has the **absolute advantage** in making airplanes, because the US takes fewer hours to make 1 airplanes than Japan does. Japan has the absolute advantage in making cars, because Japan takes fewer hours to make 1 car as opposed to the time taken by the US.
 * ||  ||   || Cars ||   ||   ||   || Airplanes ||
 * US ||  ||   || 6 hours ||   ||   ||   || 2 hours ||
 * Japan ||  ||   || 3 hours ||   ||   ||   || 4 hours ||

Now what is the opportunity cost of the US for making cars in terms of airplanes? For airplanes in terms of cars? opportunity cost for making cars : car hours / airplane hours 6/2 airplanes or 3 airplanes opportunity cost for making airplanes: airplane hours / car hours 1/3 cars or .33 car

Now what is the opportunity cost of Japan for making cars in terms of airplanes? For airplanes in terms of cars? opportunity cost for making cars : car hours / airplane hours 3/4 airplanes or .75 airplanes opportunity cost for making airplanes: airplane hours / car hours 4/3 cars or 1.33 cars

So. . . which country has the comparative advantage in cars? In airplanes? Japan has the comparative advantage in making cars, because it has the lower opportunity cost. The US has the comparative advantage in making airplanes, because it has the lower opportunity cost. Therefore. . . US should make airplanes, and Japan should make cars.

2. Determining Comparative Advantage with output information NOTE: output information refers to how many of one product (i.e. cupcakes, cars, airplanes, etc) a person can make with limited resources (i.e. hours, money, labor, etc) Here is an example, since that is probably the best way to explain this.
 * || US || Japan ||
 * Cars || 6 || 3 ||
 * Airplanes || 2 || 4 ||
 * This is how many cars and airplanes either country can make within an alloted time of one hour. *

Now what is the opportunity cost of the US for making cars? For airplanes? opportunity cost for making cars : # of airplanes / # of cars 2/6 airplane or 1/3 airplane opportunity cost for making airplanes: # of cars / # of airplanes 6/2 cars or 3 cars

Now what is the opportunity cost of Japan for making cars? For airplanes? opportunity cost for making cars : # of airplanes / # of cars 4/3 airplanes or 1.33 airplanes opportunity cost for making airplanes: # of cars / # of airplanes 3/4 car or .75 car

US has the **absolute advantage** in making cars, because the US makes more cars than Japan does. Japan has the absolute advantage in making airplanes, because Japan makes more airplanes than the US.

So. . . which country has the comparative advantage in cars? In airplanes? Japan has the comparative advantage in making airplanes, because it has the lower opportunity cost. The US has the comparative advantage in making cars, because it has the lower opportunity cost. Therefore. . . US should make cars, and Japan should make airplanes.

If you still have some doubt over absolute advantage, comparative advantage, and some of the other basic concepts, here are some videos. Hopefully they'll help clear out any remaining doubts. :) http://youtube.com/watch?v=aLe_LF622JI http://youtube.com/watch?v=8UsOCSBt3fA http://youtube.com/watch?v=9leliceP63c http://youtube.com/watch?v=A6_v7okrO-s

**__C. Introduction to Demand__**
1. Relationship Between Price and Quantity Demanded The term supply and demand refers to the relationship between the producers and the consumers of a good. The demand aspect, which we will be discussing in this section, refers to what degree the consumers demand that product and what price they will pay for it. This is shown by the demand curve as seen on the right. The position of the demand curve, meaning its orientation to the right or left, determines the price of that product. In this particular supply and demand model the demand curve has shifted to the right indicating a increase in the demand for than product. Because of this shift the demand curve now crosses the supply curve at a different place indicating a new equilibrium point. The dotted lines on the graph show that this shift has caused an increase in price and quantity. These two factors are represented by the x and y axes and depending on the equilibrium point these factors can either increase or decrease. In this instance they have both increased but they do not always act in the same way. For example if the supply curve were to shift to the left indicating a decrease in the amount of product the producers are willing to sell, the price would increase but the quantity would decrease. In summation the supply and demand curves represent the amount consumers will pay for a product and the amount producers will sell the product for. Where these two curves meet is the equilibrium point. Based on where this equilibrium point is found and its position on the x and y axes the price and quantity change. The more demand there is for a product the more money people will be willing to pay for it and the higher price the producers can charge. Here is a video that I found that might help if you are having trouble understanding the supply and demand curves: http://www.youtube.com/watch?v=JWVG0FAfgmA

2. Determinants of Demand There are certain factors that cause the demand to shift to either the right or the left. Thses factors, which change the demand for a certain product, are known as the determinants of demand. Some of the most common determinants of demand are: 1.) tastes or preferences of consumers 2.) number of consumers in the market 3.) the money incomes of consumers
 * an increased taste in a product increases its demand
 * a decreased taste in a product decreases its demand
 * more consumers increases a products demand
 * fewer consumers decreases a products demand


 * Superior goods** or **normal goods**
 * As income increases, a superior good's demand increases
 * As income decreases, a superior good's demand decreases
 * Superior goods are most common good

4.) prices of related goods
 * Inferior Goods**
 * As income increases, an inferior good's demand decreases
 * As income decreases, an inferior good's demand increases

Substitute Goods
 * As price of A increases, demand for B increases
 * As price of A decreases, demand for B decreases
 * Example: Nike's and Reeboks

Complementary Goods
 * As price of A increases, demand for B decreases
 * As price of B decreases, demand for A increases
 * Example: computers and computer games; gasoline and motor oil

Independent Goods
 * As price of good A changes, demand for good B does not change

5.) consumer expectations about the future prices and incomes
 * if consumers expect a price increase in near future, demand increases
 * if consumers expect a price decrease in the near future, demand decreases

3. Changes in Quantity Demanded vs. Changes in Demand Before we can delve into this topic it is important to understand the difference between a movement along the demand curve and a shift of the demand curve. A movement refers to a movement along the demand curve and a shift means a translation of the entire curve to the left or right depending on how demand has changed. On your left you can see a graph that shows a movement along the demand curve, and on the right is a shift of the entire demand curve.



A change in quantity demanded is a movement along the curve while a change in demand means a shift of the entire curve. A change in quantity demanded is usually caused by a change in the price of the product. This price could be enforced by the government or by individual sellers. This movement along the graph only occurs when the supply and demand relationship remains consistent and the change is caused when a price change effects only quantity or vice versa. A change in demand results in a shift of the curve right or left and is caused by a change in a determinant (such as one stated above) other than price.

http://economics.about.com/

**1.** Relationship between supply and quantity supplied.
Supply is defined as being "the quantity of a good or resource that sellers/suppliers are willing and able to offer to the market for sale under a given set of conditions over aspecific period of time." A supply curve illustrates the law of supply which states that ceteris paribus, if a price of a product rises, the quantity of that product supplied will increase. Likewise, if the price of a product decreases, the quantity supplied will also decrease. //The Supply Curve// The supply curve (shown at left) shows the relationship between the price and quantity supplied. Price is measured on the vertical axis and quantity supplied is displayed along the horizontal axis. Due to the law of supply (see below), the supply curve generally slopes upward. A situation in which the supply curve would not slope upward is the supply curve of labor. Under normal circumstances, if a product has a higher price, more will be supplied. With the labor supply curve, the more a company is willing to pay, the more hours a person will be willing to work. However, as the hours get higher and higher, the person may begin to value their time more and more and choose to forgo extra income in order to spend their time in leisure. This backward bending supply curve is illustrated on the right.

//The Law Of Supply// The law of supply states that if other things remain constant, if the price of a good rises, the corresponding quantity supplied increases, and as the price falls the quantity supplied will decrease. In order for a business to supply more of a product, they will have to charge more in order to have the financial resources to produce more.

**2. Determinants of supply**
The following factors cause supply to shift to the right or the left on a supply curve: 1) Prices of Resources: As resource prices rise, typically supply will be reduced. It will cost more for the producer to manufacture their product, and therefore they will require higher prices to be paid for their product. As a result, the producer may choose to lower supply in order to drive prices up. For example, let's say that Furby are made from plastic and a magical ingredient known as Furbz. If the price of Furbz increases, it will cost the producer more money to create each individual Furby. As a result, the producer will need to charge more for each Ferby in order to make up for the increased price of Furbz. Thus, the supply of Ferbys on the market will decrease. 2) Technological Innovations: Technological innovations usually lead to improved productivity, which means that the prices of production can be decreased. A decrease in the cost of production will allow for supply to increase. An example of this is that if you are manufacturing a Wii and new technology comes along that allows you to make a Wii in half the time and for half the price, the supply of Wiis will increase. 3) Number of Producers: If there are more producers producing a product in a market, the supply will increase. 4) Taxes and Subsidies: If the government is willing to provide tax breaks and subsidies, then the supply of a product will increase. Likewise, if the government imposes new taxes on a product, the supply will most likely decrease. 5) Price Expectations: Producers may choose to change the supply of their products due to their expectations about what prices will be in the future. Let's say an eggnog company distributes eggnog all year round. The company comes to the realization that their consumers will most likely buy more eggnog around the holidays, and therefore they would be able to charge more for their eggnog and still receive business. The company would possible choose to hold on to some of their eggnog and wait to sell it at a later date when they could make more money off of it thereby decreasing supply now and increasing supply in the future.

3. Changes in quantity supplied vs. changes in supply
A change in price results in a change in quantity supplied. Therefore, this results in movement along the supply curve, NOT a shift in the supply curve. This is illustrated below on the left. A change in supply is caused by factors other than price. These factors will cause shifts of the supply curve. This is illustrated below on the right. Changes in the determinants of supply lead to shifts in the supply curve.


 * __E. Introduction to Elasticity of Supply and Demand__**
 * 1) Elasticity is the responsiveness in which the supply and demand curve will change. A curve that has a high elasticity is susceptible to change. If the curve has a low elasticity, a higher change in measure, such as price level, is needed in order to affect the curve. There are many factors that can affect elasticity. Supply elasticity is affected by price changes. Demand elasticity is affected by the availability of substitutes, amount of income available to spend on the good, and time.
 * 2) [[image:elastic_s.gif caption="elastic_s.gif"]][[image:inelastic_s.gif caption="inelastic_s.gif"]]Supply elasticity- If there is a large change in price, as well as a large change in supply, then the supply graph is considered to be elastic. A large change in price, but small change in supply, the graph is then considered to be inelastic.
 * 3) Elastic Supply Inelastic Supply
 * 4) Demand elasticity- If there is little change in price level, but large change in quantity, then the demand curve is considered to be elastic. An inelastic demand curve would have a large change in price level, but little change in quantity.
 * 5) Availability of substitutes- If a price rises in a product, then the demand will decrease. As a result, consumers will more than likely buy another product of similar fashion, but lower in price. This will then cause a decrease in price level for the first product, and possibly increasing demand for it again. However, not every product can be easily switched over to. One example of an inelastic product is oil. There are very few other options for energy resources other than oil. Consumers can not change what they put in their gas tank over night, so as a result, countries such as Saudi Arabia may charge what ever price they want on oil and the consumers can do very little about it. Products that are necessities have very little price changes as opposed to goods and services, which are relatively elastic.
 * 6) Amount of income available- This is another important factor when determining the elasticity of supply and demand. A simple way to see this is if the price of a product were to go up and a buyer's income were to stay the same, then demand would go down. If a product were to increase proportionately in price with the buyer's income, then demand should not change. On the other hand, if the price of a product were to down, but the buyer's income were to either stay the same or increase, then demand will increase because the buyer's purchasing power has increased.
 * 7) Time- Time is unlimited, yet so important because we have so little of it. Any product can be affected by time. Take for example you only like satellite TV (as opposed to cable), so you pay a monthly fee of $30 for Direct TV. Unfortunately, the only other satellite service is Dish Network, which is actually more expensive (say $50 for example). By paying for Direct TV monthly, the demand for it become inelastic. However, say the person can no longer pay for the service, then he or she will have to cancel the service. As a result, the service of Direct TV becomes elastic over time.
 * 8) [[image:elastic_d.gif caption="elastic_d.gif"]] [[image:inelastic_d.gif caption="inelastic_d.gif"]]

Elastic Demand Inelastic Demand,