Definitions and Diagrams

Section 1 and 2

Section 1Introduction to Economics

Macroeconomics

The study of economy wide activity.

For example: A study on the the unemployment in Uganda.

Microeconomics

The study of individual Markets

For example: The supply of Cadbury Chocolate in Rokko Island supermarkets.

Normative Economics

Economics that works to alter the state of the world and its economic welfare; the opposite of positive economics

For example: Studying ways to cut the unemployment rate in Australia.

Positive Economics

Statement of fact; can be proven or disproven; examine how an economy functions

For example: There was a 5% increase in demand in Japan from 2009 to the 2010 fiscal year for Coca Cola.

Scarcity

A lack of resources in terms of the consumer demand.

For example: There is a scarcity of water in the Democratic Republic of Congo.

Marginal Utility

The satisfaction a consumer gains from consuming one extra unit

For example: If someone eats a chocolate bar and are happy about eating it, they might not be as happy to eat a second chocolate bar.

Market Economy

An economy where supply and demand dictate how resources are allocated; individuals dictate the allocation of resources rather than the government

For example: The United States runs a system that has many similarities to a market economy.

Mixed Economy

An economy in which the allocation of resources are dictated by both individuals and the government

For example: New Zealand runs a system with government ownership and individual ownership coincide.

Command Economy

An economy where the government dictates the allocation of resources

For example: The Soviet Union was a system similar to that of a command economy as the state controlled the allocation of resources.

Production Possibilities Curve

A PPC is an economic model that displays the total potential output; shows economic growth and how it can be achieved; shows opportunity cost

PPC: Figure 1

AB

Pencils

Pens

0

Section 2Microeconomics

Market

A market is where a buyer and seller come into contact over a product or service

For example: Pearl dealers can meet buyers in Hong Kong over the sale of pearls

Demand

The willingness and the ability to a buy a good or service during a specific amount of time

For example: There was an increased demand for iPhones in 2010.

D1

D2

An Increase in the Demand of Snuggies

Q1 Q2

P1

0

Supply

The amount and the availability of a certain product or service to supply during a certain amount of time

For example: there is a constant supply of gas in Japan.

Price

Q1Q2

P1

S1S2

0

Quantity of Military Goods

The Supply of Weapons in Afghanistan

Law of Demand

As the price of a product or service decreases, the demand for the product or service will increase and vice versa.

For example: If the price of Meiji chocolate decreases from 110 yen to 100 yen, its demand will decease.

Law of Supply

As the price of a product or service falls, so will its supply and vice versa.

For example: If Meiji’s chocolate price falls 10 yen to 100 yen, then so will its supply.

Maximum Price

A maximum price is a price ceiling which imposes that a good or service cannot be sold above that price.

For example: If the government sets a price ceiling on oil at $5.10 a gallon, it cannot be sold above that price.

Minimum Price

A minimum price or a price floor dictates that a good or service cannot be sold at below that price.

For example: If ice cream is has a price floor of $1.30 then the ice cream cannot be sold below that price.

Shortages and Surpluses

PrIce

P2

P1

P3

D

S

Quantity

Surplus

Market Clearing Price

Shortage

0

Elastic

A good or service that is responsive to change

For example: Fish at a market are elastic depending on the amount caught each day.

Inelastic

A good or service that is not response to change

For example: There is only one Oprah Winfrey and she is always going to be Oprah. She is unique.

Price Elasticity of Demand

It is a measure of the responsiveness of a good or service’s quantity demanded

For example: The PED of a Hummer will be different to that of Blue Marlin.

Cross elasticity of Demand

XED measures the responsiveness of one good or service after a change in price of another good or service

For example: Meiji chocolate might change in price after Cadbury chocolate changes in price.

Income elasticity of demand

Income elasticity of demand measures the responsiveness of the demand of a good or service in response to a change in income

For example: YED would measure the demand for Porche’s following a drop in average income earnings.

Price Elasticity of Supply

PES measures the responsiveness of the good or service supplied given a change in the price of that good or service

For example: PES would measure the supply demanded of a Porche after its price increased.

Complimentary Goods

A complimentary good is a good or service that if a related product experiences an increase in demand, the complimentary good will also experience an increase in demand and vice versa

For example: Ketchup and fries are complimentary goods.

Supplementary goods

Supplementary goods are good or services that if a supplementary good experiences an increase in demand, this good or service will experience a fall in demand

For example: Coke and Pepsi are supplementary goods.

Indirect Tax

An indirect tax is a sales tax; it is a tax on the bearer of the consumer of the product or service

For example: There is an indirect tax on chocolate in New Zealand.

Tax Incidence

Tax incidence is a tax that is shared amongst a group of consumers in a market rather than an individual; dependant of elasticity

For example: A tax incidence would be set on on Meiji as they are the producers of the chocolate.

Theory of the Firm

Costs

– Fixed costs are costs of production that do not change with the level of output. They will be the same for the one or any other number of units.

• Cost of rent, electricity – Variable costs are costs are costs of production that vary with

the level of output.

• Cost of goods that are produced– Total costs are the total costs of producing a certain level of

output–fixed costs plus variable costs.

• Combination of rent, electricity and goods produced

Costs– Average cost is the average (total) cost of production per unit.

It is calculated by dividing the total cost by the quantity produced

• The total cost of producing chocolate is $1000/1000 bars produced=$1 per bar of chocolate

– Marginal cost is the additional cost of producing an additional unit of output.

• The cost of producing an extra bar of chocolate could change from $1 to $1.02 depending on various factors

Total Cost, Fixed Costs, and Variable Costs

Output

Cost

TFC

TVCTC

0

The Short Run

– The short run is the period of time in which at least one factor of production is fixed• For Meiji chocolate this could mean that they

have to make chocolate using the same machines

The Long Run

- The long run is the period of time in which all factors of production are variable. • For Meiji chocolate this means that everything

can change: technology, staffing, location etc.

Revenues– Total revenue is the aggregate revenue gained by a firm from

the scale of a particular quantity of output (equal to price times quantity sold). • The total amount of money that Meiji chocolate made eg. 50

sold * $3 a bar =r TR of $150– Average revenue is total revenue received divided by the

number of units sold. Usually, price is equal to average revenue.• $150 TR / 50 bars sold = $3 a bar

– Marginal revenue is the extra revenue gained from selling an additional unit of a good or service.• Meiji could make an extra $2.80 if they sell an extra bar of

chocolate

Profits– Normal profits are the amount of revenue needed to cover the total

costs of production, including the opportunity costs.

• Meiji chocolate might needs $1000 dollars to cover production costs

– Abnormal profits are any level of profit that is greater than the required to ensure that a firm will continue to supply its existing good or service. (It is an amount of revenue greater than the total costs of production, including opportunity costs.)

• This is anything over that $1000 dollars needed– The profit-maximizing level of output is the level of output where

marginal revenue is equal to marginal cost.• When Meiji chocolate produces at a level where its marginal revenue is equal

to that of its marginal cost

Normal Profit

Q

PCost

OutputMR

ACMC

D=AR

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