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Chapter 1

This document introduces key concepts in economics including scarcity, opportunity cost, production possibilities frontier, demand and supply curves, equilibrium price and quantity, and market surpluses and shortages. It explains that economics studies how people allocate scarce resources to satisfy unlimited wants. The production possibilities frontier shows the maximum amounts of two goods that can be produced with available resources. Opportunity cost is the best alternative forgone when producing something. Demand and supply curves demonstrate the relationship between price and quantity, and how equilibrium is reached through market forces.

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Hannah Lane Subong
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72 views

Chapter 1

This document introduces key concepts in economics including scarcity, opportunity cost, production possibilities frontier, demand and supply curves, equilibrium price and quantity, and market surpluses and shortages. It explains that economics studies how people allocate scarce resources to satisfy unlimited wants. The production possibilities frontier shows the maximum amounts of two goods that can be produced with available resources. Opportunity cost is the best alternative forgone when producing something. Demand and supply curves demonstrate the relationship between price and quantity, and how equilibrium is reached through market forces.

Uploaded by

Hannah Lane Subong
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Introduction to Economics

➢ the study of how society manages its scarce resources

◼ Wants or desires are virtually unlimited while the resources available to satisfy these wants are scarce
▪ Scarcity- the limited nature of society’s resources
◼ Economics studies how people use their scarce resources in an attempt to satisfy their unlimited
wants.
◼ Resources are always scarce;
▪ Not only scarce, but also have alternative uses.
◼ Optimum allocation is required;
▪ It is about making of choices or decision-making.

Production possibilities frontier


→ Graph which shows maximum amounts of two different goods that can be possibly produced during
any time using a scarce resource
→ Assumptions:
• All available resources are used fully
• All available resources are used efficiently
• Quality and quantity of available resources are not changing
• Technology is not changing
• Only two goods can be produced with available resources and technology
Opportunity Cost
→ Best alternative that is forgone to produce or consume something else

➢ Law of demand: states that the quantity demanded of a good falls when the price of the good rises,
other things equal
• Quantity demanded- is the amount of the good that buyers are willing and able to purchase
• Demand schedule- is a table that shows the relationship between the price of a good and the
quantity demanded
Changes in Quantity Demanded
- Movement along the demand curve;
- Caused by a change in the price of the product
Shifts in the Demand Curve
- A shift in the demand curve, either to the left or right
- Caused by any change that alters the quantity demanded at every price
- Is affected by:
▪ Consumer income
▪ Prices of related goods
▪ Tastes
▪ Expectations
▪ Number of buyers
- An increase in income increases demand
- A decrease in income decreases demand
➢ Law of Supply: the claim that the quantity supplied of a good rises when the price of the good rises,
other things equal
• Quantity supplied- is the amount that sellers are willing and able to sell
• Supply schedule- is a table that shows the relationship between the price of a good and the
quantity supplied
Changes in Quantity Supplied
- Movement along the supply curve
- Caused by a change in anything that alters the quantity supplied at each price
Shifts in the Supply Curve
- A shift in the supply curve, either to the left or right
- Caused by a change in a determinant other than price
- Is affected by:
▪ Technology
▪ Prices of resources used
▪ Prices of other products
▪ Government taxes or subsidies
▪ Expectations
▪ Number of sellers

➢ Refers to a situation in which the price has reached the level where quantity supplied equals
quantity demanded
Equilibrium price
→ The price that balances quantity supplied and quantity demanded
→ On a graph, it is the price at which the supply and demand curves intersect
Equilibrium quantity
→ The quantity supplied and the quantity demanded at the equilibrium price
→ On a graph, it is the quantity at which the supply and demand curves intersect

➢ Price > equilibrium price


➢ Quantity supplied > quantity demanded
➢ There is excess supply or a surplus
➢ Suppliers will lower the price to increase sales, thereby moving toward equilibrium

➢ Price < equilibrium price


➢ Quantity demanded > quantity supplied
➢ There is excess demand or shortage
➢ Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward
equilibrium

1. Decide whether the event shifts the supply or demand curve (or perhaps both).
2. Decide in which direction the curve shifts.
3. Use the supply-and-demand diagram to see how the shift changes the equilibrium price and
quantity.
◼ Shifts in curves versus Movements along curves
▪ A shift in the supply curve is called a change in supply.
▪ A movement along a fixed supply curve is called a change in quantity supplied.
▪ A shift in the demand curve is called a change in demand.
▪ A movement along a fixed demand curve is called a change in quantity demanded.

No change in supply An increase in supply A decrease in supply


No change in P same P down P up
demand Q same Q up Q down
An increase in P up P ambiguous P up
demand Q up Q up Q ambiguous
A decrease in P down P down P ambiguous
demand Q down Q ambiguous Q down

➢ Ration away shortages and surpluses, thus marketplace is very efficient as a means of allocation
and distribution, but may not be equitable in distribution of goods and services.

➢ Market is unlikely to provide enough public goods and services;


• Spillovers
• Inequities
• Market power
• Instability

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