Elasticity of Demand

This is a measure of how consumers react to a change in price.

Elastic Demand 

1. Demand that is very sensitive to a ∆ in price, and E > 1.
2. Examples: Soda, Candy, Fur Coat, Steak
3. Not a necessity, and there are substitutes.

Inelastic Demand

1. Demand that is not very sensitive to a ∆ in price, and E < 1. 
2. Examples: Salt, Milk, Insulin, Gas
3. Product is a necessity, there are few substitutes, people will buy no matter what. 

Unitary Elastic

1. Always E = 1.

Problem Set:

The price of Moo iced coffee drink has risen from $1.50 to $1.70 per 500ml container. Sales at your local corner store of "Moo" fall from 500 containers per week to 300 containers per week.

Production Possibility Graph (PPG)

Production Possibility Graph 

1. Shows alternative ways to use resources
2. Each point on the PPG reflects a trade-off
3. Graphs are concave

4 Assumptions that can be made:

1. Fixed technology
2. Fixed resources
3. Full Employment + Productive efficiency
4. Two products are being considered

Productive Efficiency

1. Producing goods at the lowest cost, full employment of resources, allocating resources efficiently
2. Any point on the curve, point needs to be labeled

Allocative Efficiency

1. Combination of the most desired products by society, or those who are in charge of economic decisions.
2. Where do we want to produce on the curve, (more robots or pizzas), where most efficient.

Graphing Examples:

Point A: This point shows that it is not produced efficiently (attainable, inefficiently). 

Point B: This point means that goods are produced efficiently (attainable, efficient).

Point C: This point represents a technological breakthrough (unattainable).

You can watch this video for a brief explanation on how to draw these graphs if you're still unsure.

Unit I - Basic Concepts of Economics

ESSENTIAL KNOWLEDGE FOR ECONOMICS

1. Microeconomics v. Macroeconomics
1. Microeconomics
1. The study of how households and firms make decisions and how they interact in the market.
2. Supply and demand, market structures
2. Macroeconomics
1. The study of the major components of the economy
2. International trade, inflation, wage laws
2. Positive v. Normative Economics
1. Positive
1. Attempt to describe the world as is, very descriptive in nature
2. Normative
1. Claims that attemtps to prescribe how the world should be, very prescriptive in nature
2. Government should raise the minimum wage
3. Wants and Needs
1. Wants are desires
2. Needs are basic requirements for survival
4. Scarcity v. Shortage
1. Scarcity
1. The most fundamental economic problem that society faces
2. Satisfying unlimited wants with limited resources
2. Shortage
1. A situation in which quantity demanded is greater than quantity supply
2. Food item not available, for example

1. Goods
1. Capital Goods
1. The items used in the creation of other goods, such as factory machinery and trucks.
2. Consumer Goods
1. Goods that are intended for final use by the consumer.
2. Services
1. Work that is performed for someone.
3. Factors of Production
1. Land
2. Labor
3. Entrepreneurship (Risk-taking, Innovation)
4. Capital
1. Physical
1. Human-made objects used to create other goods, (e.g. buildings and tools).
1. Human
1. The knowledge and skills a worker gains through education and experience.

1. Opportunity Cost
1. The most desirable alternative given up by making a decision.

Demand and Supply

Demand and Supply

DEMAND

Demand - quantities people are willing and able to buy at various prices.

The Law of Demand -there is an inverse relationship between price and quantity demanded.

What causes a "change in quantity demanded"? (∆QD) - ∆ in price.

What causes a "change in demand"? (∆D) 

1. ∆ in buyers' taste (advertising)
2. ∆ in income (normal goods + inferior goods)
3. ∆ in price of related goods
4. ∆ in expectations
5. ∆ in buyers (population)

SUPPLY 

Supply - the quantities that producers or sellers are willing and able to produce or sell at various prices.

The Law of Supply - there is a direct relationship between price and quantity supplied.

What causes a "change in quantity supplied"? (∆QS) - ∆ in price.

What causes a "change in supply"? (∆S)

1. ∆ in technology
2. ∆ in weather
3. ∆ in resource or factor prices
4. ∆ in taxes or subsidies
5. ∆ in number of suppliers
6. ∆ in expectations

Let's look at an example graph.

Apple Computers vs. Microsoft Computers

Before Apple's new operating system:

What happened to the second graph? Why is there a new line labeled "D1"? How do you determine what is changing? Well, popularity has nothing to do with supply, does it? If Pepsi is increasing in popularity, then this is a change in D, or demand, also expressed as "∆D". The Demand line has moved to the right, meaning that it is higher than it used to be. Anything that increases shifts to the right, and anything that shifts to the left, decreases. Very easy.

Practice Questions: 

1. Considering that Apple Inc. and their computers have experienced dramatic errors since their new operating system has launched. The popularity of Mac and all Apple computer products has dropped, and people started buying in more Microsoft. What could be a determinant and the movement?

Factor:  ∆ in buyers' taste                                                                       Movement: increasing

If you're still not sure about the graphs, terminology or how to draw a graph, I'd recommend you watch this video: