Business Cycles

• 1 cycle occurs from trough to trough
• Cycle avg. 5 - 7 years
• Recessions last approx. 14 months
• Peaks and troughs meaningless b/c we never know we are in one until its over
• Trough = end of recession
• Recession lose >10% of real GDP -> Depression

Peak - Highest point of real GDP; shows max amount of spending and min unemployment; inflation is a problem.

Expansion (recovery) - Real GDP up b/c of increase in spending and decrease in unemployment.

Contraction/Recession - Real GDP down for 6 months; unemployment up & spending down

Trough - Lowest point of Real GDP: max unemployment and min spending

Supply and Demand

Demand

Demand is the quantities that people are willing and able to buy at various prices

Law of Demand - Inverse relationship between price and quality demanded

• Change in price changes the change in quantity demanded

Causes of change in demand

• Change in...
• buyers' taste
• # of buyers
• income
• Inferior goods - increase in income -> decrease or no change in demand
• Informal goods - increase in income -> increase in demand
• price of related goods
• Complementary goods - goods that pair well
• Substitute goods - replacement for similar goods
• expectations

Supply

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

Law of Supply - Direct relationship between $ and quantity supplied

• Change in price causes a change in quantity supplied.

Causes of change in supply

• Change in...
• weather
• tech
• cost of production
• # of sellers
• taxes/subsidies
• expectations

Why the curve moves left

• Supply down
• Increase in cost of production
• Technology down
• Taxes up
• Subsidies down
• # of sellers down
• Weather conditions are worse

Why the curve moves right

• Supply up
• Cost of production down
• Technology up
• Taxes down
• Subsidies up
• # of sellers up
• Weather conditions are good

Elasticity of Demand

• Elasticity of Demand - Measure of consumers' reaction to price changes
• Elastic - Sensitive demand from price change; E > 1; Not a necessity, some substitutes
• Ex: sodas, steaks, candy, fur coats 
• Inelasic - Demand not vulnerable to price change; E < 1; necessary product; few to no substitutes; always bought
• Ex: Insulin/Medicine, Salt, Gas, Milk
• Unit/ary - E = 1

Calculation

1. Quantity - (New Q - Old Q) / Old Q
2. Price - (New $ - Old $) / Old $
3. PED - % change Q dem./ % change $ = |PED|

Production Possibilities Curve

B, D, C - Attainable and efficient
A - Attainable yet inefficient (underutilization)
X - Unattainable in current state

Also known as the PPC, PPF, or PPG

The PPC shows alt. ways of resource usage

4 Assumptions

1. 2 goods
2. Fixed resources
3. Fixed technology
4. Full employment of resources

Efficiency

• Efficiency - Max usage of resources; little wasted
• Allocative - Products produced most desired by society
• Productive - Products produced w/ least cost; any point on curve
• Underutilization - Using fewer resources than economy's capability

Movements of the PPC

1. Inside PPC - when resources are unemployed
2. Along PPC - on curve
3. Shifts of PPC
• Increase - graph moves ->
• Decrease - graph moves <-

Causes of Shift

1. Tech change (Out)
2. Resource change (Out)
3. Economic growth
4. Natural disasters/war/famine (In)
5. Labor change (In)
6. Increase in education & training (Human capital) (In)

Unit 1 Miscellaneous

Macro vs. Micro

• Macroeconomics - Study of economics as whole {International trade, Supply and Demand, and minimum wage}
• Microeconomics - Study of individual/specific units of economy {Market struc., Business org.}

Positive vs. Normative Economics

• Positive - Tries to describe current world, descriptive; "What is...", Collects and presents facts
• Normative - Tries to prescribe expectations of the world; represented by "ought" and "should"

Needs vs. Wants

• Needs - Basic requirements for survival

1. Food
2. Water
3. Shelter
4. Clothing

• Wants - Desires of citizens

Goods vs. Services

• Goods - Tangible commodities

• Capital goods - Materials for other goods (trucks, machinery, factories) 
• Consumer - Final product to be used by customer
• Services - Work performed for someone

Scarcity vs. Shortage

• Scarcity - Fundamental economic problem society faces; how to satisfy unlimited wants w/ resources.
• Shortage - Quantity demanded > Quantity of supply

4 Factors of Production

1. Land 
2. Labor
3. Capital
• Physical - Tools, buildings, factories, machinery
• Human - Skills, abilities, intellect, talent
4. Entrepreneurship - (Req innovation and risk taking)

Trade-offs - Alt. we give up whenever we choose something over another

Opportunity cost - Next best alt. what to give up
Total revenue - Total $ a firm receives from selling
Fixed cost - Cost resistant to change no matter the amount produced

• Ex: mortgage, rent, salary, insurance

Variable cost - cost rises/falls based on # produced. Ex: Bills

Marginal cost - cost of producing one more unit.