Economics 101 Notes (1)

Bland IntroductionBy: Chris Wilson

Production Possibilities Curve/Frontier

● The curve/frontier represents the potential output of the presented entity.

● Datapoints inside the production-possibilities curve (PPC) represent an under-utilizing of resources.

● Datapoints outside the PPC can’t occur, because they use more resources than are present.

Constant Cost Model

● The curve/frontier represents the idealistic potential output of the presented entity.

● By using a linear model, we can make better comparisons (rather than dealing with “more complicated math”).

● Datapoints (0,9) and (9,0) are possible on the ideal model.

Comparisons

● The U.S. has the absolute advantage in the production of guns because they can produce absolutely more guns.

● Repeat: butter.● However, absolute

advantage shouldn’t be used to determine production.

Figuring Out the Comparative Advantage (5 steps)● Comparative advantage

means that one entity can produce something at a lower marginal opportunity production cost than another entity.

● Make a table.● Go to the extremes (0,x) and

(x,0).● Fill out the table.● Understand the table.

{or guns!}

Production

● Specialization = good.● Trade to accommodate for

other resource.● No specialization = bad.

Production Possibilities Curve/Frontier

● When determining the “trade” aspects, the number needs to fall between the production ratios (in this example, the green circles represent these: 1 and 10).

{Let begin scary visual representations}

{End scary visual representations}

● A non-linear supply & demand curve (equilibrium of (4,6)) changing to a new curve by shifting the quantity rightwards.

● Note change in supply curve’s location changes the passing-through of the demand curve.

● Changing the price doesn’t change the demand, but rather changes the quantity demanded.

● Changing the demand doesn’t change the supply, but rather changes the supply demanded.

● The income effect… budget doesn’t change, but widget price does. As price falls, quantity demanded rises; as price rises, quantity demanded falls.

● The substitution effect… as the relative price rises for Product A, the quantity demanded falls.

● As the relative price falls for Product A, the quantity demanded rises.

● The diminishing marginal utility… you are willing to purchase more and more of a good/service only if the price goes down.

The determinants of demand are:● Number of consumers● Income normal goods● Income inferior goods● Preferences● Prices of related products

(substitutes)● Prices of related products

(complements)● Expected future prices by

consumer● Expected future income

by consumer{C

ompe

ting

Cola}

“Understand these concepts, combat these concepts, and relearn these concepts.”

--Brunette and Ruff--