BackFoundations of Economics: Key Concepts, Decision-Making, and Market Dynamics
Study Guide - Smart Notes
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Introduction to Economics
Definition and Scope
Economics studies how people and society allocate scarce resources and satisfy unlimited wants. It examines the choices individuals, businesses, and governments make to manage resources efficiently.
Scarcity: The fundamental economic problem of having limited resources to meet unlimited wants.
Resources: Examples include land, labor, capital, and entrepreneurship.
Economic agents: Individuals, firms, and governments involved in economic activities.
Additional info: Economics is divided into microeconomics (individual and firm behavior) and macroeconomics (aggregate economic phenomena).
Types of Economic Systems
Market Economy
In a market economy, people and businesses decide what to make and buy, and prices are determined by supply and demand.
Decentralized decision-making.
Prices act as signals for resource allocation.
Examples: United States, most developed countries.
Command Economy
In a command economy, the government decides what to make, how to make it, and who receives the goods and services.
Centralized decision-making.
Government sets prices and production targets.
Examples: North Korea, former Soviet Union.
Traditional Economy
A traditional economy bases decisions on customs and traditions. People do things the way they always have.
Decisions are made according to historical precedent.
Often found in rural or indigenous communities.
Calculating Opportunity Cost
Definition and Formula
Opportunity cost is the value of the next best alternative foregone when making a decision.
Formula:
Alternatively, opportunity cost can be what is sacrificed when choosing one option over another.
Identify all options and what is given up.
Example: If you spend time studying instead of working, the opportunity cost is the wage you would have earned.
Shifts in Demand and Supply Curves
What Shifts a Demand Curve?
The demand curve shows the relationship between the price of a good and the quantity demanded. Several factors can shift the demand curve:
Number of buyers: More buyers increase demand.
Price: Changes in the price of related goods (substitutes and complements).
Income: Higher income can increase demand for normal goods.
Other factors: Tastes, expectations.
Direction of shift: Increase in demand shifts the curve to the right; decrease shifts it to the left.
What Shifts a Supply Curve?
The supply curve shows the relationship between the price of a good and the quantity supplied. Factors that shift the supply curve include:
Number of sellers: More sellers increase supply.
Input prices: Lower input prices increase supply.
Technology: Improvements increase supply.
Direction of shift: Increase in supply shifts the curve to the right; decrease shifts it to the left.
Summary Table: Factors Affecting Demand and Supply Curves
Curve | Factors | Increase (Shift Right) | Decrease (Shift Left) |
|---|---|---|---|
Demand | Number of buyers, price, income, tastes, expectations | More buyers, higher income (for normal goods), positive expectations | Fewer buyers, lower income, negative expectations |
Supply | Number of sellers, input prices, technology | More sellers, lower input prices, improved technology | Fewer sellers, higher input prices, outdated technology |
Additional info: Shifts in curves are different from movements along the curve, which are caused by changes in the good's own price.
