Economics Basics

Supply and Demand

Factors Affecting Demand

• Price
• Personal Income
• Price of Related Goods (Substitutes and Complements)
• Tastes
• Expectations
• Technology

Factors Affecting Supply

• Price of Good/Service
• Price of Production Factors
• Price of Related Goods
• Technology
• Expectations

Percentage Change Calculation

Percentage Increase/Decrease = (New Value - Old Value) / Old Value * 100%

Price Elasticity of Demand

Price Elasticity of Demand = (% Change in Demand) / (% Change in Price)

• Always negative.
• Less than 1 = Inelastic
• More than 1 = Elastic

Price Elasticity of Supply

Price Elasticity of Supply = (% Change in Supply) / (% Change in Price)

• Less than 1 = Inelastic
• More than 1 = Elastic

Income Elasticity of Demand

Income Elasticity of Demand = (% Change in Demand) / (% Change in Income)

• Less than 1 = Inelastic
• More than 1 = Elastic

A Just Price

When the market needs goods, traders will supply them if there is a benefit. Profit shouldn't be excessive, with no chance for deception, and the buyer must accept the price.

Production Possibilities Frontier

Example: Increasing the production of technology has an opportunity cost, such as reduced agricultural production.

Opportunity Cost of 1 Table = Time per Table / Time per Chair

Opportunity Cost of 1 Chair = Time per Chair / Time per Table

Types of Goods

Private Goods

Excludable and Rival (e.g., car, house)

Shared Resources

Non-Excludable and Rival (e.g., gas, water)

Natural Monopolies

Excludable and Non-Rival (e.g., parking, roads)

Public Goods

Non-Excludable and Non-Rival (e.g., national defense, public education)

Fiscal Policy

Fiscal policy involves spending and taxes:

1. Stimulate Economy: Reduce taxes, increase spending.
2. Slow Down Economy: Reduce spending, increase taxes.

Comparative Advantage

Comparative advantage is the ability of a party to produce a good or service at a lower opportunity cost than another.

• Normal goods have less elastic demand than luxury goods.
• Goods with substitutes have more elastic prices than those without.
• When everyone sells shares of a stock with bad profits, the price goes down.

Perfectly Competitive Market

A perfectly competitive market has many buyers and sellers of identical goods, so each one's market power is insignificant, and there are no barriers to entry for competitors. Businesses produce and sell to maximize profit. Buyers purchase because the value of goods exceeds the price. All transactions are mutually beneficial. All buyers and sellers are price takers, accepting the market price.

Market Failure

Market failure occurs when normal supply and demand forces don't apply. Positive or negative externalities (outside forces) disrupt the equation.

Solutions to Externalities

1. Private Solutions: Moral codes, social sanctions, charitable organizations, private negotiations.
2. Public Solutions: Regulations, taxes, and subsidies.