Unit 1 notes 01/06/16

Factors of Production

-The resources required to produce goods and services

1. Land- natural resources
2. Labor- work force
3. Capital- a.) Human Capital: skills b.)Physical Capital: tools, machinery, factories
4. Entrepreneurship- innovative and a risk taker

Trade-offs

- alternatives that we give up when we choose one course of action over another

Opportunity Cost

-Next best alternative

Production Possibility Graph (PPG)
-shows alternate ways to use an economics resources
PPF (frontier)
PPC (curve)

4 Assumptions of PPG

1. Two goods
2. Fixed resources (land, labor, capital, entrepreneurship)
3. Fixed technology
4. Full employment of resources (using all resources equally)

Efficiency -using resources in such a way to maximize production of goods and services

Auecative Efficiency- products being produced are one's MOST desired by society

Productive Efficiency-products are being produced in the least costly way, this in at any point on the Production Possibility Curve

Under utilization- Using fewer resources than an economy is capable of using

X: Inside the curve

• attainable but inefficient 
• under utilization

A, B, C: attainable and inefficient

Y: unattainable 

•  advantages in technology 

3 Types of Movement that occur withing a PPG 

1.  Inside PPC- occurs when resources are unemployed r underemployed (no productive efficiency)
2. Along PPC- movement within curve 
3. Shifts of PPC- curve can move 

What causes the PPC/PPF to shift? 

1.  advance in technology (Y)
2. change in technology
3. change in labor force 
4. economic growth
5. natural disaster/ war / famine 
6. more education and training 

Elasticity of Demand

- A measure of how consumers react to change in price 

3 Types: 

1. Elastic Demand- demand that is very sensitive to change in price. E>1 (always)
2. Inelastic- not very sensitive to change in price.  It is a necessity and people will buy no matter what, there are few or n substitutes. E<1
3. Unitary Elastic Demand- E=1

01/13/16 Notes

Elastics have substitutes. Ex:

• soda, steak, candy, fur coats

Inelastic have no or few substitutes. Ex:

• gas, salt, insulin/ medicine, milk, toothpaste

Price Elasticity Demand (PED)

Step 1. Quantity: New Quantity - Old Quantity

Old Quantity

Step 2. Price: New Price - Old Price

Old Price

Step 3. PED: Percentage Change in Quantity Demanded

Percentage Price in Change

Fixed Cost- a cost hat does not change no matter how much is produced

Ex: Rent, insurance, mortgage, salary

Variable Cost- a cost that rises or falls depending on how much is produced

Marginal Cost- cost of producing one more unit of a good

Ex: late fee