Trade-offs force society to make choices when answering the following three fundamental questions:
1.What goods and services will be produced? 2.How will the goods and services be produced? 3.Who will receive the goods and services
To develop a model, economists generally follow these steps:
a. Decide on the assumptions to use in developing the model. B. Formulate a testable hypothesis. C. Use economic data to test the hypothesis.
D. Revise the model if it fails to explain well the economic data. E. Retain the revised model to help answer similar economic questions in the
Positive analysis: Analysis concerned with what is. Normative analysis: Analysis concerned with what ought to be.
Factors of production are divided into four broad categories:
Labor includes all types of work, from the part-time labor of teenagers working at McDonald’s to the work of top managers in large corporations.
Capital refers to physical capital, such as computers and machine tools that is used to produce other goods.
Natural resources include land, water, oil, iron ore, and other raw materials (or “gifts of nature”) that are used in producing goods.
An entrepreneur is someone who operates a business. Entrepreneurial ability is the ability to bring together the other factors of production to
successfully produce and sell goods and services.
Perfectly Competitive Market: A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3)
no barriers to new firms entering the market.
Law of demand: The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will
increase, and when the price of a product rises, the quantity demanded of the product will decrease.
The demand curve relates price and quantity demanded. Linear demand has the form: (Q=A-B.P) A is the intercept and B is the slope. Usually
written in inverse form (P=a-b.Q). Where a=A/B and b=1/B
A is the “choke price”: the price above which demand falls to zero. B is the slope: impact of quantity demanded on price
Law of supply: The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in
price cause decreases in the quantity supplied.
The supply curve relates price and quantity supplied. Linear supply has the form: (Q=D.P-C) C is the intercept and D is the slope. Usually written
in inverse form P=c + d.Q. Where d=1/D and c=C/D. C is the “choke price”: the price below which sellers reduce their supply to zero. D is the