Factors of Production
Resources
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Land
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Labor
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Raw materials in natural state
Does not include crops and farms.
Human effort.
The work force.
Capital
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
Items produced by humans used to produce goods and services. For
profit.
 Not just money: Happer is used by a roofer to do a service.
Entrepreneurship
 Ingenuity and risk-taking ability used to produce (to make for profit)
 Hard to quantify.
Productivity:
Productivity: The efficient use of scarce resources.
Productive resources: Scarce resources
Production possibilities: Graphs to show trade-offs and opportunity costs.
B: Best possible Guns
A: Underproduction
C: Best possible Butter
D: Middle of both
X: Overproduction: Not possible without additional resources
Microeconomics: Affect local economy (small business) individual choices
Macroeconomics: Choices of society/government
 Monetary policies
 Increase/Decrease of interest rates
 Fiscal Policy (taxation)
 Foreign Policy
Economic Systems (Macro)
Systems
Economic Systems: The way a nation uses its resources to satisfy the wants of the
people.
 Traditional Economy
 Past history. Third world. Shrinking in popularity.
 Dad was a fisherman so you become a fisherman.
 Command Economy
 Government controls and dictates actions
 Government says that you will be a fisherman.
 Market Economy
 Ruled by the people
 You want to be a fisherman so you become a fisherman.
 Goal: Individual freedom
 Ownership of factors of production
 Central Planning low
 Social Programs low
 Taxes low
 Incentives
 Lacks concern for all
 Poverty and unemployment
 Mixed Economy
 A combination of both Command and Market
Types of Governments

Democratic Socialism
 Constitutional frame
 Government controls selected areas
 Individual choices with gov’t guidance
 Government owns major factors of production
 More equal distribution of benefits
 Central planning
 Social programs exist
 Taxes high

 Most European countries
Authoritarian Socialism
 “Communism” (Failed in every case)
 Equality and public ownership
 Factors are ALL owned by gov’t
 Complete central planning
 Awesome social programs
 Taxes high
 Little personal economic freedom
 Needs are all satisfied
 Mass transportation
 Free education
 Channeling careers
 No business system
Globalization: Growing integrations of the global economy. Counter reliance.
Market Structures
Perfectly Competitive Market:
 Many buyers and sellers
 All firms sell identical goods
 Corn is corn.
 Price takers (only one)
 They must take the price set at market
 Firms and easily enter and leave
 You can be a farmer tomorrow. No entity prevents your entry.
Monopolistic Market:
 Only one seller and no substitute
 High barrier of entry
 Price seeker
 Can’t patent an idea, can only patent a product
 Types
 Natural
 Necessary for some infrastructure
 Sewer/water
 Cable/Telephone
 Technology
 New invention
 Windows
 Drugs (Before generic)
 Geographical
 Small town drug store
 No competition b/c of area
Monopolistic Competitive Market:
 Many buyers and many sellers
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
Firms in the market produce slightly different products
Easy entry and exit
Price seeker
 Compete for best price
 Examples
 Shoes
 Cereal
 Computer software
Oligopolistic Market
 Select few, very large sectors dominate the market
 Similar or identical products
 Price Seeker
 Examples
 Coke/pepsi
 Comcast/dish
 Verizon/T-mobile/Sprint/AT&T
 Airlines
 Fast Food
Key Terms
Collusion: Together competitors fix the price to make higher profits.
Fare Wars: Drop price unless the intent is to overcome all competition and buy out
failing firms.
Loss Leaders: Really low prices to lure you into the store to buy more stuff from
them.
Antitrust: Restrict legally formed monopolies
 Sherman Antitrust act
 1st significant law against monopolies.
Supply and Demand
Market: Where buyers and sellers come together
Good: Something tangible that brings utility (use)
Service: Intangible thing that brings utility
Price: Agreed upon amount set by supply and demand
Demand
Demand: The amount of a good that a consumer is willing and able to buy at various
prices at a given time.
Law of Demand:
Price Up = Quanitity Demanded down
Price Down = Quantity Demanded Up
(Quantity Demanded determined by PRICE. Demand is not.)
Change in Demand: Entire demand girl shifts (Right when increase supply or
demand)
Non-Price Determinants of Demand (Factors which affect amount perchased)
1. Consumer Income
a. Availability of extra money
b. Normal goods (going out to eat)(buying new clothes) (go to movies)
c. Inferior goods (generic products) (lottery tickets) (spam)
2. Consumer taste
.
a.
3.
.
a.
b.
i.
c.
4.
.
a.
b.
c.
5.
.
a.
6.
.
What they want
CO2 news article increases demand
Complementary products
Have one, need the other
Changes the price of related goods
Printers & ink
Printer price down = ink demand increases
Hot dogs and hot dog buns
Substitute products
Interchangeable products. Consumer will buy the cheaper.
Changes price of related goods
Mayo/Miracle Whip
Coke and Pepsi
Change in expectations
Expect price to drop -> will wait and opposite
Disney after 9/11
Change in demographics
Changes demand by increasing the people who need things.
Terms
Utility: You buy things because they are useful
Marginal Utility: Amount of utility added when you add another product
Diminishing marginal utility: One more thing doesn’t add anything/makes it worse
(Buy one get one free)
Elasticity of Demand
Elasticity of Demand: Measured by the slopes of graphs
Elastic goods: Small change in price produces relatively large change in QD
Price change % > 1
 Goods with many substitutes
 Shoes

Jeans
Inelastic goods: Small price change produces very small QD change.
Price change % < 1
 Lightbulbs
 Screws
 Cables
 Gasolene
Supply
Supply: The quantity of a product that a firm is willing and able to sell at different
prices.
Price down = Quantity Supplied down
Non-Price Determinants of Supply:
1. Technology
2. Productivity
a.
Incentives
3. Cost of Production/Inputs
.
Costs more to produce more
a.
Gas
b.
Wage/labor
c.
Capital/equipment
d.
i.
Diminishing Marginal Production
The point where having more people doesn’t help.
4. Number of Sellers
.
When more sellers want to produce supply increases
5. Taxes and subsidies
.
Increased taxes decrease production
a.
Fewer workers and fewer supplies
6. Expectation
.
Expect prices to change down the road
Supply and Demand Together! Woah!
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Equilibrium
 The goal of everyone
 Supply = demand
Shortage
 Demand is high, supply low
 Not enough production means prices are pressured upwards.
Surplus
 Excess when demand is low and supply is high.
 Forced to liquidate to get to equilibrium
Price Floors
 Government protectionism set above market equilibrium

 Minimum price set
Price Ceilings
 Maximum price set by government below market equilibrium
GDP National Income Accounting
Circular Flow
Components:

Firms
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
Produce goods and services (businesses)
Households
 Consumers, laborers, investors, savers
 2/3
Product Market
 Where we go to purchase goods
 Target
Factory Markets
 Where households go to sell to firms the factors of production
Financial markets
 Allows investing and saving (banks)
Government
 Collects taxes and provides goods and services
GDP: Gross Domestic Product
GDP: Total market value of all final goods and services produced annually in a
country.
 Price of goods x quantity of goods
 Intermediate goods don’t count
 What goes into making a product or good
 Illegal services
 Legal paid in cash/ not recorded
 Used
 Traded outside of traditional market setting
 Stock transactions
 Government payments
 “Transfer payments” like social security
 BUT gov’t spending is taken into GDP
GNP: Gross National Product. Final products produced by US citizens/companies no
matter the location.
GNP = C + I + G + (x-m)
Consumption + Investment by business + Government purchases + (Exports Imports)
Real GDP: Calculated with inflation
Real GDP = (GDP / Deflator) x 100
NNP(GDP - Depreciation) = GDP - CCA
Inflation Rate = Deflation - 100
Business Cycle
Business Cycle: The ups and downs of real GDP
Components:
 Recession: Real GDP stagnates or drops 6+ months
 Expansion: GDP growing
 Trend Line: Predictor line where economy will be
 Depression: Unemployment 25% or higher, factories not working at capacity,
acute shortages.
 Peak: Point where GDP stops growing.
 Trough: Point where recession stops and GDP starts growing.
Unemployment
Unemployed: Willing and able and actively seeking work.
Unemployment rate: % or labor force unemployed
*Full employment is considered <4%
Who isn’t counted?
 Minors under 16
 Work for no pay
 Retirees
 People not able/willing/ or actively seeking work.
Types of Unemployment:
 Structural: Skills no longer match what the market wants/needs.
 Cyclical: Follows the business cycle (demand deficiency for all goods)
 Frictional: Fired / Laid off / Specific corporate failure (demand deficiency for
your product) / Quit / Right after college
 Will always exist.
 Seasonal: According to season. Cascade bay. Landscaping,
Government involvement: Employment Act of 1946 for unemployment
compensation. Acts as an automatic stabilizer.
Inflation
Inflation: Sustained rise in general level of pricing.
Consumer Price Index: CPI, Change in price over time of common household goods
and services. Best indicator of inflation.
Pros:
 Businesses can charge more
 Businesses can hire more employees
 Increased incomes
 Debts easier to pay back
 Property debts easier to pay back
Cons:
 Sucks for people on fixed income like retirees cause their money is worth
less.
 Less buying power
 Savers/ Creditors
Demand-Pull Inflation: Increased demand, decreased supply = Price up
“Too many dollars chasing not enough goods” so price will increase.
Cost Push (supply-side) Inflation: Increased production prices
(Labor/Manufac./Energy/Wages) Price will increase.
Deflation: Decline in average prices
 Lowered wages
 Moving (more likely to sell house at a loss)
 Harder to pay fixed expenses.
Phillips Curve
 Inflation vs Unemployment
 Goal is stability
 Stagflation! When you solve one, you make the other worse.

Fiscal Policy
Fiscal Policy: The deliberate control of government spending and taxation to achieve
macroeconomic goals.
John Maynard Keynes:
 Economist after depression
 Government monitors economy GDP/GNP system
 Demand-Side

Consumer portion of the GDP is most important
 Government projects to increase employment
Expansion (dec tax) (inc spend)
Contraction (inc tax) (dec spend)
Crowding out: Increased government spending leads to reduction of private
spending
Crowding in: Decrease in government spending leads to increase in private
spending.
Automatic Stabilizers: Entitlements like unemployment compensation and welfare
(keeps people spending). Income tax systems like a progressive tax (redistributes
wealth).
Taxation:
 Progressive: More you make, higher % you pay.
 Regressive: Larger % or lower incomes (same $ amount)
 Proportional: All tax takes the same %
Monetary Policy
Friedman and Wife: advisors.
Federal Reserve: 12 regional, board meets in DC chaired by Ben Bernanke, Janet
Yellen will be next head.
Fed’s Tools:
 Discount rate: Grandaddy of all interest rates. What fed charges members.
 Fed Funds Rate: What banks charge each other every night.
 Reserve Requirement/Ratio: Amount bank has to have on hand.
 Open Market Operations: Buying and selling of bonds.
Monetary Policy: Intentional control of circulating money supply for the purpose of
achieving macroeconomic goals.
Money: Medium of exchange, unit value, stores value.
 M1 :sum of currency (including checking)
 Liquid
 M2: M1+savings and highly liquid assets
MV=PQ