Microeconomics: Production Possibilities & Demand

Production Possibilities Curve

• The production possibilities curve (PPC) illustrates the maximum attainable combinations of two goods that can be produced with the given resources and technology.
• The PPC is concave to the origin because of increasing opportunity cost.
• The opportunity cost of producing one good is measured by the amount of the other good that must be forgone.
• Opportunity cost is not constant due to increasing relative cost.
• Points on the PPC are productively efficient.
• Points outside the PPC are unattainable.
• Points inside the PPC are productively inefficient.
• The PPC can shift outward if there is an increase in resources, an improvement in technology, or an increase in labor productivity.

Demand

• The demand schedule shows the relationship between the price of a good and the quantity demanded, holding all other factors constant.
• The demand curve is a graphical representation of the demand schedule.
• The law of demand states that there is an inverse relationship between the price of a good and the quantity demanded, holding other factors constant.

Shifts in Demand

• Factors that can shift the demand curve include:
  • Changes in income
  • Changes in tastes and preferences
  • Changes in the prices of related goods (substitutes and complements)
  • Changes in expectations
  • Changes in the number of buyers

Supply

• The supply schedule shows the relationship between the price of a good and the quantity supplied, holding all other factors constant.
• The supply curve is a graphical representation of the supply schedule.
• The law of supply states that there is a direct relationship between the price of a good and the quantity supplied, holding other factors constant.

Shifts in Supply

• Factors that can shift the supply curve include:
  • Changes in input prices
  • Changes in technology
  • Changes in the number of sellers
  • Changes in expectations
  • Changes in government policies

Equilibrium Price

• The equilibrium price is the price at which the quantity demanded equals the quantity supplied.
• It is the price that clears the market.
• The equilibrium price is determined by the intersection of the demand and supply curves.

The Economic Functions of Government

• The government plays a role in the economy by:
  • Providing a legal system
  • Promoting competition
  • Providing public goods
  • Ensuring economy-wide stability

Antitrust Legislation

• Antitrust legislation restricts the formation of monopolies and regulates certain anticompetitive business practices.
• A monopoly is a firm that can determine the market price.

Public goods

• Public goods are non-rivalrous and non-excludable.
• Public goods can be consumed by many people at the same time without diminishing the amount available to others.

The Political Functions of Government

• The government provides government-sponsored goods, such as museums and sports stadiums, which are deemed socially desirable.
• The government inhibits certain goods, such as heroin, alcohol, and tobacco, which are deemed socially undesirable.
• The government uses transfer payments, such as Old Age Security and disability payments, to provide income to individuals.
• The government uses transfers in kind, such as education and health care services, to provide goods and services to individuals.

Unemployment

• Categories of individuals who are without work include:
  • Job losers
  • Re-entrants
  • Job leavers
  • New entrants
• Discouraged workers have stopped looking for a job because they believe they will not find a suitable one.
• The labor force participation rate is the percentage of noninstitutionalized persons 15 years of age and older who are employed or seeking employment.

Types of Unemployment

• Frictional unemployment is caused by the time it takes workers to search for appropriate job offers.
• Structural unemployment is caused by changes in the structure of the economy, such as technological advances or globalization, that lead to a mismatch between the skills of workers and the skills demanded by employers.
• Seasonal unemployment is caused by seasonal variations in demand for labor.
• Cyclical unemployment is caused by contractions or recessions in economic activity.

Inflation and Deflation

• Inflation is a sustained increase in the average price level of goods and services in an economy.
• Deflation is a sustained decrease in the average price level of goods and services in an economy.
• A price index is a measure of the cost of a market basket of goods and services relative to the cost of the same market basket in a base year.
• The Consumer Price Index (CPI) is a statistical measure of a weighted average of prices of a specified set of goods and services purchased by wage earners in urban areas.

Business Fluctuations

• A recession is a period of time during which the rate of growth of business activity is consistently less than its long-term trend or is negative.
• A depression is an extremely severe recession.