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INCOME EFFECT: One of two reasons for the law of demand and the negative slope of the market demand curve (the other is the substitution effect). The income effect results because a change in price gives buyers more real income, or the purchasing power of the income, even though money or nominal income remains the same. This causes changes in the quantity demanded of the good.
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Lesson Contents
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Unit 1: The Concept |
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Unit 2: Resources |
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Unit 3: Opportunity Cost |
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Unit 4: College Cost |
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Unit 5: THE Problem | |
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Scarcity
In this lesson you'll see why scarcity tends to make economists grumpy. You'll see that scarcity is a perpetual condition that exists because people have unlimited wants and needs, but limited resources. You'll also see how this scarcity problem underlies the common notion of cost, which is integral to the study of economics. The five units contained in this lesson provide a tour through the economic problem of scarcity. - The first unit, A Big Problem, examines the fundamental concept of scarcity -- the combination of limited resources and unlimited wants and needs -- that is virtually synonymous with the study of economics.
- The second unit, Resources, discusses the four basic categories of limited resources -- labor, capital, land, and entrepreneurship -- which produce the goods that are used to satisfy unlimited wants and needs.
- In the third unit, Opportunity Cost, we take a look at the notion of opportunity cost and see how it is related to the scarcity problem.
- We then turn out attention in the fourth unit, College Cost, to a simple example of the explicit and implicit costs of attending college.
- The fifth and final unit, THE Big Problem, in this lesson then ponders why scarcity is considered THE economic problem and provides a little insight into why economists are grumpy.
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ASSUMPTIONS, CLASSICAL ECONOMICS Classical economics, especially as directed toward macroeconomics, relies on three key assumptions--flexible prices, Say's law, and saving-investment equality. Flexible prices ensure that markets adjust to equilibrium and eliminate shortages and surpluses. Say's law states that supply creates its own demand and means that enough income is generated by production to purchase the resulting production. The saving-investment equality ensures that any income leaked from consumption into saving is replaced by an equal amount of investment. Although of questionable realism, these three assumptions imply that the economy would operate at full employment.
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Helping spur the U.S. industrial revolution, Thomas Edison patented nearly 1300 inventions, 300 of which came out of his Menlo Park "invention factory" during a four-year period.
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"If anything terrifies me, I must try to conquer it. " -- Francis Charles Chichester, yachtsman, aviator
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MR
Marginal Revenue
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