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economics
- how people make choices under the conditions of scarcity and the results of the choices for society
- 3 central features: what and how much to produce, how to produce, and for whom
- microeconomics: study of ind'l choice under scarcity and how the choices is influenced by economic forces
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economic reasoning
- trained to compare cost and benefits of any decision
- cost-benefit approach: taking out unimportant elements and focusing on important ones by creating simple models
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Marginal Cost/Marginal Benefits
- Marginal Costs: increase in total cost that results from carrying out one additional unit of output
- Marginal benefits: increase in total benefit from one additional consumption of a good
- Sunk Cost: cost that cannont be recovered at the moment a decision has been made
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opportunity cost
the next best thing that you giving up for something else (trade-off)
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economic force/market force
- economic force: the necessary reaction to scarcity (limited amount)--trading cards
- market force: economic force that is given relatively free rein by society, rations goods by chaning prices
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postive/normative economics
- positive economics: what is/how the economic works, tested, true/false
- ex)do price restrictions affect market forces
- normative economics: goals of the economy is
- ex)what should the distributuion of income be in an economy?
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production possibility model
graph showing the cocept of opportunity cost graphically and numerically
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PPF (production poss. frontier)
- alt combinations that describes the max amounts of one good that can be produced for every possible level of production of the other good
- limit to what is attainable (amount of resources)
- every choice involves an opportunity cost
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comparative advantage
- one person has comparativeadvanate over another if his opportunity cost of performing a task is lower than other person's opportunity cost
- efficiency: producing a good as cheaply as possible or to attain as much output as possible givin the resources (inputs)
- specialization: leads to countries consuming more than their own capacities
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neutral/biased technological change
- neutral tech change: improvemnt occurs for both products
- biased tech change: improvent only on one product
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demand
- def: shows the quantity that demanders are willing and able to buy at different prices in a given time period
- demand curve: graph that shows the demand schedule of how customers respond to higher prices by buying less and to lower prices by buying more
- determinants of demand:
- 1. price of the good (movement along curve
- 2. income
- 3. price of other goods
- 4. taste/preference
- 5. expectation
- 6. population (#of buyers)
- 7. taxes
- 8. wealth
- law of demand: there is an inverse realtionship, the lower the price the greater the quanity demanded
- a change in the price can only cause a change in thequantity demanded
- price doesn't cause a change in demand only quantity
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subsitute goods/complimentary goods
- subsitute: demand curve will shift to the left, decrease in price of one good leads to the decrease in demand for other good
- complimentary: goods that we consume jointly, a decrease in the price of one goods lead to an increase in the demand for the other good
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normal good/inferior good
- normal: good for when demand increases when income increases (curve shifts to the right)
- inferior good: goo for which demand decreaes when income increases, consume less (generic brand)
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Supply
- quanity supplied: the quantity that sellers are willing and able to sell at a particular price
- law of supply: positive relaitonship, higher the price, the greater the quantity supplied
- determinants of supply:
- 1. price (movement along curve)
- 2. number of sellers
- 3. expectatins (price in future)
- 4. production costs
- 5. tech progress
- 6. climate/weather conditions
- 7. prices of related goods
- 8. taxes(left)/subsidies (right)
- a change in price will only cause a change in the quanity supplied
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Market equilibrium
- market: a group of buyers/sellers with the potential to trade with each other
- market equilibrium: q. demanded = q. supplied
- market mechanisms: laws ofthe market at work
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gov. intervention in the market
- excess supply: amount by which supplied exceeds demaded, price exceeds equilibrium price
- excess demand: amount by which demanded exceeds supplied when prices is below equiibrium price
- price ceiling: price impsed below market price, max allowable price (excess demand/shortage)
- price floor: price imposed above market price, min allowalble price (excess supply/surplus)
- extice taxes: tax that is levied on a supplier or buyer, of unit of product produced or consumed
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elasticity
- def: measures how much one economic variable responds to chagnes in another econ var
- elasticity of demand: the responsiveness of quanity demanded to price changes
- price elasticity of demand: the respnsiveness of the quantity demanded is to prices changes
- determinants of elasticity of demand:
- 1. necessities of luxuries
- 2. availability of substitues
- 3. price of the good relative to income
- 4.time
- elastic: price elasticity i greater than 1 in absolute value (react to price change)
- inelastic: price elasticity is less than 1 (don't react to price change)
- unit elastic: price elastic is equal to 1
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