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The study of the choices people make and the actions they take in order to make the best use of scarce resources in meeting their wants and needs
The study of the choices and actions of individual households, firms, consumers, etc
The study of the behaviour of the economy as a whole, including issues like the unemployment, inflation and changes in the level of national income.
Judging Economic Allocation
- 1. Efficiency- allocative efficiency is present when society's resources are so organized that it is impossible to make someone better off by any reallocation without hurting someone else
- 2. Equity - distributing goods and services in a manner considered by society to be fair
- 3. Moral and Political Consequences - any science without ethics is bad science; have to pay attention to these consequences
Involves statements about what is and can be tested by checking the statement against the observed facts.
Involves statements about what ought to be; depends upon values and beliefs and cannot be tested.
Economics as a science
Economics is a social science that seeks to explain how people act. Like any science, it uses models, theories and assumptions to descrive how people behave.
Is a simplified description of the way things work. Models and theories are meant to provide an understanding and explanation. They also should be useful to predict behaviours.
An error in reasoning that correlation implies causation.
Post Hoc Fallacy
From the latin phrase that means after this therefore because of this... An error of reasoning that a first event causes a secon event because the first occured before the second.
Fallacy of Composition
Incorrect belief that what is good for the individual is good for the group
Production and Possibility Frontier
Graph that show all of the possible combinations of two goods that a society can produce given its factors of production and its level of technology
Benefits foregone by NOT using the resources in the best alternative way
Law of Increasing Costs
In order to produce extra amounts of one good, society must give ever increasing amounts of the other good
Individuals do not intentionally make decisions that will leave them worse off.
Main characteristics of a Market economy
- 1. Self interest; people will pursue their own best interest
- 2. incentives: people respond to incentives (change in price)
- 3. Market prices and quantities are determined in an open market: established by the economy, not the government
- 4. Institutions: to ensure basic property rights are upheld (to protect consumers and producers)
The Law of Demand
- As a product's relative price (to other products) increases, its quantity demanded decreases; as a product's relative price decreases, its quantity demanded increases; all other things held equal
- Also called the law of downward sloping demand curves as it describes the shape of the demand curve.
Price of substitutes
Variable taht affects demand; two goods are substitutes if, for the consumers, these goods satisfy the same needs and desires. If the prices of a substitute increases, the demand for the original commodity shifts out which corresponds to an increase in demand
Price of complements
Variable affecting demand; complements are products that tend to be used jointly. If the price of a complement increases the demand curve for the original commodity shifts in which corresponds to a decrease in demand
Number of Buyers
Variable affecting demand; when the number of buyers increases, demand increases
Variable affecting demand; as preference change, demand changes
Variable affecting demand; the consumer's expectation of what will happen to the price of a good in the future may cause the demand curve to shift. For example, if the price of a product is expected to increase in the future, consumers may try to stock up on the commodity today.
Variable affecting demand; Normal good: as disposable income increases, demand for good increases. Inferior good: as disposalbe income increases, demand for inferior good decreases
Law of supply
As the relative prices of a commodity increases, the quantity supplied increases, ceteris paribus. As the relative price of a commodity decreases, the quantity supplied decreases, ceteris paribus
Costs of inputs
Variables affecting supply; as costs increase, the supply curve for the commodity shifts in which corresponds to a decrease in supply
Technology and Productivity
Variable affecting supply; a better, cheaper production technology allows the producer to supply more of the product at every price level, thus increasing supply
Number of Firms
Variable affecting supply; if the number of firms increase, supply increases.
Taxes and Subsidies
Variable affecting supply; taxes are effectively an addition to production costs and result in decreases supply. Subsidies work in the opposite fashion, decreasing production costs and increasing supply
Variable affecting supply; the producer's view of the future may change the supply
Prices of Substitutes in Production
Variable in supply; substitutes in production are goods that can be produced using the same inputs. If the price of a substitute in production for good X increases, the supply of good X decreases.
Prices of Complements in Production
Variable in supply; complements in production are products, which be the nature of production, are produced together. When the price of a complement in production for good X increases, the supply of good X increases. (ie, beef hides)
Changes in Nature
Variable in supply; natural events such as hurricanes, frost, and floods can have significant impacts upon the supply of a product. Good weather can also change the supply of a product.
Occurs at the point where quantity demanded equals quantity supplied
The market works like this to guide economic forces to coordinate individual actions and allocate scarce resources.
The social and historical forces, forces of trandition, cultural forces, ect.
Political and legal forces; legal rules in society.
Sometimes markets fail, often done accidently
The government sets the minimum price that can be charged for a good or service
The government sets the maximum price that can be charged for a good or service
The government sets the maximum quantity for a commodity
Elasticity of Demand
Measures the responsiveness of quantity demanded to a change in the price
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