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Economics
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study of scarce resources
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scarcity
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basic problem of economics; condition where wants are greater than resources
Scarcity CAN'T be solved
Scarcity CAN'T be solved
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opportunity cost
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highest valued alternative given up when choice is made
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marginal utility
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additional usefulness of an item
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diminishing marginal utility
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as more items are consumed the additional benefit of that item goes down
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sunk cost
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cost made in the past that should be ignored
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absolute advantage
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country can make more of an item than another country
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comparative advantage
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country can make an item at a lower opportunity cost (specialization)
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resources, inputs, or factors of production
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land: natural resources
labor: human effort put forth in the production process (human capital is the knowledge, skills, and training of workers)
capital: equipment, tools, factories, etc..
labor: human effort put forth in the production process (human capital is the knowledge, skills, and training of workers)
capital: equipment, tools, factories, etc..
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entrepreneurship
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combination of the other factors of production, a novel way to search for a profit
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economic systems
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traditional, command, market, and mixed
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traditional economy
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agricultural and tribal/village living
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command economy
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the government makes the economic choices
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market economy
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Economic decisions are made by individuals or the open market
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mixed economy
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private enterprise exists in combination with a considerable amount of government regulation and promotion
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maximizing utility rule
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Marginal Benefit = Marginal Cost or Marginal Utility = Price
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circular flow
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how producers and consumers in an economy interact with each other through two distinct markets: resource and product
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reasons for the law of demand
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income effect, substitution, and diminishing marginal utilityw
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income effect
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as price of a good decreases, consumers income appears to increase, so consumers demand more of the item at a lower price
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substitution effect
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as the price of one good decreases, other goods appear to become more expensive, so consumers demand more of the good with the lower price
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diminishing marginal ultility
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the more one consumes a good the less utility it possess,therefore, consumers are only willing to buy additional units of a good if the price decreases
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price inelasticity
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looks at how responsive demand is to a change in price
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elastic demand
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price has a big impact of the demand for that item (if the price is too high people will not buy)
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inelastic demand
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as the price of an item changes, the demand for that item does not (gas or cigarettes)
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perfectly elastic demand
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change in price take quantity to zero
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perfectly inelastic demand
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same quantity is demanded regardless of price
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cross elasticity
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determines if products are substitutes or complements
(% change of Q of product A) / (% change in product B)
(% change of Q of product A) / (% change in product B)
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positive cross elasticity
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goods are substitiutes
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negative cross elasticity
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goods are complements
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income elasticity
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income determine the demand of an item
(% change in Q) / (%change in income)
(% change in Q) / (%change in income)
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normal good
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demand increases when income increases (expensive cars, houses, steak, etc..) positive elasticity
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inferior goods
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demand decreases as income increases (ramen noodles, hot dogs, etc..)negative elasticity
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stages of return/production
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increasing marginal returns, diminishing/decreasing marginal returns, and negative returns
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increasing marginal returns
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each worker produces more additional products than the previous worker (positive production)
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diminishing/decreasing marginal returns
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each worker produces less additional products than the previous worker (not productive)
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negative returns
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workers produce less products than the previous worker (negative production=bad)
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types of costs
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explicit, implicit, fixed, and variable
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explicit cost
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"out of pocket" cost of producing (accountants only consider these)
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implicit cost
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opportunity cost of producing (money you will have earned at another job)
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fixed cost
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don't change; have to pay these even if there is no profit (rent, insurance, etc..)
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variable cost
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costs that change (usually labor)
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shut down rule
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if price is below the AVC than the company should shut down
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economies of scale
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ATC decreases as plant size increases
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diseconomies of scale
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ATC increases as plant size increases (too big for its own good)
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constant returns to scale
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ATC stays the same as plant size increases
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marginal revenue
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additional revenue earned buy selling one more product
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total revenue
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total amount of money earned from selling a product (Price x Quantity)
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profit
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TR-TC
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allocative efficiency
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producing what society wants
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productive efficiency
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producing at the lost opportunity cost
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natural monopoly
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it is natural for one firm to produce because they can produce at the lowest cost
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dominant strategy
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optimal strategy regardless of what an opponenet does (choice that has two stars)
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nash equilibrium
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the set of strategies in which each firm does the best it can considering its competitors' actions (quadrant with two stars)
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positive externality
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benefits received that will spill over to society (MSB(social benefit) is > than MPB(private benefit)
this is a positive product that is underproduced (people want more)
this is a positive product that is underproduced (people want more)
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how does the government correct for positive externalities?
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government issues susidies
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negative externality
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costs incurred that will spill over into society (MSC (social cost) is > than MPC(private cost))
this is a negative product that is overproduced (people want less)
this is a negative product that is overproduced (people want less)
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how does the government correct for negative externalities?
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government issues taxes
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resource market
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where firms go to hire workers, rent land, borrow money, etc..
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derived demand
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demand for resource come from the products the resources produces
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monopsony
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same thing as a monopoly but instead of the firm being PRICE makers the are WAGE makers
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