MACRO- the study of economy wide phenomena, including inflation, unemployment, and economic growth
positive economics
descriptive
explaining economic phenomena without judgement
-why do prices of umbrellas rise with rain?
-what will happen to oil price if war in gulf?
prescriptive
evaluates whether market outcomes are good/bad or could be improved
a benchmark is needed: what is "good"
-are uniform taxes good?
- or do we want them progressive?
depends on values: what do we care about? efficiency? equity? rights?
produce goods from scarce recourse.
-want to maximize profits
-subject to technological constraint
-solution gives the supply curve
consume goods
-work in firms
-want to maximize utility
-subject to budget constraint
-solution gives the demand curve
institution, regulations
-maximize social welfare
the quantity of good demanded as function of all relevant variables
ex: what affects the demand for ice cream? temperature, tastes, diet trends
if temp = 10 => demand is Qd=40-20P
why is it downward sloping?
-As p goes down each individual buys more and more individuals buy
the pairs of quantity demanded given each price.
we move along the demand curve whenever p changes (holding all else constant) results in a change in quantity demanded
-change in tastes (hot day)
-new information
-change of income
-new regulations (taxes, deductible donations)
-change in the price of other goods (substitutes or complements)
quantity supplied as a function of all relevant variables
ex: ice cream Qs=20p
the supply function in (Q, P) space, holding all relevant carables constant.
why upward sloping? the higher the price the more resources toward production
change in supply for a given price
-cost of production
-change in gov regulations
how sensitive are quantities demanded to changes in price
-the percentage change in a variable (Q) for one percent increase in another (P)
following gas discoveries in israel the price of oil decreases.
what happens to the quantity of oil consumed? increases.
but by how much?
-gold: elastic
-water: inelastic
-housing: inelastic
-ice cream: elastic
on specific data points
infinite number of possible values, take the derivative
how does quantity demanded change when income changes?
-sensitivity of demand for a product relative to changes in income
-usually positive: demand more of goods when I have more disposable income
a good for which, other things equal, an increase in income leads to a decrease in demand
ex: store brand, instant noodles
when a small change in income creates a large change in demand
ex: caviar
when the price of one good largely affects the demand of our good
ex: the demand for cars with respect to the price of oil or public transportation
demand: in long run learn to adjust to substitutes
supply: in short run limited by plant size and tech
goods for which the stock owned by consumers is large relative to annual production. only buy once in a while
ex: refrigerators, cars
when Qd = Qs
Qd=40-20p
Qs=20p
p=1
numerous buyers and sellers that nobody is big enough to affect market price
-not true for monopoly
the market for butter when there is an increase in the price of margarine.
-demand for butter goes up, Q and P rise
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