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Economics
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the study of how agents choose to allocate scarce resources and how those choices affect society
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Economic Agent
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an individual or a group that makes choices
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scarce resources
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things that people want, where the quantity that people want exceeds the quantity that is available
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scarcity
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the situation of having unlimited wants in a world of limited resources
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positive economics
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analysis that generates objective descriptions or predictions about the world that can be verified with data
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normative economics
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analysis that recommends what an individual or society ought to do
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Microeconomics
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the study of how individuals, households, firms, and governments make choices, and how those choices affect prices, the allocation of resources, and the well-being of other agents
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Macroeconomics
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The study of the economy as a whole
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The three principles of economics
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1. Optimization
2. Equilibrium
3. Empiricism
2. Equilibrium
3. Empiricism
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Optimization
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picking the best feasible option, given whatever (limited) information, knowledge, experience, and training the economic agent has
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Trade-offs
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when the agent needs to give up one thing to get something else
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budget constraint
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is the set of things that a person can choose to do (or buy) without breaking their budget
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Opportunity cost
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the best alternative use of a resource - applies to ALL tradeoffs
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Cost-benefit analysis
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a calculation that identifies the best option by summing benefits and subtracting costs, with both benefits and costs denominated in a common unit of measurement, like dollars (ex: driving vs flying)
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net benefit
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the sum of the benefits of choosing an alternative minus the sum of the costs of choosing that alternative
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Equilibrium
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A situation in which no agent would benefit personally by changing his or her own behavior (ex: switching lanes in traffic)
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Empiricism
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Analysis that uses data. Economists use data to test theories and determine what is causing things to happen
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Scientific Method
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the ongoing process that economists and other scientists use to 1) develop models of the world 2)evaluate models by testing them with data
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Model
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A simplified description of reality (aka - theory) - should be useful, not necessarily precisely accurate
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emperical evidence
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facts that are obtained through observation and measurement (aka data)
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Hypotheses
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predictions (generated by a model) that can be tested with data
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Mean
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the sum of all different values divided by the number of values
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median
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ordering the numbers from least to greatest, then finding the value halfway through the list
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Causation
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occurs when one thing directly affects another
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experiment
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a controlled method of investigating casual relationships among variable
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randomization
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the assignment of subjects by chance, rather than by choice, to a treatment group or control group
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natural experiment
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an empirical study in which some process out of the control of the experimenter has assigned subjects to control and treatment groups in a random or nearly random way
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variable
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changing factor or characteristic
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Correlation
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means that there is a mutual relationship between two things, as one thing changes, the other changes as well - causation not present
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Positive correlation
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two variables tend to move in the same direction
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Negative correlation
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two variables tend to move in opposite directions
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Zero correlation
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no correlation
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omitted variable
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something has been left out of a study that if included would explain why two variables are correlated
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independent variable
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the variable that the experimenter is choosing, value doesn't depend on another variable
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Dependent variable
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the variable that is affected by the experiment, variable depends on another variable
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Marginal analysis
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the change in the net benefit of one option compared to another
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Greatest total value
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calculates the total value of each feasible option and then picks the option with the greatest total value ex) calculate rent per/month and commuting time then convert your time into a money value
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principle of optimization
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an optimal feasible alternative has the property that moving to ti makes you better off and moving away from it makes you worse off
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optimum
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best feasible choice
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Market
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a group of economic agents who are trading a good or service
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market price
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if all sellers and buyers face the same price, that price is referred as the market price
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perfect competitive market
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All goods exactly the same
Buyers & sellers so numerous that no one can affect market price—each is a "price taker"
Buyers & sellers so numerous that no one can affect market price—each is a "price taker"
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price taker
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accepts the market price - cant bargain for a lower price
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Quantity demand
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the amount of a good that buyers are willing to purchase at a given price (price of object directly affects buyers decision to buy or not buy)
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Demand Schedule
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a table that reports the quantity demanded at different prices, holding all else equal
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demand curves
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plots the relationship between prices and quantity demand
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Law of demand
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the quantity demanded rises when the prices fall
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willingness to pay
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the highest price that a buyer is willing to pay for an extra unit of a good
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Diminishing marginal benefit
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as you consume more of a good, your willingness to pay for an additional unit declines. ex: more gas one has, the less they will pay for an additional gallon
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market demand curve
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The sum of the individual demand curves of all the potential buyers. It plots the relationship between the total quantity demanded and the market price, holding all else equal.
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Aggregation
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sum of all the demand curves
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Shifts in the DEMAND curve
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1. tastes and preferences
2. income and wealth
3. availability and prices of related goods
4. number and scale of buyers
5. buyers' expectations about the future
2. income and wealth
3. availability and prices of related goods
4. number and scale of buyers
5. buyers' expectations about the future
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Normal good
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an increase in income leads to an increase in demand ex: nice steak dinners
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Inferior good
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an increase in income leads to a decrease in demand ex: raman noodles
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substitutes
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when a rise in the price of one leads to a rightward shift in demand for the other
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Complements
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when the fall in the price of one good leads to a righward shift in the demand for the other
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Quantity supplied
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the amount of a good or service that sellers are willing to sell at a given price
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Supply schedule
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a table that reports the quantity supplied at different prices
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supply curve
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plots the quantity supplied at different prices
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positively related
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variables move in same direction, one variable goes up - the other goes up too
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law of supply
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the quantity supplied rises when the prices rise
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willingness to accept
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the lowest price that a seller is willing to get paid to sell an extra unit of a good
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Shifts in the SUPPLY curve
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Prices of inputs used to produce the good
Technological change
Number and scale of sellers
Sellers beliefs about the future
Technological change
Number and scale of sellers
Sellers beliefs about the future
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input
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a good or service used to produce another good or service
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Competitive equilibrium
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the crossing point of the supply curve and the demand curve
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competitive equilibrium price
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quantity supplied = quantity demanded
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Competitive equilibrium quantity
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the quantity that corresponds to the competitive equilibrium price
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Excess supply
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when the market price is above the competitive equilibrium price, quantity supplied exceeds quantity demanded
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Excess demanded
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when quantity demanded is more than quantity supplied
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