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cost benefit analysis
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core of economics
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economics
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study of the allocation of scare resources in the face of unlimited wants or the study of the choices people and societies make in the face of scarcity.
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microeconomics
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studies how individual decision making units make choices in the face of scarcity.
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macroeconomics
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studies the behavior of the economy as a whole and the movement in prices output and employment.
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models
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simplified descriptions of a phenomenon. they don't have to be realistic, but should be plausible, informative, and make good predictions.
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opportunity cost
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cost of something is the best thing you must give up to get it.
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marginal analysis
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thinking about incremental changes
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household main decisions
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demand goods and services and supply factors of production
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firms main decisions
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supply goods and services and demand factors of production
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ceteris paribus assumption
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"other things remain the same"
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marginal cost
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additional cost of one more
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marginal benefit
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additional benefit of one more
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production possibilities frontier
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boundary between the combinations of goods and services that can and can not be produced given the available resources and state of technology.
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production efficiency
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an allocation of resources such that theres no way to produce more of one good without producing less of another.
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law of increasing opportunity cost
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when we give up more of one thing to get additional ones of another.
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comparative advantage
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ability of a person to perform an activity or produce a good/ service at a lower opportunity cost than someone else.
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absolute advantage
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when one person is more productive that another person in several or even all activities.
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law of comparative advantage
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states that whoever has the lower opportunity cost of producing a good should specialize in the production of that good.
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determinants of supply
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price of the good (own price), tastes & preferences, income, price of related goods, expectations, number of buyers.
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Law of demand
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there is an inverse relationship between the price of a good and the quantity demanded, all else is equal.
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normal goods
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are goods for which there is a positive/ direct relationship between income and demand.
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inferior goods
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are goods for which there is a negative/ inverse relationship between income and demand.
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compliment goods
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2 goods with a negative/ inverse relationship between the price of one good and the demand for the other.(ex. cereal and milk)
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substitute goods
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2 goods with a positive direct relationship between the price of one good and demand for the other. (ex.coke and pepsi)
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determinants of supply
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price of a good(own price), technology/productivity, price of inputs, price of related goods, expectations, number of sellers.
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law of supply
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direct relationship between the price of a good and quantity supplied, all else equal.
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compliments in production
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if there is a positive/ direct relationship between the price of one good and the supply of the other goods are produced along with each other. (ex. ham and bacon)
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substitutes in production
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if there is a negative/inverse relationship between the price of one good and the supply of the other. goods are produced in place of each other. (ex. frozen yogurt and ice-cream)
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market equilibrium
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supply=demand
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elasticity of demand
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a (units free) measure of the responsiveness/ sensitivity of the quantity demanded to a change in the price of a good. WILL ALWAYS BE NEGATIVE.
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if E<1 demand is...
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inelastic
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if E>1 demand is...
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elastic
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if E=1 demand is...
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unit elastic
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income elasticity of demand
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a measure of the responsiveness/ sensitivity of the quantity demanded to a change in income.
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cross price elasticity
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measure of the responsiveness/sensitivity of the quantity demanded of one good to a change in the price of another.
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total revenue
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price x quantity
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profit
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total revenue - total cost
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scarcity
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wants are greater than what we can produce without resources.
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rational choice
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compares the extra benefits of one more unit to the extra choice of one more unit.
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substitution effect
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deminiting returns, the more you had of something the less value it has. i.e. one PB&J vs. 2 PB&J's
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