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EFFICIENCY
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If resources are plentiful or few- you want resources to be in the most optimal place to function everyone effectively. The pie is growing or shrinking.
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EQUITY
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How you will divide resources/shares. How will you divide the pie?
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OPPORTUNITY COST
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The value of your next-best option.
FORMULA: WHAT WE GIVE UP/WHAT WE GET
FORMULA: WHAT WE GIVE UP/WHAT WE GET
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People think rationally
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Benefits are greater than the costs; we do it.
Costs are greater than the benefit; we don't do it.
Costs are greater than the benefit; we don't do it.
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People think on the margin
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You are thinking about what the next or additional action means to you. The word "marginal" means "additional." The first glass of lemonade on a hot day quenches your thirst, but the next glass, maybe not so much.
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Sunk Cost
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Opportunities/Events that have already happened.
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Marginal Cost
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The price added by producing one additional unit of a product or service.
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Marginal Benefit
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Maximum amount one is willing to pay to consume that additional unit of a good or service, what's in it for you?
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Incentives
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Anything that changes marginal cost or benefit, sometimes leads to unintended consequences.
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Optimal Policy
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The best of efficiency and equity.
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Ratio of Trade
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How much a person/place/company is willing to give that will still benefit them. (The US will accept and benefit from any trade where it receives at least 5 t-shirts for each computer they give).
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Comparative Advantage
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Between two (or more) things/places/people/companies, whoever has the lower Opportunity Cost of producing a good. Calculate the OC to figure this out.
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Perfect Competition
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The most basic way of thinking about a market, 80% of markets are like this. Happens when there are identical/commodity goods, many buyers and sellers.
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Monopoly
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When there's only one seller in a market. Not perfect competition.
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Monopsony
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When there's only one buyer in a market. Not perfect competition.
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Demand Curve
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Describes the relationship between price and quantity. As price falls, quantity increases.
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Market Demand
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Sum of all the individual demand curves. What everyone is willing to pay for a good.
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PRICE WILL NEVER...
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SHIFT A DEMAND CURVE. (Unless it is the price of a substitute/complement product)
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What shifts a demand curve?
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Weather patterns, scientific discovery, trends/consumer preferences, introducing related products, the price of related products, income, number of buyers, expectations about price.
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When the price increases on a substitute product...
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... The demand increases for the original product.
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When the price lowers on a substitute product...
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... The demand decreases for the original product.
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Substitute Product
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A product that could replace the original product.
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Complement Product
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A product that is frequently bought with the original product.
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When the price increases on a complement product-
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-The demand decreases for the original product.
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When the price decreases on a complement product-
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-The demand increases for the original product.
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Inferior Product
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A product that is commonly purchased by people with lower incomes. There is substitute product with a slightly higher price that has a better quality that people are willing to pay more for.
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When someone's income rises, their demand for an inferior product...
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... lowers.
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When someone's income lowers, their demand for an inferior product...
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... rises.
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When someone's income rises, their demand for a normal product-
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-increases.
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When someone's income lowers, their demand for a normal product-
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-decreases.
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If a price increase is expected on a product tomorrow, the demand for the product...
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... will increase today.
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Supply Curve
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A positive relationship between price and quantity.
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Market Supply
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Sum of all the individual market curves. What everyone is willing to be paid.
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Scarcity
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The problem of having unlimited human wants and needs in a world of limited resources. Society has insufficient resources to fulfill all human wants and needs.
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