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Economics
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A systematic approach to the study of human decision-making.
Broken up in micro and macro
Broken up in micro and macro
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Microeconomics
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Narrowly defined units
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Macroeconomics
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Highly aggregated
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2 main types of analysis
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Positive and normative
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Positive analysis (focus)
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an attempt to describe "what is" or "what will be"
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Scarcity
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Requires choice-- A situation in which there is a limited amount of resource at a particular time
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Resource
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Things that we use to produce final goods & services
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Natural resource
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Land
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Human resource
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Labor
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Capitol resource
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Physical resources like tools, equipment and machines
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Opportunity cost (important)
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Is the value of the highest forgone alternative as a result of making a choice. It can vary across people and includes but does not equal monetary cost
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people are rational
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People who use all available information as they act to achieve their goals
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Individuals respond purposefully to ____
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Incentives
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When the incentives change then
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peoples behaviors change
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Where are optional decisions made?
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At the margin
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Ceteris Paribus Analysis (important)
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Latin for all things held constant
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When do we use Ceteris Paribus?
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Use it when we want to find what happens when one thing is changed, and also have to keep in mind that in the real world all is not constant, but in theory could be
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Common pitfalls
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1- Do not ignore secondary effects (not easily or immediately observable)
2- Association does not equal causation
2- Association does not equal causation
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What is the economic problem all societies must solve?
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Scarcity
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Three questions that economies have to answer
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1- What goods and services will be produced?
2- How will the goods & services be produced?
3- Who will receive the goods & services?
2- How will the goods & services be produced?
3- Who will receive the goods & services?
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Production possibilities Frontier (PPF)
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A curve showing the maximum attainable combos of goods and services that can be produced given:
1-The current technology
2-The current level of resources
3-That the resources are used fully and efficiently
1-The current technology
2-The current level of resources
3-That the resources are used fully and efficiently
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Scarcity (PPF)
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Points outside the PPF are unattainable
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Efficiency (PPF)
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Points inside the PPF are inefficient
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Choice/trade-offs
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Producing more of one thing = giving up the other
(opportunity cost)
(opportunity cost)
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normative analysis
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analysis concerned with what ought to be
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economic growth
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shifts in PPF
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absolute advantage
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a situation where an entity can produce more with the same resources than another entity.
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comparative advantage
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a situation where an entity can produce a good at a lower opportunity cost.
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law of comparative advantage
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entities can gain by specializing in the production of goods for which they have a comparative advantage and exchanging them for goods for which they do not have a comparative advantage.
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demand curve
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a curve that answers the question "how much" (what quantities) of a good are consumers willing and able to buy at various prices, all else held constant.
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Law of Demand
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the quantity demanded of a good is inversely related to its price, all else held constant.
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Factors that shift the demand curve
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income, price of related goods, expectations of future prices, number of buyers, government, tastes and preferences
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supply curve
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a curve that answers the question "how much" (what quantities) of a good are producers willing and able to sell at various prices, all else held constant.
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Law of Supply
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the quantity supplied of a good is directly or positively related to its price, all else held constant.
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Factors that shift the supply curve
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input/resource prices, technology, government (taxes), expectations of future prices, number of sellers/producers, prices of alternative goods (substitutes), and supply shock
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Equilibrium
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when quantity supplied equals quantity demanded.
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If the quantity supplied at a price is greater than the quantity demanded, that is called a ______ and we would expect price to ______ in this case.
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Surplus, decrease
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You own a house and are thinking of renting one room in your house to a classmate. The opportunity cost of this activity equals:
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The value to you of using the room you will rent out in the next best way.
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All the following illustrate why the demand curve for pizza is downward-sloping except:
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When the price of pizza stays the same but our income decrease, we feel poorer because we can no longer purchase the same combination of goods and services as before so we purchase less pizza.
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Why does the demand curve for pizza is downward-sloping
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When the price of pizza increases, pizza would become relatively more expensive and we would substitute our purchases away from pizza so the quantity demanded of pizza would decline. (The income effect)
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If there was an advance in the technology used to produce food, that would cause the PPF to
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rotate outward so that the vertical intercept is still 40 but the horizontal intercept is greater than 60.
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Assume a common resource (cows) is used to produce both milk and hamburgers. If the price of hamburgers increases, we might expect the _____ for milk to _____.
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Supply curve, decrease
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All of the following would increase the supply curve of television except:
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an increase in the price of tvs
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The following would increase the supply curve of tvs
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a decrease in the price of the inputs used to make tvs
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The following would increase the supply curve of televisions
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an increase in the number of producers of televisions
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What would increase the supply curve of televisions?
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a new technology is discovered for the production of tvs
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If both producers and consumers start to expect future prices of desks to be higher, this would cause the equilibrium price of desks to increase
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true
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If consumers incomes fall, we might except the demand for ramen noodles to ______ because they are a _____ good
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increase, inferior.
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