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Economics
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the study of how individuals make choices when faced with scarce resources
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Scarcity
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limited nature of society's resources and time
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Opportunity Cost
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(Cost/Gain) Whatever must be given up to obtain some item (value of next best alternative not consumed) Example: Opportunity cost of the 1.5 hours spent in class is the 1.5 hours you are not sleeping in your dorm room
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Unintended Policy Consequences
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consequence of a public policy, for example, a public policy is placed that increases the tax on cigarettes in hopes of decreasing the number of smokers. The unintended policy consequence is that people start rolling their own cigarettes or (kits are sold), or smuggling for profit.
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Marginal
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Adding one more unit (Ex. when thinking about eating a 3rd slice of pizza, the marginal slice is the 3rd slice)
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Market Economy
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allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
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Economic Models
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Real world is too complicated to think about everything at once, these help us simplify reality to improve our understanding of it. Built on assumptions, allows to see what's truly important and omits many details.
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Assumption
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can simplify the complex world and make it easier to understand, focuses our thinking on the essence of the problem
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Production Possibility Frontier (PPF)
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a graph that shows the combinations of output that the economy can possibly produce using the available resources causes of shifts
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Infeasible
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any point outside the PPF
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Efficient
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doing the best you can given your resources, any point along the PPF
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Inefficient
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any point inside the PPF
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Change in resources
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will change the production possibilities (change the PPF)
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Change in technology
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a change in how well resources are used
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When it is bowed in shape?
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if the opportunity cost of a good rises as the economy produces more of the good, PPF is bow
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Division of labor
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when you focus on a particular task, you get better at it, transition time saved, the on doing the task will think of ways to do it faster and better
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Absolute advantage
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Ability to produce a good using fewer inputs than another producer
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Comparative Advantage
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ability to produce a good at a lower opportunity cost than another producer
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Opportunity Cost
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whatever must be given up to obtain some item
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Perfectly competitive market
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goods offered for sale are exactly the same, there are numerous buyers and sellers
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Market
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group of buyers and sellers of a particular good or service. Markets are competitive, a lot of buyers and sellers
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Demand
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relationship between the price of a good and the quantity demanded of the good
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Law of demand
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when the price of a good rises, the quantity demanded of the good decreases, price and quantity have an inverse relationship
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Market demand
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sum of all individual demand curves
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5 shifters of demand
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consumer preferences / tastes, number of buyers, consumer income, expectations, prices of related goods
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Compliments
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goods that are consumed together (hotdogs and hotdog buns)
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Compliment
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increase in price of a complement will decrease the demand for the good
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Substitutes
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goods that are consumed instead of each other (hotdogs and pizza)
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Substitute
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increase in the price of this will increase the demand for the good
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Supply
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Relationship between the price of a good and the quantity supplied (amount producers are willing to supply)
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law of supply
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price and quantity supplied have a positive relationship (they do the same thing)
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market supply
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all individual supply curves added up together
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5 shifters of supply
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price of inputs, technology, natural disasters, number of firms, expectation of future prices
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Comparative statics
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Steps:
1. Is supply or demand affected?
2. Which way will supply or demand shift?
3. What happens to price and quantity?
1. Is supply or demand affected?
2. Which way will supply or demand shift?
3. What happens to price and quantity?
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Market equilibrium
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supply in the market is equal to the demand in the market
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Elastic
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more responsive (price increases, and quantity demanded decreased by a lot)
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Inelastic
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less responsive (price increases, and quantity demanded does not decrease by much)
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Inelastic
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a good that is a necessity because you need it to live
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Elastic
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a good that is a luxury and is not necessarily needed?
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Elastic
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the more substitutes the more ______ the good is
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Inelastic
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if price is relatively low to income then it is
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Elastic
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if price is a large share of income then it is
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More elastic
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more time to adjust
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Less elastic
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Less time to adjust
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Total Revenue
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Price*Quantity
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Elastic
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when a good is ______, increase in price will decrease total revenue
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Inelastic
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when a good is ______, increase in price will increase total revenue
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Elasticity of Supply
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measures how much the quantity responds to the change in price
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Inelastic supply
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if quantity responds only slightly to changes in price
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Price ceiling
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above equilibrium this price control is not binding and has no effect on the market outcome
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Price ceiling (shortage)
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below equilibrium tis price control is a binding constraint and creates an excess in demand or a shortage
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Price floor
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below equilibrium this price control is not binding and has no effect on the market outcome
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Price floor (surplus)
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above equilibrium price this price control is a binding constraint and creates a surplus
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Shortages
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sellers must ration the goods among buyers
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Utility
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not comparable across individuals, it allows us to rank choices (show preferences)
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Total Utility
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the amount of total satisfaction that a consumer receives from everything they consume
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Marginal Utility
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additional utility that a consumer gets from consuming one more unit
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Consumer Surplus
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total gains that consumers get by paying a price less than the marginal benefit or willingness to pay
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Producer Surplus
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measures the benefit sellers receive from participating in a market
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Total Surplus
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total gains from trade in a market (Consumer surplus + Producer surplus)
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Willingness to Pay
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the maximum amount that a buyer will pay for a good
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