Intro to Economics, Price Elasticity of Demand, Production and Costs, Market Power

Scarcity

Limited amount of resources, unlimited wants and needs

Factors of production

Land, labor, capital, entrepreneurship

Opportunity cost

Next best alternative when choosing an option

Economic questions

What to produce? How to produce? For whom to produce?

Free market

Individuals own factors of production, economic questions answered through free market

Command system

Government makes all decisions for what's best in society

Closed/traditional

Based on customs/traditions, is self-sufficient

Production Possibility Curve (PPC)

Graphical representation of the trade off between the production of two goods

Linear PPC

In order to produce more guns we must give up some production for butter (Opportunity Cost)

Demand

Quantity of a good/service that a consumer is willing and able to purchase at a set price

Law of Demand

As price of a good/service increases, Qd decreases

Real income effect

As price of a good decreases, real income increases, quantity demanded increases

Substitution effect

As price of a good decreases, people will substitute to that good, quantity demanded increases

Law of Diminishing Marginal Utility

The more a good is consumed the less utility you derive from it, the price of good must decrease

Utility

Total amount of satisfaction

Changes in demand

Movement along demand curve due to change in price, shift in demand curve due to non-pricing factor

Change in price of related good

Substitutional goods, and complementary goods

Income

Normal goods, and inferior goods

Consumer Taste

Trends

Change in population/demographics

People's expectations for future prices

Economic Methodology

Economies tries to use scientific methods to explain how the economy works on a macro and micro level

Positive economics

Can be proven based on empirical evidence

Normative economics

Based on opinion/belief

Classical economics

Believes free market self-corrects, and government isn't required

Keynesian economics

Believes recessions can last, and government intervention is necessary

Supply

The quantity of a good/service that a producer is willing and able to produce at a given price

Law of supply

As price of good/service increases Qs increases

Changes in Supply

Movement along supply curve due to change in price, shift in supply curve due to non-pricing factor

Change in cost of factors of production

Increase in wages

Technology change

More efficient production

Tax

Additional business expense

Subsidy

Money goes to company

Equilibrium

Occurs at the point of intersection between supply & demand, Qs = Qd

Surplus

Qs > Qd, there will be downwards pressure on price

Shortage

Qd > Qs, there will be upwards pressure on price

Shocks in the Market

Change in Demand and Supply changes together, Change in Supply Demand and supply changes separately

Allocative Efficiency

Occurs when factors of production are allocated in a manner that maximizes social surplus

Consumer Surplus

Difference between price consumer is willing/able to pay and the market price

Producer surplus

Difference between price producer is willing/able to supply and the market price

Community/Social surplus

Sum of consumer and producer surplus

Functions of price mechanism

Signalling function, Incentive Function

Business Objectives

Maximizing profits, CSR (Corporate Social Responsibility), Market Share, Max Revenue

Behavioral Economics

Introduces human psychology into consumer decision model

Biases

Factors that influence an individual's decision making

Anchoring Bias

Reference point an individual will make based on past experiences

Framing Bias

The way decisions are made upon the way the choices are presented

Availability Bias

Decision making affected by how easily information comes into our mind

Rationality

Bounded rationality, Bounded Self-Control, Bounded Selfishness, Imperfect information

Behavioral Economics in action

Choice Architecture, Nudge Theory

Price Elasticity of Demand (PED)

Measure of the responsiveness of Qd to a change in price

PED

Relates to the economic concept of change

Determinant of PED

Number & Closeness, Time, Proportion of Income

Income Elasticity of Demand (YED)

Measure of responsiveness of Qd to a change in household income

YED

Relates to the economic concept of change in household income

Structure changes in the Economy

Primary, Manufactured, Service

Price Elasticity of Supply (PES)

Measure of responsiveness of producers to a change in price

PES

Relates to the economic concept of change in price

Determinants of PES

Time, Market Period, Stock & Unused Capacity, Availability of factors of production

Government Intervention - Taxes

Reasons for government intervention, Types of Indirect tax, Incidence of Taxation

Subsidies

Money from the government, to produce in order to encourage additional products and lower market price

Reasons for Subsidies

Producers, Consumers, Market Failure

Market Failure

Occurs when free market forces lead to the allocation of resources that do not maximize total welfare

Externalities

Impact or "spill-over" effect of the consumption/production of a good/service on a 3rd party

Market Failure Terms

Marginal Private Cost (MPC), Marginal Social Cost (MSC), Marginal Private Benefit (MPB), Marginal Social Benefit (MSB)

Externality Graphs

Negative Externality of Production, Negative Externality of Consumption, Positive Externality of Production, Positive Externality of Consumption

Merit & Demerit Goods

Associated with market failure, Merit Goods, Demerit Goods

Government Intervention: Price Controls

Methods of Intervention, Demerit Goods, Merit Goods

Market Power - Perfect Competition

Assumptions, Classical Economic Theory, Graph Analysis, Efficiency in Perfect Competition, Evaluation of Perfect Competition

Market Power - Monopolies

Assumptions, Graph Analysis, Natural Monopoly, Efficiency of a monopoly, Advantages of a Monopoly, Methods of Intervention

Market Power - Monopolistic Competition

Assumptions, Graph Analysis, Efficiency in Monopolistic Competition, Evaluation

Market Power - Oligopolies

Assumptions, Collusive vs Non-Collusive, Nash equilibrium, Evidence for Oligopolistic Markets, Non-pricing competition, Efficiency in Oligopolies, Potential Benefits of Oligopolies