Econ

Key thinkers

adam smith

what is econ

unlimted wants + limited resources = scarcity

economics definition

Economics is a social science studying how individuals business and goverments apply scarce resources to make decisions and create incentives

what is adam smith known for

associated support of free market/founder of economics

what is his pin factory example

if one person straigthens the wire one person cuts it and another packagaes it

dvision of labour = specialization =

concentrate on a narrow part of a service or product to boost productivity and efficencey introducing comparative advantage

comparative advantage

countires/companies focus on producing goods with the lowest oppurtunity cost to maximise the benfits of trading with other countires

why are prices so fundamental to markets

prices act as the primary signal in supply and demand influencing resource allocation and consumer behaviour

self interest

ones inerest pursued without regards for others - eg a baker sells bread to earn money

the invisbile hand

The idea that people chasing their own profit in a free market accidentally help society by creating the goods and prices people want.

Example: A baker bakes delicious bread purely to earn money (self-interest). However, this action benefits the community by providing them with fresh food at a price they are willing to pay.

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creative distruction

creating / innovation of new dismantles old in favour of more effiecent new technology

creative distruction example

smartphones destroyed
mp3 players
digital cameras
satnav
but created
app developers
new tech jobs
mobile accessory markets (cases)

pareto improvement

someone becomes better of without making anyone else worse off - 2 ppl swapping sandwiches because they both prefer eachothers

pareto efficencey

no more improvements can be made without hurting someone (trade off involved) one person becomes better off the other becomes worse off

utility function

happiness or satisfaction from consuming something - chochoalte bar

maximising utlity

people choose the option that gives the most satisfaction vs another option - pizza pasta

marginal benefit (MB)

extra benefit from performing another unit

Marginal Cost (MC)

Extra cost from doing one more unit

when to use marginal optimization

mb = mc
when marginal benefit = marginal cost

oppurtnunity the cost

the loss of choosing one option over another

long run vs short run

short run - some factors are fixed like a facotry size
long run - but a bigger facotry can be built

keynes "in the long run we are all dead"

long term solutions are useless if help is needed now

Neo-classical economics assumes

• people are rational
  -people maximise utility

• markets are efficent

• use mathamethics model
  assumes youll always cjhose the cheapest supermarket not the nearest or favourite

re thinking the neo classical approach

ppl ar enot always perfectly rational like buying something on offer even if yu dont need it
-market failure
eg
financial crashes
climate change

where does demand come from

demand comes from people willing to pay at a certain price

difference between value and demand

value depends on preferences and need like water when hungry

CS = Consumer surplus

difference between what consumers are willing to pay and actually pay - happy to pay £10 end up paying only £5

factors that effect supply

price of good
cost of production
technolgoy
number of sellers

factors that effect demand

price of good
income
prices of related goods
taxes
number of buyers

Market effecicney

total surplus = consumer surplus + producer surplus
remeber pareto efficencey one person cannot be made better of without making someone esle worse off
whens prices reflect their true

examples of interventions in the market

price ceilings
minimum rpices
taxes

elasticitiy

a % change in behaviour of buyers or sellers in response to a % change in price

things that effectelasticity

avaialability of substitutes
degree of necessity
duraion of price change
proprtion f budget
brand loyalty/reputation

what does a low elasticity show (sellers)

market power

price elasticity formula

% change in quantity demanded / % change in price

what do elasticity results show

0-1 inelastic (weak response to price change)
-1 unit elastic (equal chane in price to demand)
less than -1 (Strong response to price change)
REMEBER ABSOLUTE VALUES ARE JUST NON NEGATIVE

cross price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good

cped ( Cross-price elasticity of demand) formula

change in quantity demand of A / change in price of B x change of price of B x change in emand of A

RESULTS MENAING cross price elasticity of demand

• = compliment relation (with) + = substitue relation (instead)

loss leaders

sell price A a a low price and good B is an essential complient so revnue rises from that like printers and printer cartdidges

income elasticity of demand

% change in quantity demanded given a % change in income

formula of income elasticity of demand

change in qd% / change in income% X change in income / change in qd

how do interpret results

• = inferior goods (frozen chicken potatoes)

• = luxry goods (salmon

veleben goods

demand increases as the price increases this is because as price rises less people can own them making them more desirable especially to the wealthy like patek watches

gross vs net

gross = before tax
net = after tax

what does imposing taxes on inelastic goods (unavoidable) usually do

increases profit for the goverment

what is another reason goverment introduce taxes on products

to reduce consumption

deadweight loss

the fall in total surplus that results from a market intervention

imposing a tax on a supplier

increase supply curve (shifts up left) because price has risen in order to sell so demand usually drops as lets say they sold for 10 they now have to sell for 12 if a £2 tax is imposed or sell more at the same price

imposing a tax on the buyer

customer pleasure is reduced from the price they pay so demand would drop to a smaller level (down to the left like a 160 degree angle)

why is tax not accounted for as a DWL

because it is a transfer one profits (goverment) one loses (buyer or supplier)

incidence of taxation on inelastic (demand doesnt chnage) demand products

a very vertical inverse demand curve means consumers "pay" tax as people want and are attatched to the product

incidence of taxation on elastic products

consumption falls here as produers "pay" tax as consumers arent attached to product or have substitues so the dmeand line is slowly falling

APL average product of labour

average amount produced per worker

MPL marginal product of labour

Change in outpout from one additional worker keeping all other inputs constant

APL Formula

Q/L

Q = Output units

L = Units of labour used

MPL Formula

ΔQ/ΔL

ΔQ = change in output

ΔL = change in labour

MRPL marginal revenue product of labour

how much more money does firm make after addition of another unit of labour determing a firms willingness to pay for the unit of labour

MRPL Formula

ΔTR/ΔL

TR = REVENUE = Q X P

L = Labour

winner takes all markets

a nurse is one to one whereas football is to large broadcasts allowing for more possibile revenue oppurtunities

tournament theory

CEOs are paid relating their marginal product (the value they add)

as even a small decision for a large corporation can reap large rewards

superstar economics

small differences in ability translate itno huge economic differences as at a large scale lets say 50bn compared to 50m - a 5% increase is much better making different candidates worth tens of millions

Like elite level footballer or high skilled workers/partners within a firm

rent seeking

money gained from having a advantage almost a bargaining power over actual work or investment

For example a driving instructure lobbying (trying to influence) a change to make driving instructor licesnse harder to gain removing competiton framed as a public safety measure

collective barganning

as large firms are a monopsy (limited alternative) workers create unions to protect themselves

things unions contribute to

wage pay equality , workers rights and welfare , wokring hours and conditions , political and civil rights