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Economics
the study of the choices we make under the conditions of scarcity.
Scarcity
The limited nature of society’s resources.
A situation in which the amount of a good available is insufficient to satisfy the desire for it.
positive analysis
focuses on facts and cause-and-effect relationships
avoids value judgements
“what is”
normative analysis
incorporates value judgements about what the economy should be like or what policy actions should be recommended
“what ought to be”
Scarcity Principle
Although we have unlimited wants and needs, the resources available to us are limited . So, having more of one good thing usually means having less of another
resource
anything that can be used to produce something else.
What is a free lunch?
a gift (getting something without giving anything up in return)
trade-off
An exchange, that is, giving up one thing to get something else
efficiency
A situation in which society gets the maximum benefits from its scarce resources
opportunity cost principle
The cost of something is what you give up to get it.
benefit
The benefit of something is the gain or pleasure that it brings
cost
what you must give up to get something
opportunity cost
the amount of other products that must be forgone or sacrificed to produce a unit of a given product
the next best option that you’re giving up
how do you calculate the opportunity cost
explicit cost + implicit cost
explicit cost
The money sacrificed and actually paid out for a choice
implicit cost
The value of something sacrificed when no direct payment is made
the rationality principle
rational people think at the margin
Economists usually assume that people are rational
rational choice
A choice that uses the available resources to best achieve the objective of the person making the choice
margin
A choice on the margin is a choice made by comparing all the relevant alternatives systematically and incrementally.
marginal cost
The Opportunity cost that arises from a one-unit increase in an activity
what you must give up to get an EXTRA or ADDITIONAL unit of it
The marginal cost of any activity increases as you do more
marginal benefit
the benefit that arises from a one-unit increase in activity.
incentive
A reward or a penalty that encourages or discourages an action
something that induces a person to act
incentive principle
A person( or a firm or society) is more likely to take an action if its benefit rises and less likely to take it if its cost rises
market economy
an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
social interest
the choices that are best for society as a whole
market failure
A situation in which a market left on its own fails to allocate resources efficiently.
market power
The ability of a single economic actor( or a small group of actors) to have a substantial influence on market prices
inflation
An increase in the overall of prices in the economy
microeconomics
study of how households and firms make decisions and how they interact in markets
macroeconomics
study of economy as a whole
model
an abstract/simplified representation of reality
a modified version of reality
key characteristic of models
as simple as possible to accomplish its purpose
simplifying assumption
makes a model simpler without affecting its conclusions
critical assumption
affects the conclusion of a model in an important way
3 key economic questions
what goods/services do we need to produce as a society
how do we produce the goods and services
for whom are the goods and services produced
4 kinds of resources
land
labor
capital
entrepreneurship
capital
long lasting tool that itself is produced and helps us to produce something else
market
any arrangement or institution that brings buyers and sellers together
2 sides of circular flow model
buyers/demanders
sellers/suppliers
what happens in the resource/factor market
businesses buy
households sell
what happens in product/good market
households buy
businesses sell
traditional economy
resources are allocated according to long lived practices of the past
command / centralized / centrally planned system
most economic decisions are made by the governmnt
market economy
resources are allocated through individual decision making
laissez-faire
gov’t intervention is minimal and prices dictate nearly all economic activity
modern “mixed” economy
mix between capitalism and communism
characteristics of market system
private property
freedom of enterprise and choice
self interest
competition
invisible hand
tendency of competition to cause individuals and firms to unintentionally but quite effectively promote the interests of society even when they are only attempting to pursue their own interests
competition
rivalry among firms for resources and consumers
freedom of choice
allows owners to employ/dispose of property/money as they see fit
allows workers to enter any line of work
ensures customers are free to buy whatever
freedom of enterprise
ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods/services and sell them to their chosen markets
self interest
people will make choices that are best for them, not best for the society
production possibilities curve
a curve or graph showing the maximum combinations of 2 goods that can be produced with resources and technology currently available
law of increasing opportunity cost
more of something we produce, more opportunity cost for producing even more
why would the ppc shift outward
economic growth and technological advances
reasons for being inside the ppc
resources are not being fully used (unemployment or natural disasters)
perfectly competitive market
nobody has market power, prices are adjusted by invisible hand
demand
the relationship between price and quantity demanded
quantity demanded
amount of a good/service that buyer is willing/able to buy at a certain price during a certain time period
3 ways to show demand
table (demand schedule)
graph (demand curve)
equation (demand equation)
law of demand
the rule that, holding everything else constant, when the price of a good rises, the quantity demanded of that good will decrease
income effect
people have more purchasing power when prices are lower
substitution effect
when the price of something rises, consumers will buy alternatives
demand shifters
factors other than the price of a product that affect demand for the product
most important demand shifters
price of related goods
consumers’ income
expected prices
consumers’ taste
number of buyers
change in demand
a movement of an entire demand curve such that the quantity demanded changes at every particular price
change in quantity demanded
a change in the quantity demanded along a fixed demand curve as a result of a change in the good’s own price
substitute good
a good/service that can be used in place of another good
complement good
a good that is consumed along with another good
normal good
a good for which an increase in income leads to an increase in the demand for a good
inferior good
a good for which an increase in income leads to a decrease in demand for a good
Different shapes of ppc and what they mean
linear - constant slope / opportunity cost
nonlinear (concave) - increasing slope / opportunity cost
how to calculate opportunity cost of one more unit
loss/gain
economic system
system that decides the what, how, and for whom in production
what two markets are in the circular flow model
resource/factor
product/good
What happens to equilibrium price and quantity when demand increases
both increase
What happens to equilibrium price and quantity when demand decreases
both decrease
What happens to equilibrium price and quantity when supply increases
EQ increase
EP decreases
What happens to equilibrium price and quantity when supply decreases
EQ decreases
EP increases
supply
relationship between price of a good and quantity supplied of the good
quantity supplied
the amount of any good, service, or resource that a firm is willing and able to supply at a given price during a specific time period
change in quantity supplied
movement from one point to another along a fixed supply curve due to a change in price
change in supply
a movement of an entire supply curve such that the quantity demanded changes at every particular price
factors that affect supply
price of related goods in production
price of resources used in production
technology
government taxes, subsidies, and regulations
producer expectations
number of firms
3 questions to predict price changes
does the event influence the demand or supply?
does the event increase or decrease demand or supply?
what are the new equilibrium price and equilibrium quantity and how have they changed?
Note 
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