Economics

Economic Agent

individual or a group that makes a choice

Scarce Resources

Things that people want, where the quantity that people want exceeds supply

Scarcity

Is the situation of having unlimited wants in a world of limited resources

Economics

The study of how agents coose to allocate scarce resources & how these choices affect society.

Postitive economics

Described what people actually do (objective)

Normal economics

Recommends what people should do (subjective)

Optimization

Trying to choose the best option

Equilibrium

Everyone is simultaneously optimizing, so nobody would benefit by changing their behavior

Empiricism

Verify claims with data.

Microeconomics

Study of how individuals, households, firms, and government choices affect prices, the allocation of resources, & the well being of other agents.

Macroeconomics

Economy as a whole (inflation rates, unemployment rates, economic output growth rates)

Trade-Offs

When an economic agent needs to give up something in order to gain another

Budget Contstraint

Shows the bundles of goods or services that a consumer can choose given her limited budget (quantifies trade-offs)

Opportunity Cost

Best alternative use of a resrouce that gets sacrificed when you pick the other option

Cost-benefit analysis

A calculation that adds up costs and benefits using a common unit of measurement

Model

simplified description of reality (theory)

Empirical Evidence

Set of facts established by observation and measurement (data)

Causation

Occurs when one thing directly affects another through a cause-and-effect relationship

Corellation

There is a mutual relationship between two things

Zero Correlation Variables

Two variables that are not related, when correlation does NOT imply causality.

Three categories of correlations

1. Positive Correlation

2. Negative Correlation

3. Zero Correlation

Ommitted Variables

Something that has been left out of the study, that would have explained why two variables in the study are related

Reverse Causality

Occurs when the cause and effect can go both ways and therefore isn’t necesarily causation

A natural experiment

An empirical study in which some process-out of the control of the ecxperimenter-has assigned subjects to control and treatment groups in a random way

Optimization in levels

Calculates the total net benefit of different alternatives and then chooses the best alternative

Optimization in differences

Calculates the Change in net benefits when a person switches from one alternative to another,then uses marginal comparisons to choose the best alternative

Optimum

Best feasable choice

Comparative Statistics

the comparison of economic outcomes before and after some economic variable is changed

Marginal Analysis

Cost-benefit calculation that studies the difference between a feasable alternative and the next feasable alternative (only looking at the one extra thing)

Market-price

If all buyers and sellers face the same price

Quantity demanded/supplied

The amount of a good that buyers/sellers are willing to purchase/sell at a given price

Demand/Supply schedule

Table that reports the quantity demanded/supplied at different prices

Demand/Supply Curve

Plots the quantity demanded/supplied at different prices

“Holding All Else Equal”

Implies that everything else in the economy is held constant)

Other way of saying “Holding All Else Equal”

Ceteris Paribus

Aggregation

Process of adding up individual demand curves

Market Demand Curve

Sum of all potential buyers’ deman curves

Law of Demand

In almost all cases the quantity demanded rises when the price falls

Diminishing Marginal Benefit

As you consume more of a good, your willingness to pay for an additional unit declines

5 Factors that make the demand curve shift

1. Taste & Preference

2. Income & Wealth

3. Availability & prices of related goods

4. Number & Scale of Buyers

5. Buyers’ beliefs about the future

“Left shift”

decrease in demand/supply

“Right Shift”

Increase in demand/supply

Movement along the demand curve

When a good’s price changes and its demand curve hasn’t shifted

Substitutes

When the fall in price of one good, leads to a left shift (decrease) in the demand for another

Complements

When the fall in price of one, leads to a right shift (increase) in the demand for another

Law of Supply

In almost all cases the quantity supplied rises when the price rises

4 Factors that make the Supply Curve shift

1. Prices of inputs used to produce the good

2. Technology used to produce the good

3. Number & Scale of sellers

4. Seller’s belief about the future

Competitive Equilibrium

Corssing point of the supply curve & the demand curve

Competitive Equilibrium Price

Equates the quantity supplied and quantity demanded (y-axis)

Competitive Equilibrium Quantity

Quantity that corresponds to the competitive equilibrium price (x-axis)

Excess Supply

Market price is above competitive equilibrium price (supply exceeds demand)

Excess Demand

Market price is below competitive equilibrium price (demand exceeds supply)