ECON 201

every day i wake up and wonder why i took this class.

SCARCITY

resources are limited, unlimited wants/needs exceed ability of resources to meet needs

PEOPLE FACE TRADE OFFS

The idea that no decision comes without consequences

THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT

It is not just actual cost of good/service that needs to be considered, consider what you're giving up too

OPPORTUNITY COST

What could've been done w/ what was given up?

EXPLICIT COST

Monetary expense paid by someone who doesn’t own the resource

IMPLICIT COST

Forgone opportunity cost for owner of the resource

RATIONAL PPL THINK AT THE MARGIN

Idea that people want to do things at the lowest marginal cost

MARGINAL COST/BENEFIT

additional cost/benefit

PEOPLE RESPOND TO INCENTIVES

incentives matter in economic stability and productivity

TRADE CAN MAKE EVERYONE BETTER OFF

Through specialization and trade, everyone benefits
More goods lower cost

MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECON ACTIVITY

WHAT goods and services? HOW will they be produced? WHO will receive them?

MARKET ECONOMY

Capitalism
Invisible hand
Adam smith
Decisions of households/firms interacting in markets allocate econ resources

MIXED ECONOMY

Capitalism + socialism
More gvt involvement (e.g. healthcare, welfare)
1) Decisions arise from buyers/sellers in markets
2) Gvt plays a significant role in allocation of resources
3) Market and central planning

GVTS CAN SOMETIMES IMPROVE ECON ACTIVITY

i. Enforce property rights
1) Ability of a person to own/control over scarce resources
2) Less productive if there is a high risk of theft/loss of control
3) Laws + law enforcement
ii. Promote efficiency
1) Market failure - fails to allocate scarce resources efficiently
a) Caused by:
b) externalities: production/consumption affects others (pollution)
c) Market power: single buyer or seller has substantial influence (monopoly)
iii. Promote equity
1) Redistribution of income
Taxes and redistribution

A COUNTRY'S STANDARD OF LIVING DEPENDS ON ITS ABILITY TO PRODUCE GOODS/SERVICES

Increases in real GDP per capita depends on increase in labour productivity

LABOUR PRODUCTIVITY

1) qty of goods/services produced by one person/one hour of work
a) Determined by:
i) Physical capital: advanced production equipment, tools, structures
ii) Human capital: knowledge and skills that workers acquire through life, education, training
iii) Natural resources: inputs into production of goods/services produced by nature: land, rivers + mineral deposits
Technological change: change in qty of output a firm can produce based on given input qty

PRICES RISE WHEN THE GVT PRINTS TOO MUCH MONEY

a. Decrease in supply
b. Central banks print too much money
i. Short run - monetary expansion leads to increased output, decreased interest rate, increased price level
c. Long run increase in money supply is reflected entirely in a proportional increase in the price level, no effect on output/interest rate

INFLATION

increase in the general level of prices

DEMAND PULL

Increased in aggregate demand for goods and services

COST PUSH

increase in production cost

SOCIETY FACES A SHORT-RUN TRADEOFFS BETWEEN INFLATION AND UNEMPLOYMENT

a. During a business cycle expansion
i. Production, employment, income increase = low unemployment
ii. Demand and spending by households/firms are high, result in prices increases = high inflation
b. During a recession
i. Production, employment, income decrease = high unemployment
Demand and spending by households/firms are low, results in prices decreasing = deflation, low inflation

CIRCULAR FLOW DIAGRAM

product market - households - factor market - firms
b. Flow of $ - counterclockwise
1. Spending on goods - revenue - wages, rent, profits - income
c. Flow of input/output
1. Goods + services - labour, land, capital, enterprise, - factors of production - goods + services

PRODUCTION POSSIBILITIES FRONTIER

Shows max of each product you can produce (scarcity, opportunity cost, efficiency)
If you have X amount of resources, you can only produce a certain amount of goods Y and Z

ALLOCATIVE EFFICIENCY

Using the resources in the way that is consistent with demand
Where MB of the last unit = MC for production of that unit.

SPECIALIZATION AND TRADE

Increases overall production
Resources can be used more efficiently
Decreases overall opportunity costs

ABSOLUTE ADVANTAGE

Can produce more in sheer numbers
More productive
More efficient

COMPARATIVE ADVANTAGE

Solely based on opportunity costs
Compares who will lose less in production
Specialization

MARKET

Group of sellers/buyers + the rules applied
Buyers determine demand
Sellers determine supply

PRICE

Cost/money req'd to purchase a good or service
Determined by the market

RELATIVE PRICE

The price of a good in comparison to the next best good

COMPETITIVE MARKET

When the market has enough buyers/sellers that not one single buyer/seller can determine market price

DEMAND CRITERIA

- Want
- Can afford
- Have made a definite plan to buy it
- All 3 criteria

QUANTITY DEMAND

Amt of a good/service that someone will buy at a certain price and time

DEMAND SCHEDULE

Table that shows the relationship between price and qty demanded

DEMAND CURVE

Graph that shows the relationship between price and qty demanded

LAW OF DEMAND

price goes up and qty demanded goes down

SUBSITITUTION EFFECT

The idea that consumers will find alternatives when price is too high therefore qty demanded decreases

INCOME EFFECT

the idea of affording
purchasing power increasing or decreasing

MARKET DEMAND

sum of all consumer demand for good/service
-ve relation between price/Qd

DEMAND SHIFTS

Along the demand curve: price points
Changes in demand from other factors: moves entire curve left or right

EFFECTS ON QUANTITY DEMANDED

- Income
- Taste of consumers
- Quality changes
- Catastrophe
- Prices of related goods
- Population and demographic
- Expectations
• Expected increase in price = current demand increases
• Future income change = current demand increases
Product availability

SUBSTITUTE

Good that is an alternative for another

COMPLEMENTS

goods that are used in conjunction

NORMAL GOOD

increase income = increase demand

INFERIOR GOOD

income increases = demand decreases

MARKET SUPPLY

Decisions of producers of how much a product to provide and how much to sell it for

SUPPLY CRITERIA

- Has resources/production technology
- Can profit/break even from production
- Has made a definite plan to supply it
- Technological feasibility

QUANTITY SUPPLIED

Amt willing to supply at a certain price and time

SUPPLY SCHEDULE/CURVE

Table/graph showing the relationship between supply and price
+ve slope

LAW OF SUPPLY

increase price = increase supply

EQUILIBRIUM

where supply and demand curves intersect

MARKET CLEARING PRICE

Everyone in the market has been satisfied

SURPLUS

qty supplied > qty demanded
prices must be lowered

SHORTAGE

qty supplied < qty demanded
price must be raised

LAW OF SUPPLY/DEMAND

Price adjusts depending on qty supplied + demanded
Main goal is to reach equilibrium

PRICE ELASTICITY OF DEMAND

measure of the responsiveness of the qty demanded to a good to a change in the price of that good, everything else constant

ELASTIC DEMAND CURVE

□ Qty moves proportionately more than price
□ Perfectly elastic when PED = infinite
Demand curve is horizontal

INELASTIC DEMAND CURVE

absolute value < 1
qty moves proportionately less than price
perfectly inelastic when PED = 0
qty not affected by price
demand curve is vertical

UNIT ELASTIC CURVE

qty moves proportionately the same as price
% change in qty demand = % change in price

DETERMINANTS OF PED

- availability of close substitutes
- necessities vs luxuries
- definition of the market
- time horizon

RELATIONSHIP BETWEEN PED AND TR

- depends on elasticity (price and TR move in opposite-elastic, same-inelastic, constant-unit)
- decrease in price does not mean decrease TR

TOTAL REVENUE

amount paid by buyers and recieved by sellers of a good/service
P x Q

ELASTICITY ALONG A LINEAR DEMAND CURVE

- not constant across the curve
- At prices above midpoint = elastic
- Prices below midpt = inelastic
- Prices at midpt = unit elastic

CROSS PRICE ELASTICITY OF DEMAND

measure of the responsiveness of the qty demanded of one good to the change in the price of another good
substitute = +ve, complement = -ve, unrelated = 0

INCOME ELASTICITY OF DEMAND

responsiveness of qty demanded of one good to changes in income
normal good (necessity) = +ve < 1
normal good (luxury) = +ve > 1
inferior good = -ve

PRICE ELASTICITY OF SUPPLY

Responsiveness of qty supplied of a good to a change in price
same as demand

FACTORS OF PES

- resource substitution possibilities
- time horizon
- short-run - less elastic than long-run

PRICE CEILING/PRICE CAP

legal max on the price

EFFECTS OF PRICE CEILINGS

- above eq price: not binding on market, no effect on market
- below eq price: binding on market, shortage occurs, reduce quality or service
- leads to inefficient underproduction

BLACK MARKET

illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed

PRICE FLOORS

legal minimum at which a good can be sold

EFFECTS OF PRICE FLOORS

- below eq price: not binding
- above eq price: binding, surplus,
- harm buyers but benefit sellers
- unemployment and large costs on small businesses

WAGE CONTROL

equilibrium wage rate in illegal region
labour supply > demand

PER-UNIT TAXES

taxes assessed as a particular dollar amt on the sale of a good or service as opposed to a % tax

EFFECTS OF TAXES ON BUYERS

D decreases
price sellers receive lowers
qty sold lowers
price buyers pay increases
if tax > price, buyers and sellers share burden of tax

EFFECTS OF TAXES

market price rises
qty demanded decreases
effect is equivalent on buyers and sellers
tax places wedge between price buyers pay and price sellers recieve

TAX INCIDENCE

actual division of the burden of a tax between buyers and sellers in a market
dependent on elasticity

ELASTICITY AND TAX INCIDENCE

Perfectly inelastic demand = buyers pay entire tax
Perfectly elastic demand = sellers pay entire tax
More inelastic demand = higher share that buyers pay
More elastic supply = higher share that buyers pay
Perfectly inelastic supply = sellers pay entire tax
Perfectly elastic supply = buyers pay entire tax

ALLOCATION OF SCARCE RSOURCES

- market price/equilbrium
- command
- majority rule
- contest
- first-come, first-served
- lottery
- personal characteristics

WILLINGNESS TO PAY

maximum amt that a consumer is willing to pay for a good or service (benefit)

CONSUMER SURPLUS

difference between price paid and willingnes to pay
(marginal benefit - price)/units bought
benefit in excess of expenditure
area between D curve and market price on y-axis

EXPENDITURE

area under demand curve and market price (qty demanded x price per unit)

PRODUCER SURPLUS

(price sold - marginal cost) / units sold
area below market price + above supply curve

WELFARE ECONOMICS

how allocation of resources affects economic well being

TOTAL SURPLUS

consumer surplus + producer surplus
we want to maximize this

EFFICIENCY

property of a resource allocation of maximizing total surplus amongst entire society
MB of consumers = MC of sellers

UNDER/OVERPRODUCTION

inefficient production
results in a deadweight loss

DEADWEIGHT LOSS OF TAXATION

w/o tax: MSB = MSC
w/ tax: MSB > MSC
inefficiency
tax revenue takes part of total surplus
deadweight loss due to decreased qty

DEADWEIGHT LOSS

amount of inefficiency
determined by elasticities

DEADWEIGHT LOSS AND TAX REVENUE

small tax: small DWL and small TR
larger tax: larger DWL and larger TR
largest tax: largest DWL, lower TR

LAFFER CURVE

tax revenue rises first and then falls

MC OF PUBLIC FUNDS

change in the Tc to society of raising one more dollar in tax revenue
MCF= 1 + change in DWL

MB OF PUBLIC FUNDS

benefit associated w/ an extra dollar of expenditure on gvt programs financed by taxation
increase expenditure on the program and increase taxes to finance it , until MBF=MCF

IMPORTS

goods and services bought domestically but produced in other countries

EXPORTS

goods and services produced domestically but sold in other countries

WORLD PRICE

price of a good that prevails in the world market for that good

AUTARKY

country that doesn't participate in trade

FREE TRADE

trade between countries that is unregulated by the government

TARIFFS

taxes on imports
Similar to tax effects
Increases world price - qty supplied increases and qty demanded decreases
Consumer surplus shrinks while producer surplus increases
Deadweight loss
Production cost increases - social loss
Decrease in qty demanded - social loss