Economics

Choice

Choice

means to face scarcity

Incentive

to promote goods actions or actions with negative effects. Reward or penalty

Scarcity

Inability to have everything

Microeconomics

Choices of individuals and businesses

• Market

• Individuals

• Government

• Business

Macroeconomics

Performance of the national and global economy

• Global

• National

Goods and services

• What?

• How?

• For whom?

What?

Changes and varieties | Determinantes? ex. what determinates what we produce

How?

Factors of production

For whom?

Consumers

Factors of Production

• Labor (workers)

• Land

• Capital

• Entrepeneurship

Labor (workers)

• wages

• human capital

• skills, jobs

Land

• rent

• natural resources

• oil, gas, coal, water

Capital

• Interests

• tools that help you produce

• material goods (may be rented)

Entrepeneurship

• profits

• the ideal/vision

• human resource that organizes labor, land, and capital

Can self-interest promote social interest?

• self-interest= best choice available for you

• social-interest=efficiency, best for society, fairness

*how can we align both even when it seems not possible

Economic thinking (consumption)

Social Science

Statements:

• Normative:

  • what should be

  • values

  • how life or things should be based on values

• Positive:

  • What is

  • Test

• Cause vs. Effect

  • Models

Economics

the study of choices and its consequences

Efficient Resource Allocation

Economies must decide the best way to allocate their scarce resources to meet the needs and wants of their population

PPF (Production possibilities frontier)

Represents the production boundaries of an economy (scarcity)

• 2 goods

• cetris paribus

• Efficiency

PPF efficiency

• Misallocated:

  • not best match

  • skills

• Unused:

  • Idle

  • Unemployment

Production efficiency: lowest cost

Inefficient production

Tradeoffs = opportunity cost

• Highest value alternative

Opportunity cost

PPF

which is the most efficient point?

Efficiency

• Production: lowest possible cost

• Allocative: lowest possible cost, quanitites that provide the most benefit

Marginal Cost (MC)

Cost of producing ONE more unit

• Refers to how much the cost changes

• Opportunity cost is not constant

• Is the slope

Marginal Cost Curve - MC

• the results of calculating the slope

• costo marginal de un bien en cada cantidad a lo largo de la FPP

Marginal Benefit

• Benefit of consuming ONE more unit

• Measure: the most that people are willing to pay for ONE more unit

• Quantity: of other services & goods that you give up

• Preferences: want -like

• Decreasing marginal benefit: why?

Allocative Efficiency

PPF

• Any point = tradeoff (intercambio)

• Best point: tradeoff of a good that provides a greater benefit

Economic Growth

Expand production possibilities

• living standards

Economic Growth & the PPF

If we develop new technologies and accumulate capital:

• Increase consumption in the future

• Disminuye la producción actual de bienes y servicios

Opportunity cost: decrease in today’s consumption

Opportunity cost

of an action is the highest-valued alternative

Advantages:

• Comparative:

  • lowest opportunity cost

  • abilities and resources

  • in terms of another good

• Absolute

  • highest productivity

  • per hour

Relative price

The ratio of one price to another

Liz and Joe example of comparative advantage

Factors that bring changes in demand

• the price of related goods

• expected future prices

• income

• expected future income increases

• population

• preferences

Normal good

demand increases as income increases

Inferior good

demand decreases as income increases

Circular flow diagram

• Market: Firms, markets, property rights, money

• Sectors: Households, firms, government, rest of the world

• Dynamic: Income=expenditure

3= financial, factors of production, goods and services

• Needs to work clockwise and counter-clockwise

Sectors

• households

• firms

• government

• rest of the world

households

• factors of production

• consumption expenditure

• savings

• income=salaries (dividends, interests, rent, transfers)

• payments=taxes

• no investments

firms

• factors of production

• expenditure (investments, financial conc.)

• inventories

• future salas

• purschase goods and services

• capital increase

• FDI = +10% value of the company investment, power of participation gives revenue

government

• expenditure

• transfers

• purschases

• income=taxes and loans

• can borrow from IMF or the world bank

rest of the world

• exports

• imports

prices

• Money: number of currency that you give in exchange for a good or service

• Relative: ratio of one price to another. opportunity cost. the value of a product and what you give up to buy it

supply and demand model

• competitive markets:

  • producers offer goods or services, IF the price covers their opportunity cost

• consumers seek cheaper goods or services

  • alternatives

Determines relative prices

• Price = relative price

demand

it represents that you…

1. want (can we satisfy all our wants?

2. can afford (scarcity)

3. plan to buy

effects

• Substitution:

  • goods have substitutes

  • opportunity cost increase=incentive to switch

• Income:

  • higher prices and same income

  • can’t afford everything

  • stop buying those goods that increase the price

quantity demanded

• quantity demanded vs quantity bought = not equal

• quantity demanded = amount per unit of time

law of demand

“ceteris paribus, the higher the price of a good, the smaller is the quanity demanded. the lower the price of a good, the bigger is the quanity demadned”

demand curve

• Demand

  • price-quantity relationship

• Demand curve

  • illustration

  • willingness and ability to pay

• Demand schedule

  • quantities demanded at each price

changes in demand

• price of related goods

• substitutes: can be used in place of another

• complement: used with another good

• change in quantity: only price change, movement along the curve

• change in demand: price remains constant, other factor changes, shift of the curve

changes in demand

any factor that influences buying plans

• expected future prices

• income

  • positive relationship

  • normal good= demand increases with income

  • inferior good= demand decreases with income

• expected future income and credit

  • easy to get credit

  • positive relationship

• price of related goods

• population

  • size and age structure

• preferences

  • determine the value of a good

  • influenced by: weather, information, fashion

consumer surplus

the difference between the willingness to pay and the price payed

• sum of individual surpluses=total consumer surplus

• usually consumers pay less than their willingness to pay

  price effects

supply

• quantity supplied vs quantity sold

  • not equal

• quantity supplied = amount per unit of time

supply represents

it represents that firms:

1. plan to produce it (what are the constraints?)

2. can profit (resources and technology

3. have resources and technology

supply curve

• supply

  • price-quantity relationship

• supply curve

  • illustration

• supply schedule

  • quanitities supplied at each price

changes in supply

• change in quanity:

  • only price change

  • movement along the curve

• change in demand:

  • price remains constant

  • other factor changes

  • shift of the curve

causes of changes in supply

any factor that influences selling plans

• price of related goods

  • substitutes=goods that can be produced with the same resources

• expected future prices

  • remaining of sales (now vs.future)

• price of factors of production

  • lowest price willing to accept changes

• number of suppliers

  • positive relationship

• technology

  • ways that factors of production are used to produce

• nature

  • natural forces that influence production

Producer surplus

the difference between the producer’s min. price (cost) and the price received

• sum of individual surpluses = total producer surplus

market equilibrium

• no shortages or surplus

• price adjustments eliminate shortages or surpluses

• surplus = excedente

• making sure that everything produced is sold

Changes in demand

increase vs. decrease

• if only price changes there is only a movement

• expected price increase might decrease the demand

changes in supply

• decrease in supply, we have a higher price to produce less

• in case of the increase of suppliers price and quantity decrease

• in equilibrium a price change will always end up in shortage or surplus

Equilibrium

• price adjustments: coordinate buying and selling plans

• equilibrium price: qty demanded= qty supplied

• equilibrium quanity: qty supplied at equilibrium price

• consumers value the good more than its current price

• producers can’t sell all they want at high prices

produces a change in prices

isolated changes

• quantity change certain

  • increase in demand and supply

  • decrease in demand and supply

• price change certain

  • decrease in demand and increase in supply

  • increase in demand and decrease in supply

• important: magnitude of changes

demand curve

supply curve

market equilibrium

quantity equilibrium

price equilibrium

Tax incidence

• division of the burden

• who really pays the tax

tax on sellers

• increase in cost= decrease in supply

• min. selling price + tax = new equilibrium

• new= price and incidence

• to know the curve shift you add the tax to the price and then make the shift in the supply curve to the left

tax on buyers

• the higher the price, less is the demand

• increase in price= decrease in demand

$ Tax - price that producers get

$ cons - represent what consumers will pay

taxes and efficiency

• wedge between buying and selling prices

• underproduction

• shift of consumer and producer surplus to tax revenue

taxes and elasticities - demand

taxes and elasticities - supply

taxes and fairness

• benefits

  • pay taxes= benefits received

• ability to pay

  • how easily can the burden be covered

subsidies

payment from the government to a producer

effects:

• supply increase

• price decrease

• qty produced increase

• MC increase

• inefficient over-production

elasticity

change in the quantity for a specific change in price

interpreting elasticity

predictions

• effect on TOTAL revenue

• price effect

• quantity effect

• unit-elastic: nochange

• inelastic: revenue increase

• elastic: revenue decrease