Microeconomics - Prof: Jehoon Han

What is economics?

What does Oikonomos mean?

the study of how society manages its scarce resources

- society has limited resources and cannot produce all the goods and services people wish to have.

the person who manages a household

four principles of how people make decisions

1. People face trade-offs

2. The cost of something is what you give up to get it

3. rational people think at the margin

4. people respond to incentives

Principle one

People face trade-offs:

every decision involves giving up one thing for another

- society also faces trade-offs. Be able to see the America's longest war graphic and explain (government spending)

efficiency

society gets the max benefits from its scarce resources

equality

benefits are distributed uniformly among society's members

three principles of how people interact

5. trade can make everyone better off

6. markets are usually a good way to organize economic activity

7. governments can sometimes improve market outcomes

principle six

markets are usually a good way to organize economic activity:

The wealth of nations (1776):

self-interested firms and households act as if "led by an invisible hand" to promote overall economic well-being

- the invisible hand works through prices:

prices determined by supply and demand, guide decisions about production and consumption, helping allocate resources efficiently.

economist scientists

make positive (descriptive) statements:

- claims about how the world is

- can be confirmed or refuted by examining evidence

"minimum-wage laws involve unemployment"

economist policy advisers

make normative (prescriptive) statements:

- make a claim about how the world ought to be

- evaluation involves both value and facts

"the government should raise the minimum wage"

Two Economic Models

Model 1: Circular-flow diagram

Model 2: The Production Possibilities Frontier (PPF)

Circular Flow Diagram

simplified representation of the organization of the economy:

two markets:

- goods and services

- factors of production

two agents:

- households

- firms

*LOOK AT DIAGRAM AND KNOW WHAT EACH AGENT IS DOING IN EACH MARKET*

Production Possibilities Frontier

a graph that shows the combinations of output that the economy can produce given the available resources and tech.

- any point that is outside the frontier is not feasible w current resources, BUT any point on or inside the frontier is a possible output combination

Efficient (ON->producing all it can) and Inefficient (INSIDE->producing less) Points:

What does the slope of the PPF represent?

reflects the opportunity cost of a car

- bowed outward ppf: opp cost of a good rises as the economy produces more of the good

What does a straight line PPF represent?

constant opportunity cost

absolute advantage

the ability to produce a good using fewer inputs than another producer

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

- a person can't have comparative advantage in both goods

Who has comparative advantage?

calculate opportunity cost

Opportunity Cost

whatever must be given up to obtain some item

- the opp cost of one good is the INVERSE of another good

x

1/x>1/y

- smaller number is opp cost aka has comparative advantage

perfectly competitive market

a market in which all market participants are price-takers

- identical goods

- buyers and sellers are numerous

Quantity Demanded

the amount of a good that buyers are willing and able to purchase at any given price

demand

the relationship between price and the quantity demanded

demand schedule

table showing quantity demanded at each price

demand curve

graph showing how quantity demanded changes with price

Law of demand

the price of a good or service and the quantity demanded are negatively related

market demand

sum of all individual demands for a good or service

Market Demand Curve

shows how the total quantity demanded of a good changes as its price varies, assuming other factors remain constant

factors that influence buyers

income

prices of related goods

expectations of the price of the good

number of buyers

supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

supply curve

a graph of the relationship between the price of a good and the quantity supplied

Equilibrium

A state of balance

market's equilibrium

the point at which the supply and demand curves intersect

Equilibrium Price

the price that balances quantity supplied and quantity demanded

Equilibrium Quantity

the quantity supplied and the quantity demanded at the equilibrium price

3 steps for analyzing changes in equilibrium

1. identify if the event shifts the supply or demand curve (or both)

2. determine if the curve shifts right or left

3. sue the supply-and-demand diagram to find how the shift affects equilibrium price and quantity

elasticity of demand

a measure of the responsiveness of quantity demanded to a change in one of its determinants

price elasticity of demand

how much the quantity demanded of a good changes in response to a change in its price

*remember formula !!

Determinants of Price Elasticity of Supply

1. substitutes

2. necessities vs luxuries

3. market definition

4. time horizon

substitutes

close substitutes: elastic

no close substitutes: inelastic

necessities vs luxuries

luxuries: elastic

necessities: inelastic

market definition

narrow markets: elastic

broad markets: inelastic

time horizon

longer horizon: elastic

shorter horizon: inelastic