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Economics
the study of how humans allocate scarce resources (limited resources)
It’s a social science and studies human behavior
Scarcity
The limited nature of the society's resources
Example: Land, water, food, oil
Basic Principles:
1) People behave rationally
2) People respond to incentives
Example: tax on cigarettes ⇒ less smoking
Tax on cigarettes = incentives
Less smoking = the rational behavior
Microeconomics
the study of how individual households and firms make decisions and how they interact with one another
How someone/single individual spends their money OR how they distribute a scarce resource
Macroeconomics
The study of the economy as a whole. The goal is to explain the economic changes that affect many households, firms, and markets simultaneously
Fiscal and Monetary policy
Division of labor:
The production of a good or service is divided into a number of a good or service is divided into a number of tasks performed by different people
Specialization:
Workers concentrate on one part of the production process where they have an advantage
Economies of scale:
level of production increases the cost of producing each unit decreases
Two types of markets
1) Markets for goods and services
2) Labor Markets
Markets for goods and services
households DEMAND
Firms SUPPLY
Labor Markets
Firms DEMAND
Households SUPPLY
“The invisible hand”
A term coined by Adam Smith
a natural phenomenon that guides markets economy
it describes how consumers and producers interact in the economy
Self-interest can lead to positive social benefits
EG} thinks of example of how two stands offer the same thing but one has ir for cheap which will you buy
Regulations
Sometimes market economies have inefficiencies or market failures = government is needed to correct for market failures
some can be monopolies, income inequality, pollution
regulations define the “rules of the game” in an economy
regulations enforce private property laws, protect people, prevent fraud, collect taxes
Underground economy (black markets)
Buyers and sellers make transactions without government approval
What are the three economic systems?
Traditional economy
Command economy
Market economy
Traditional economy:
these economies organize their affairs the same way they have always done
economic decision s are made by individuals based on their own beliefs/customs rather than a written set of laws
Command economy
The government decides what goods and services will be produced and what prices will be charged
one ENTITY (can be any person of power) working the majority of the economic decisions
Example - methods of production that will determine how much workers will be paid
Market economy
decision making is decentralized, economies are based on private enterprises
Example - Means of production (resources and businesses) are business owned and operated by private groups of individuals
Opportuntiy set:
all the possible opportunities for spending on two goods and services
Budget constraint
all the combinations of two goods that one can afford when the budget is exhausted (you’ve spent all your money)
plots on a graph/line connecting them
Opportunity cost:
What must be given up to obtain the next best thing (something you desire)
What is the equation that equals opportunity cost
Implicit costs + Explicit costs = Opportunity cost
Implicit costs
(economics)
sacrifice something valuable that is NOT money
Example: In college, an implicit cost is sleep, time, and social life
Explicit Costs:
(accounting)
out of pocket expenses/ actual financial trasnactions
Sunk costs:
costs incurred in the past that cannot be recovered
if you buy a concert ticket its final sale you can get your money back
Utility:
The satisfaction one gains from a good or service
another word for HAPPINESS
Marginal Utility:
An extra satisfaction you get from consuming one more unit of something
like an extra layer of happiness/utility
Law of diminishing marginal utility
As a person receives more of a good the additional (or marginal) utility from each additional unit of the good DECLINES
think of the pizza example the more slices you eat the less utility you receive
Production Possibilities Frontier
Just as an individual cannot have everything they want and must instead make choices — society as a whole cannot have everything it may want
PPF
Production Possibilities Curve
Illustrates the trade off facing an economy producing two goods
The law of diminishing opportunity cost:
holds that as production of one good or service increases the marginal opportunity cost producing it increases as well
no matter what the cost of both will increase because what was sacrificed doesn’t make up for the cut of the other good or service
Example - If your preferred the production of clothes over food you will expand into lad used for food which may not be suited for it meaning now both food and clothes cost goes up
PPF graph reflects this
The economic approach:
Economists make the careful distinction between
positive statements and
normative statements
Positive Statement:
DESCRIPTIVE
It’s a statement AND it can be verified
“The unemployment rate is 4%”
Normative Statement:
PRESCRIPTIVE
It can’t be verified AND is more of an opinion/suggestive
“The unemployment rate should be under 4%”
Marginal decision making:
choosing whether the extra unit of something is worth it based on cost and benefits
Market
A group of buyers and sellers of a particular good or service
4 Market Structures
1) Monopoly = One seller
Standard oil, Alcoa
2) Oligopoly = few sellers
mobile networks (Verizon, T-Mobile), Supermarkets
3) Monopolistic Competition = Many sellers / Goods are differentiated
Restaurants, Clothing stores
4) Perfect Competition = Many Sellers / Goods are identical
Agricultural goods, metals, oils, water
Law of Demand
Ceteris Paribus (all other things held constant)
when the price of a good rises = demand falls
When the price goes down, = demand goes up
Quantity demanded:
The amounts buyers are willing and able to purchase
When is there a shift in demand curve (entire curve moves)
Happens when something other than price changes: Income, preference
When is there movement along the demand curve (along the same line)
Occurs when only the price changes
Normal good:
Increase in income leads to an increase in demand
Steak, korean BBQ, Nike
The more money you get the more you want to but these goods
Inferior Goods:
An increase in income = leads to a decrease in demand for these goods
and a decrease in income = will increase demand
Rice, Cup o’ Noodles, Mcdonald’s, Walmart shoes
Substitutes:
Two goods for which an increase in the price of one leads to an increase in the demand for the other (SIMILAR GOODS)
Example: Sierra Mist and Sprite
If the price increased, the demand for Sierra Mist would decrease, and the demand for Sprite would increase
If the price decreased, the demand for Sierra Mist would increase, and the demand would decrease
Complements:
Two goods for which an increase in the price of one leads to a decrease in demand for the other
(TWO GOODS BOUGHT TOGETHER)
Example: Ribs and BBQ Sauce
If the price increased for ribs, the demand would decrease for both ribs and BBQ sauce
If the price decreased for ribs, the demand for both ribs and bbq sauce would increase
Exception to the Law of Demand:
very rare, usually happens with:
Luxury goods - the more expensive a luxury good, the more desirable it is
Example: Jewelry, sports car, designer clothes
Giften good - low income goods for which there are little or no substitutes
Example: Potatoes, salt, bread
Law of Supply:
Ceteris Paribus, the quantity supplied of a good rises as the price of the good rises
price rises = want to supply more of it
price falls = supply less of that good
A positive relationship between price and quantity supplied
Inputs
Things needed to make outputs/run a business
Example - Capital and Labor (they cause a shift in supply)
so if wages rise, there will be less oil supply, so that would shift the supply line to the left because it’s decreasing
Equilibrium
A station in which the price has reached the level at which quantity supplied equals quantity demanded
the moment they intersect
Equilibrium Price (P*)
Equilibrium Quantity (Q*)
1) The market clearing price buyers have bought all they want to buy and sellers have sold all they want
2) Where the amount of the product consumers want to buy (quantity demand) is equal to the amount producers want to sell (quantity supplied)
Consumer surplus
is the benefit that consumers get when they are able to buy something for less than the maximum price they are willing to pay.
Consumer surplus = What consumers are willing to pay - (minus) What they actually pay
Imagine you were willing to pay $20 for a concert ticket, but you only had to pay $15. The extra $5 is your consumer surplus because you got the ticket for cheaper than you were willing to pay
Producer Surplus
is the benefit that producers (sellers) get when they are able to sell something for more than the minimum price they are willing to accept.
Producer surplus = What producers actually receive - What they were willing to accept.
For example, a seller might be willing to sell a product for $10, but they end up selling it for $15. The extra $5 is the producer surplus because the seller got more than they were willing to accept.
Total Surplus
CS + PS = TS
The triangle is the total surplus
In this case if Q* was any number but 1 you would multiply it to the total surplus ???
Surplus
A situation in which the quantity supplied is greater than the quantity demanded
Qs > Qd
Shortage
A situation in which quantity demanded is greater than quantity supplied. EXCESS DEMAND
Qd > Qs
Price ceiling
Legal maximum; prevents price from climbing “too high”
think of it as ceiling is high the highest point in a house
Price Floor
Minimum price; prevents price from falling “too low”
think of it as the floor is the lowest part of the house prevents you from falling into the basement
