Module 1- What is Economics?

Economic System

Manage societies resources (EX: farmland), to produce goods and services and give them out to society

Goods

EX: Mug, pen, etc.

Services

Education, lawyer, etc.

What are the two main economic systems?

Communism and Capitalism

Communism

The government makes the decisions (No hierarchy, removes personal liberty, everyone is “equal”, government places you into jobs.)

Capitalism

Individuals in society make their own decisions (make choices, can lead to income inequality)

Private Ownership

One person owns means of production and they get the profit (EX: Someone opening their own restaurant)

State Ownership

Government owns everything

Cost-Benefit Principle

Cost and benefits encourage your decisions. Evaluate and pursue

Willingness to Pay

The max amount of money someone is willing to pay for something

Economic Surplus

A measure of how much your decision has improved your well being

Opportunity Costs

Money or benefits lost by not selecting a particular option during the decision-making process (EX: If you go and watcha movie you can’t read your book)

Scarecity

Human wants are unlimited, but the resources and goods available to fulfill those wants are limited

Marginal Principle

When making a decision, break it into pieces

Marginal Benefit

Additional satisfaction a person receives from consuming one more unit of a good or service, which typically decreases with each additional unit

(EX: the first slice of pizza provides satisfaction (high marginal benefit), but the fifth slice offers less benefit, and you would be willing to pay less for it.)

Marginal Cost

Extra cost to supply more of a unit

Rational Rule

If something is worth doing, keep doing it until your marginal benefits = marginal costs

(EX: Keep hiring more baristas if the benefit of having them is equal to how much your making)

Interdependence Principle

Your best choice depends on your other choices

(EX: Buying a house depends on the credit market)

The Four Core Principles

Marginal Principle (how many)

Cost-benefit Principle (relevant costs and benefits)

Opportunity Costs (Take full account of what you give up)

Interdependence Principle (Look at the choices and how they effect each other)

Framing Effect

How wording changes perception of choices

Sunk Costs

Money / time already spent that cannot be recovered

Individual Demand Curve

Plots the quantity of an item that someone plans to buy at each price

Downward Sloping Demand

As prices fall, demand rises

Diminishing Marginal Benefits

The marginal benefit of each unit is smaller than the marginal benefit of the previous unit

(EX: One scoop of ice cream is good, another scoop is also good, by the third you’re full, by the fourth you feel sick.)

Market Demand Curve

A graph plotting the total quantity of an item demanded by the entire market, at each price

Normal Good

A good for which higher income causes an increase in demand

Inferior Good

A good for which higher income causes a decrease in demand

(EX: When you are poor you take the bus a lot, but when you get richer you buy a car and use the bus less.)

Complementary Goods

Goods that go together. Your demand for a good will decrease if the price of a complementary good rises.

(EX: Hot dogs and hot dog buns)

Substitute Goods

Goods that replace each other. Your demand for a good will increase if the price of a substitute good rises, and it will fall if the price of a substitute good falls.

(EX: If bus ticket prices rise, you might drive your car instead.)

Congestion Effect

When a good becomes less valuable because other people use it. If more people buy such a product, your demand for it will decrease.

(EX: Your demand for driving on a specific road will decrease if everyone uses that road.)

Price Elasticity of Demand

A measure of how responsive buyers are to price changes. It measures the percent change in quantity demanded that follows from a 1% price change.

% change in quantity of demand/ % change in price

(EX: Cutting gas prices by 20% leads to an increase in quantity by 10%)

Elastic

When demand changes for them in the economy

Greater than 1

Inelastic

When demand remains relatively constant, even when the economy shows signs of change

Less than 1

Perfectly Elastic

When any change in price leads to an infinitely large change in quantity

Perfectly Inelastic

When any change in price leads to an infinitely large change in quantity

Network Effects

When the value of a product or service increases as more people use it

Individual Supply Curve

A graph plotting the quantity of an item that a business plans to sell at each price

Perfect Competition

All businesses are selling an identical good and there are many sellers and many buyers

Price Takers

An individual or firm that cannot influence the market price of a good or service and must accept the prevailing market price

Market Supply Curve

A graph plotting the total quantity of an item supplied by the entire market, at each price

Price Elasticity of Supply

A measure of how responsive sellers are to price changes. It measures the percent change in quantity supplied that follows from a 1% price change

Fixed Costs

Price doesn’t change when quantity does

Variable Costs

Business expense that changes in direct proportion to the volume of goods or services a company produces or sells

Short Run

Time such that a firm cannot change its capital stock (EX: size of kitchen for a new restaurant)

Long Term

Time such that a firm can change its capital stock

Variable Costs

If amount you produce changes then your costs DO change

Market Economies

Each individual makes their own production and consumption decisions, buying and selling in markets.

Equilibrium

The point at which there is no tendency for change. A market is in equilibrium when the quantity supplied equals the quantity demanded.

Equilibrium Price

The price at which the market is in equilibrium.

Equilibrium Quantity

The quantity demanded and supplied in equilibrium.

Shortage

When the quantity demanded exceeds the quantity supplied.

Surplus

When the quantity demanded is less than the quantity supplied.