Econ unit 1 - 5

What is Economics

A social science that studies how people make decisions in the face of scaricty

Scarcity

Universal phenomenon that arises because resources are finite

Micro vs Macro

Micro - A single area of the economy (individual units)

Macro - Economy as a whole (aggregate)

Positive statement

Fact based and can be confirmed or refuted by evidence

Normative statement

Describes how the world should be

Where is agreement among economists most likely to occur?

More agreement with positive micro statements and less with normative macro statements

Total economic surplus

Difference between total benefits and total costs

Cost benefit principle

People are inherently rational and a rational decision maker should undertake an action only if the marginal benefit is better than the marginal cost.

Example of Cost Benefit Princple

Marginal benefit

The amount of benefit you get per additional unit

Marginal cost

The cost required per additional unit

incentive principle

People partake in more of an action when the marginal benefit increases and less when the marginal cost increases

Factors of production

Inputs in the production process, broadly categorized as land, labor, and capital

Households and firms

Households - The decision making entities that seeks to gain benefits from consuming

Firms - The primary producers of goods and services

Represented by the Preliminary Circular flow diagram

Burden of production

Producing one good means producing less of another

Three economic questions

What to produce [product decision]

How to produce it? [resource use decision]

For whom to produce it? [distributional decision]

PPF

A curve summarizing the limits of production that a society faces. Combinations of goods that can be produced are represented through A, B, C, and E with D being unattainable and E being Inefficient.

Specialization

Specialization in production allows a society (and a company) to produce greater amounts of output than they otherwise could. Often is accompanied with trade, which is better off with specialization.

Absolute advantage

One person can produce more of the same good compared to another person/firm in the same time.

Opportunity cost

The value of the next alternative that must be forgone to undertake the activity.

Comparative advantage

One person has a lower opportunity cost in production than another

Voluntary trade

A universal “win - win” as one party wouldn’t trade if they were being shafted

Law of comparative advantage

When increasing the production of a good, a society should do so by using the productive resource with the lowest opportunity cost

Economic System

The rules and methods put in place by a society to determine what goods are produced. All economic systems include Households, Firms, Markets, and the Government.

Produced asset

Things that aid in production that are man made like machines, factories, or transport.

Capitalism

An economic system in which the means of production are privately owned for a profit. Evolved from Feudalism.

Socialism

An economic system in which the means of production are owned by the government

Feudalism

Economic system where land ownership is restricted to an aristocratic nobility.

Property rights

Right to control - the right to decide how to use your property

Right to transfer - the right to obtain or relinquish ownership of property from one person to another

Right to restitution - the right to be compensated when he damages your property

Consumer Sovereignty

The freedom to purchase or not purchase a good/service at a price in a free market

Proletariat

Working class

Communism

Economic system where means of production is owned by all people in society

Types of economic incentives

1. Material Rewards (monetary or increases in consumption)

2. Moral suasion (because it’s the right thing to do)

3. coercion (use of force or intimidation)

Mixed economy

Not every government has a perfect capitalistic or communistic system, the applications are always mixed

Structural measures

Attempts by economists to gauge differences in economic institutions, rules, or structures of different systems

incentive principle

We are more likely to do something if its benefit rises, and less likely if its cost rises

Three functions of Money

Medium of Exchange

Store of Value

Unit of Measure

Basic Circular Flow Diagram

Law of Demand

All other factors fixed, a greater quantity of a good will be demanded at lower prices (demand curves are downward sloping).

Law of supply

All other factors fixed, a greater quantity of a good will be supplied at higher prices (supply curves are upward sloping).

Buyer’s Reservation Price

Maximum amount a buyer is willing to give up to buy an item

Seller’s Reservation Price

Minimum amount a seller is willing to accept in order to part with an item

Rules of Equilibrium

Equilibrium is a state that no buyer or seller can alter to increase their own benefit. There’s always market pressure for prices to reach equilibrium (stable and self enforcing). Any price where there is excess supply/demand is not stable.

Determinants of Demand

Decrease in the price of a Complement Good (dip for chips)

Increase in the price of a substitute good

Increase in income (for normal good)

Decrease in income (for inferior goods)

Increased preference by consumers (new study ect)

Increase in market size

Expectation of higher future prices

Determinants of Supply

Decrease in cost of production

Improvement in technology

Favorable conditions of uncertain events (good weather for farming business)

Increase in Market size

expectation of lower prices (if house markets thought the prices would go down, they’d unload all their supply asap)

Supply vs Quantity supplied

The price of a good it’s self can never be the change in supply, as an increase in “own price” is just the price going up along the curve.

What happens when demand changes

Demand increases - Increase in price and quantity

Demand decreases - decrease in price and quantity

What happens when Supply changes

Supply increases - Decrease in price and increase in quantity

Supply decreases - Increase in price and decrease in quantity

Who wrote I, Pencil

Lenard Read

Negative Sum environment

A situation in which the sum of gains and losses results in negative values (doesn’t mean one side doesn’t profit)

Zero sum environment

A situation in which the sum of gains and losses results in a value of zero

Positive sum environment

A situation in which the sum of gains and losses over all people is positive in value (doesn’t guarantee a win win outcome)

Win-Win outcome

An outcome for which all people are better off than they would have been if the outcome was not realized (everyone wins) Only possible in a positive sum environment.

Win-Lose outcome

An outcome for which some are better off and some are worse off (Some win some lose)

Consumer and producer surplus

The surplus amount a consumer or producer makes or saves compared to the reservation price

Social surplus

The sum of gains over every person in society

Deadweight loss

The difference between the maximum possible level of total social surplus and the realized level of total social surplus. If a trade is efficient then DWL is zero.

Inefficiency from trade

Can be from both too little or too much trade, which causes inefficiency

How is consumer surplus represented visually?

Anything above the price level that’s under the demand curve is consumer surplus (areas A and B)

How is producer surplus represented visually?

Anything below the price level that’s over the supply curve is producer surplus (areas C and D)