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economics
study of how society manages its scare resources
society
individuals, firms, government
scarcity
limited nature of society's resources, individuals face time and income scarcity
behavior of the economy
reflects the behavior of the individuals who make up the economy
opportunity cost
what you give up
value of certain resources could have produced had they been used in the best alternative way, not always cost related, could be time
implicit+explicit cost
living expenses are not opp cost, since you're going to spend that anyway
marginal change
small incremental adjustments around the edges of what you're doing
ex: marginal benefits, marginal costs
ex: $40 a month for a movie streaming service and you watch 8 movies a month, the marginal cost: the extra you would have incurred by streaming another film (would be 0) because you pay the same $40 for the service
marginal benefit
depends on how much the person already has
water vs diamonds, water is essential but the marginal benefit of having it is small because water is plentiful
a rational decision maker
takes an action if the action benefits exceed its cost
incentive
something that induces a person to act
ex: when the price of apples rises, people decide to eat fewer apples, and tax on gas encourages different transportation
trade
allows each person to specialize in the activities she does best
market economies
the decisions of the central planner are replaced by the decisions of millions of firms and households
firms decide who to hire, households decide which firms to work for
these all interact in the marketplace where prices and self interest guide decisions
free markets
free market, an unregulated system of economic exchange, in which taxes, quality controls, quotas, tariffs, and other forms of centralized economic interventions by government either do not exist or are minimal.
market failure
to refer to a situation in which the market on its own fails to produce an efficient allocation of resources, caused by externalities and market power
the individual incentives for rational behavior do not lead to rational outcomes for the group, known as negative externalities: traffic, litter, obesity, pollution
externality
can be harmful or beneficial, the impact of one person's actions on the well-being of a bystander
in a negative externality such as pollution the market may fail to take this cost into account
positive externality=getting an education
market power
ability of a firm to unduly influence the market prices-> having only one well for water, the person who owns it has lots of power and takes advantage
causes externalities
a country standard of living depends on...
its ability to produce, more productive, then high standard of living
prices rise when
too much money is printed
inflation
increases in overall prices in the economy, value of money decrease so prices rise
a short run trade-off between inflation and unemployment
increasing the amount of money in the economy stimulates overall level of spending thus higher demand for goods and services, more demand may overtime cause firms to raise their prices but also encourages them to higher more workers
over a period of a year or two, many economic policies push inflation and unemployment in opposite directions
explicit cost
monetary cost $$$
implicit cost
time, things you could've done instead, a student who gives up income of a job when he stays in college for 4 years
marginal analysis
every decision you make you have to determine that the marginal benefit is at least as great as the marginal cost
total benefit
revenue generated by all customers for all advertising hours
total cost
total amount of time spend for all hours of advertising -change in total cost, margins of total cost
net benefit
total benefit-total cost
marginal benefit
revenue generated by additional customers gained from the last hour of advertising- the margins of total benefit
you are going to keep advertising
as long as marginal benefits exceeds or equals marginal cost, advertising is MB is at least as great as MC
circular flow diagram
model how the economy is organized and how participants interact
outer arrow is the flow of dollars, inner arrows, flow of inputs and outputs
two markets: goods and services and factors of production
two groups of people: households and firms
two types of decision makers
firms and households (in a circular flow diagram)
firms
produce goods and services using inputs, labor, land, capital,
inputs are called factors of production
factors of production
labor, land, capital
households
own the factors of production and consume the goods/services the firms produce
sell factors
buy products
households and firms in the market
households are buyers, firms are sellers, and in the market for factors of production, firms are buyers and households are sellers
factor market
households sell, firms buy (top of diagram)
businesses
(left side of diagram)
buy factors of production
sell products
product market
firms sell, households buy (bottom of diagram)
inner loop
flows of inputs and outputs
households sell labor, land, and capital, to firms for factors of production
firms use these factors to produce goods and services, which in turn are sold to households
outer loop
the corresponding flow of money
households spend money to buy goods and services from firms
the firms use the revenue from sales for payments to the factors of production such as wages
whats left is the re-profit for the firm owners who are themselves, members of households,
economists
develop models to explain behavior and/or events
model is a relationship between variables
law of demand
all else the same, an increase in the price of a good will reduce the quantity demanded of the good
ppf
an economy that only produces two goods--> cars and computers
the ppf shows the various combinations of output that the economy can possibly produce given the available resources
slope measures the opp cost of a car in terms of computers
less steep parts of the curve
less opportunity cost, bowed out because the opp costs isn't consistent
what determines the price that trade takes place
has to lie between their opp costs
comparative advantage
ability to produce a good at a lower opp cost
market
place where buyers and sellers interact and determine the price of a good
buyers determine the demand for a product and sellers determine supply
supply and demand
supply-> sellers of a good or service demand-> buyers of a good or service they refer to the behavior of people as they interact with one another in competitive markets
competitive markets
lots of buyers and many sellers that each has a negligible impact on the market price
each seller of ice cream has limited control over the price because other sellers are offering similar products
no buyer can influence the price because each buyer purchases only a small amount, raising prices too high means people will just buy elsewhere
perfectly competitive
the goods offered for sale are exactly the same
the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price
buyers and sellers are price takers, they must accept the price the market determines, buyers can buy all they want, sellers can sell all they want
monopoly
a market in which there are many buyers but only one seller, and they set the price
demand curve
relationship between price and quantity demanded
quantity demanded
determined by the goods price
law of demand
as price increase quantity demanded goes down
market demand vs. individual demand
two peoples demand curve = market demand
found by adding horizontally the individual demand curves
variables that shift demand
income: lower income means less spending so less demand
expectations:
normal good
if demand for a good falls, while income falls, its a normal good
inferior good
if demand falls while income increases
if demand for a good rises when income falls
bus rides: as income falls you are less likely to buy a car or take a cab
variables that influence buyers
price of good itself (movement along the demand curve)
income, prices of related goods, tastes, expectations, number of buyers (all shift curve)
quantity supplied
the amount that sellers are willing and able to sell
law of supply
relationship between price and quantity supplied (slopes upward)
market supply
some of all the supplies of all sellers
things that effect supply
input prices
technology
expectations
number of sellers
equilibrium
where supply and demand intersect, called equilibrium price and quantity
at this point, the quantity that buyers are willing and able to sell balances the quantity that sellers are able to sell
actions of buyers and sellers naturally moves markets towards equilibrium
increase in demand no change in supply
P up Q up
increase in demand, increase in supply
P ambiguous Q up
increase in demand, decrease in supply
P up Q ambiguous
no change in demand, increase in supply
P down Q up
no change in demand, decrease in supply
P up, Q down
decrease in demand, no change in supply
P down, Q down
decrease in demand, increase in supply
P down, Q ambiguous
decrease in demand, decrease in supply
P ambiguous, Q down
invisible hand
in a free market economy, self-interested individuals operate through a system of mutual interdependence. This interdependence incentivizes producers to make what is socially necessary, even though they may care only about their own well-being.
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