UNC ECON 101 everything to know

Scarcity

Resources are limited, therefore any resource you spend time pursuing one activity leaves fewer resources to pursue others

Cost benefit principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

Framing effect

Decisions are influenced by how the choices are stated (higher priced alternatives, etc.)

Opportunity cost principle

the true cost of producing an additional unit of a good or service is the value of other goods or services that must be given up to obtain it

Sunk costs

costs that have already been incurred and cannot be recovered

Production Possibility Frontier

maps out the different sets of possibilities that are possible with your resources

Moving along the PPF

reveals OC

Marginal principle

decisions about quantities should be made incrementally

Marginal benefit

the extra benefit of one extra unit

Marginal cost

the extra cost from one extra unit

Rational Rule to Maximize Economic Surplus

If something is worth doing, keep doing it until your MB = MC

Interdependence Principle

Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors changes, your best choice might change.

Gains from trade

the benefits that come from reallocating resources, goods, and services to better uses

Voluntary trade

trade in which both partners freely agree to and benefit from the exchange of goods/services

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

Opportunity cost equation

hours task takes/hours required to produce alternative outcome OR khan academy video LOOK UP TO REMEMBER

Three steps to identify CA

1. Determine how long each task takes each person

2. Convert into OC

3. Evaluate who has CA by finding who has the lowest OC

Power of prices

1. Price is a message

2. Price is an incentive

3. Price Aggregates Information

Prediction markets

markets whose payoffs are linked to whether an uncertain event occurs

Prediction markets...

yield forecasts because the price reflects info/decisions

Internal Market

markets within a company to buy and sell scarce resources

Knowledge Problem

when knowledge to make a good decision is not available

Individual Demand Curve

a graph plotting the quantity of an item that someone plans to buy at each price (P COMES BEFORE Q)

Ceteris Paribus (all else equal)

only letting one variable change (no interdependence principle)

Demand

the relationship between the price of a good and the amount of buyers willing to purchase them

Quantity demanded

the exact amount people will pay at a given price

4 steps to find market demand curves

1. Survey customers

2. Add the total quantity demanded by customers

3. Scale up the quantities by the survey so it is representative of the whole market

4. Plot total quantity demanded by the market at each price to draw the curve

Law of Demand

the tendency for quantity demanded to be higher when the price is lower

Diminishing marginal returns

a level of production in which the marginal product of labor decreases as the number of workers increases

Rational Rule for Buyers

buy more of an item if the marginal benefit of one more is greater than or equal to the price

Market demand

the sum of quantity demanded by each person at each price

What shifts demand curves? (PEPTIC)

Preference

Expectations

Prices of Related goods

Type/# of buyers

Income

Congestion/Network effect

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

Complements in Consumption

goods that go together

Substitutes in Consumption

Goods that replace each other

Network effect

when a good becomes more useful because other people use it

Congestion

when a good becomes less useful if other people use it

Individual supply curve

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

Law of Supply

the tendency for quantity supplied to be higher when the price is higher

Perfect competition

all businesses are selling an identical good; there are many buyers AND sellers

Implications of Perfect Competition

Firms are price-takers

Order of economic principles

1. Marginal

2. Cost-benefit

3. OC

Rational Rule for Sellers in a Competitive Market

sell one more unit if the price is greater than or equal to the marginal cost

Market supply

the sum of all that is supplied each period by all producers of a single product

What shifts supply curves (PEPTO)

Prices of input

Expectations

Productivity/technology

Type/number of buyers

Other opportunities

Substitute in production

alternative uses of your resources

Compliments in production

goods that are produced together

Planned economies

Centralized decisions are made about what/how goods and services are produced and allocated

Market economies

Each individual makes their own production and consumption decisions by buying and selling through markets

Market

any setting that brings potential demanders and suppliers together

Equilibrium

quantity supplied = quantity demanded

Shortages

A situation in which quantity demanded is greater than quantity supplied

Surpluses

A situation in which quantity supplied is greater than quantity demanded

Symptoms of a market in DISequilibrium

Queueing, bundling of extras, secondary market

x elasticity of y

% change in Y / % change in X

Midpoint formula

(x₁+x₂)/2, (y₁+y₂)/2

Price elasticity of demand

a measure of how responsive buyers are to price changes

Elastic goods are...

bigger than one

Inelastic goods are...

smaller than one

Determinants of Price Elasticity of Demand (#BNCT)

1. # of suppliers

2. Brands vs categories (cheerios vs cereals)

3. Necessities vs luxury

4. Consumers willingness to search

5. Time frame

Calculating the price elasticity of demand

% change in quantity demanded / % change in price

Higher prices lead to ___ revenue if demand is elastic

less (people are fine with switching)

Income elasticity of demand

how responsive demand is when your income changes

Income elasticity of demand equation

% change in quantity demanded / % change in income

Price elasticity of supply

how responsive producers are to price changes

Determinants of Price Elasticity of Supply (AATEE)

1. Ability to keep inventory

2. Ability to change variable inputs/production

3. Time frame

4. Easy entry/exit is more elastic

5. Extra space

Positive analysis

describes what WILL happen

Normative analysis

assesses what SHOULD happen

Efficient outcome

yields the largest possible economic surplus (changes SIZE of pie)

Equity

a measure of fairness/fair distribution of economic benefits (the size of the slices of pie)

Consumer surplus

area below demand curve and above the price

Producer surplus

area above the supply curve and below the price

Economic surplus

producer surplus + consumer surplus

Efficient production

producing a given quantity of an output at the lowest possible cost

Efficient allocation

allocating goods to create the largest economic surplus; requires that each goods goes to the person who will get the highest marginal benefit

Rational rule for markets

produce until MC = MB

Market failure

when the forces of supply and demand lead to an inefficient outcome

Why Market Failures are bad

1. Market power undermines competitive pressures

2. Externalities can have side effects

3. Information problems undermine trust

4. Irrationality leads to bad decisions

5. Govt can impede market forces (taxes)

Deadweight loss

economic surplus at efficient quantity - actual economic surplus

Government failure

government policies lead to worse outcomes

Critiques of economic efficiency

1. Distribution matters (equity ignored)

2. Willingness to pay (Kim K example)

3. The means matter, not just the ends

Statutory burden of tax

burden of being assigned by the government to send a tax payment

Economic burden of a tax

burden created after tax happens (prices increase)

Tax incidence

division of the economic burden of a tax between buyers and sellers

Who shares a higher tax incidence?

Whoever is more inelastic

Steps to evaluate taxes

1. determine which curve is shifting

2. consider if it is increase or decrease

3. compare pre-tax equilibrium with post-tax equilibrium

4. consider if S or D is more elastic

Subsidy

payment made by govt to those who make a specific choice

Price ceiling

a maximum price that sellers can legally charge

Price floor

a minimum price that sellers can legally charge

Mandate

a requirement to buy or sell a minimum amount of a good

Quota

a requirement to buy or sell a maximum amount of a good

Externalities

side effect of an economic activity

Marginal internal/private cost

the extra cost the SELLER INCURS on one more unit

Marginal external cost

the cost imposed on bystanders from the seller producing one more unit

Marginal social cost

marginal private + marginal external

Marginal internal/private benefit

the extra benefit enjoyed by the buyer from one extra unit

Marginal external benefit

extra benefit enjoyed by bystanders from the buyer buying one more unit

Marginal social benefit

marginal private + marginal external