#1 - Econ 201 Study set

What is economics about?

Making choices because of limited resources and unlimited desires due to scarcity.

cost-benefit principle

Determining if the cost of an action and if it is worth the benefit it provides.

Economic surplus

When the value of something at more than its cost, you get an economic surplus. Benefit-cost

The opportunity cost principle

The true cost of something is the next best alternative you have to give it up for it, since you can only do one thing at a time. By ranking them.

Production possibility’s frontier

The PPF shows the trade offs you confront when deciding how to spend your time. Any point under the line is inefficient, any point on the line is efficient, and any point beyond the line is impossible because we don’t have those resources.

Rational people

Rational people think on the margin, and do the best they can to achieve there objectives

Marginal Cost

Marginal Benefit

The extra cost to produce one more unit

The extra satisfaction or value you get from one more unit

The principals of interdependence

We make decisions by thinking about the decisions of others and how they interact

Positive statements

are descriptive and describe the world as it is, facts that can be proven. (can be false tho)

Normative statements

Are prescriptive in how things should be, more opinion based.

Reservation price

The maximum price your willing to pay

Perfectly competitive markets

Many buyers and sellers so that one individual doesn’t affect the price or production at all EX: farming and hair cuts

Quantity demanded

Amount buyers are willing and able to purchase

Law of demand

The lower the price, the higher the demand

Market demand curve

Sum the individual demand curves horizontally. — Is downward sloping

4 steps to estimate it:

1. Survey

2. For each price add up the totally demanded by all customers

3. Scale up the quantities to represent the whole market

4. Plot the total quantity demanded at each price

Shifts in demand curves

Increase in demand: Shifts right

Decrease in demand: Shifts left

Demand curve shifters (PEPTIC)

Preferences, Expectations, Price of related goods, The type and number of buyers, Income, Congestion and network effects

Normal good

A good for which higher income causes increase in demand

Inferior good

A good for which higher income causes decrease in demand, you buy less when your income in higher like fast food

Complementary good vs substitute good

Complementary good: Goods that go well with eachother

substitute good: goods that replace eachother

Movement along the demand curve

If the only thing changing is the price of the goods, then it is movement along the demand curve. Along the curve up and down