Final economics

Keys to thinking like an economist

1. People are rational

2. People respond to incentives

3. Marginal analysis

4. Opprotunity Cost Matters

What objective do individuals tend to have?

Maximize Satisfaction

What objective do Firms tend to have?

Maximize profits

Incentitives

Influence in behavior. If it changes, behavior changes. Prices, mechanism that points markets to make certain actions

What does it mean to think on the margin?

It means to think additionally

If marginal benefit > marginal cost

Take action

If marginal benefit < marginal cost

No action

Sunk Cost

Costs that have been paid or must be paid. Person should ignore sunk costs

Opportunity cost

Value of next best alternative you give up when making a choice

Normative Economics

Imposes a value judgement

Positive Economics

Studies about economic behavior without judgements

Example of Normative

The goverment should solve its long term budget imbalence by decreasing spending 30%

Example of positive

Increase in minimum wage to 10 dollars will decrease employment in Kansas by 2,500 workers

Factors of production resourses examples are…

Labor, capital, natural resources and inputs used to produce goods and services

Economics

Study of choices people make to achieve own goals given scarce resources

Economic System

A society allocating its scarce resources to satisfy its wants

The three economic questions

1. What goods/services will be produced?

2. How will goods/services be produced?

   1. Who will recieve the goods/services produced?

Centrally Planned Economy

A economy in which goverment has a direct or indirect way in how economic resources will be allocated

Market Economy

A economy which the decisions of households and firms interacting in markets allocate economic resources

Mixed system

An economy which most economic decisions result from the interaction of buyers and sellers in markets, but the goverment plays significant role in allocation of resources

PPF( Production Posibilities Frontier)

Curve showing the attainable combinationbns of two products that may be produced with available resources and current technology

Slope of PPF

Y/X

If corn (Yaxis) has a 4500 production and soybeans(x) had a 1500, what would be opprotunity cost?

4500/1500 = 3

What causes an economic growth in farms

Technological advances

Circular Flow Diagram

Model of market economy that shows households and firms interacting

Market

Group of buyers and sellers of a good or srvice and institution or arrangement by which they come together to trade

Production market

Markets for goods and services

Factor markets

Markets for production, labor, captial, natural resources

The two economic agents

Households and firms

Consumer Sovereignty

Consumer ultimatly dictate what will be produced by choosing what to purchase

What does supply model in a competitive Market?

It models behavior of sellers in a market

What does Demand model in Competitive market?

Models behavior of buyers in market

Quantity demanded

Amount of good or service buyers are willing to purchase at a given price

Law of demand

Holding everything constant, when price of a product falls, the quantity demanded increases and when price of a product increases the quantity demanded product falls

Things that shift demand

income, prices of related goods, future prices expectations, holidays

How Income changes demand Normal good

Demand increases when income increases, if income decreases then demand will decrease

How Income changes demand Inferior good (great value brand)

Demand decreases when income increases, demand increases when income decrease.

Prices of related good change in substitute goods

Increase in price causes a increase in demand while a decrease in price of the substitute causes a decrease in demand.

Change in price of complementary goods in demand

Increase in price of complment causes a decrease in demand. A decrease in price of complement causes a increase in demand.

Expectation of future prices

Expect prices to rise in future is increase in demand and expect prices to fall in future is decrease in demand

Quantity Supplied

Amount of good or service a firm is willing and able to sell at a given price

Law of Supply

When price of product falls, quantity supplied decreases and when price of product increases, quantity supplied increases

Marginal analysis

price represents the marginal benefit to seller of producing and selling the good

Produce good when MC and MB is what

When MC <= MB is when you would want to produce. If MC>MB do not produce and sell good