Economics - Chapter 1, 2, 3

study boi

Economics

the study of how society uses scarce resources to meet the unlimited wants and needs of humans

Microeconomics

study small, individual parts of the economy (studying a small coffee shop)

Macroeconomics

study of the economy as a whole (US unemployment rate decreases)

Scientific Method

making hypothesis, collecting data, testing and then accepting/rejecting/modifying the hypothesis

Ceteris Paribus

holding everything else equal or constant (the main “assumption” of the economic study) (e.g. the apple festival doesn’t affect the football game)

Rational Behavior

an individual consumes until reaching maximum utility

Rational consumer stops consuming (no scarcity)

when marginal utility is zero

Bliss Point

when marginal utility is zero

Rational consumer stops consuming (scarcity)

when money is zero

Endowments

all finite natural and human resources from which goods/services are produced

Factors of Production

“inputs” (natural resources, labor, capital, and entrepreneurship)

Financial Capital

the stocks, bonds, or real estate one holds

Physical Capital

hard cash

Human Capital

knowledge, education, and skills a person contains

Entrepeneurship

A person who undertakes the risks and rewards of starting a new business venture

Process of Production

people transform inputs/factors into good/service

Labor intensive technique

high labor levels and higher levels of workforce for production

Capital Intensive Technique

investing more money to make a business more successful on things like machinery

Technology

the set of all available techniques

Returns to Scale

comparing inputs and outputs

Decreasing Returns to Scale

when there is more inputs than outputs (bad)

Constant Returns to Scale

when there is equal inputs and outputs

Increasing Returns to Scale

When there is less inputs and more outputs (good)

Law of Diminishing Marginal Productivity

marginal productivity can increase, but will decrease as a result of scarcity (when we made the hearts with scissors, we had limited resources and more people and the more input didn’t help because not enough resources so output reaches max)

Total Utility

increases at a decreasing rate

Intertemporal Decisions

decisions that have effects in different time periods, education, nutrition, exercise

High Discount Rate

wants utility now to forego utility later

Low Discount Rate

willing to forego utility now because they realize they can have more in the future

Present Value

the value of something today compared to the value it can have in the future

Risk

perception of risk can affect our choices

Uncertainty

unthought of events that cannot be assigned a probability of occurring and doesn’t affect decision making because it is unthought of

Liquid Investments

you can get your money back easily (move it around easily)

Non-liquid Investments

cannot move your money easily or get it back (e.g. Certificate of Deposit)

Interdependence

dependent on others in order to produce something or have final product

specialization

being adept at a certain task or skill

specialization

leads to new innovations, increased productivity, a surplus of goods

what limits specialization?

demand- only specialize in something if there is a demand for it

Traditional Economy

economy where culture, religion, and the traditions of the people dictate how the economy is run. (amish people- sunday businesses are closed for church)

Command Economy

when the government or some central authority makes economic decisions

free market economy

an economy that is run solely by the people, we make all economic decisions  (absolutely no government involvement)

mixed market economy

most free market but government has regulations for things like alcohol and guns)

Unit of account

the people using the money know the value of the money

Medium of Exchange

it needs to be durable and widely accepted

Store of value

the currency you are using will retain its value over time

Commodity

something that has value because of the material its made of (gold, silver)

Fiat

only has value bc government says so (paper money)

equilibrium

when supply=demand

demand

The desire, ability & willingness of a consumer to purchase a good/service at a specific price

quantity demanded

a specific quantity desired bc of a specific price or circumstance (rainy day=buy more soup bc in da mood)

Substitutes

(replacement item) if the price of pepsi goes up the demand for coke goes up

complements

product that are typically bought together and effect each other (e.g. peanut butter and jelly)

how do expectations impact demand?

if you expect a snowstorm, then you buy groceries

a change in quantity demanded results in:

change in price

Market Demand

Studying the demand of a group of 

people for a certain good/service at 

various prices

supply

The amount of a good/service that producers are willing and able to make available for sale at various prices

Law of Supply

as price goes up businesses have more incentive to produce more of it

supply

not a number, an attitude

quantity supplied

a specific number supplied at a specific price and time bc of a specific circumstance

factors that affect a change in supply

technology, subsidies (money from govt) resource costs, taxes, number of suppliers, expectations

change in quantity supplied is affected by…

price

surplus

happens if we charge a price above the equilibrium (price may be lowered)

shortage

happens if we charge a price below the equilibrium (business owners may raise the price)

Price Ceilings

Maximum legal price that can be charged for a good or service

Pro- Allows people to obtain goods or services that could not previously be afforded

con- creates shortages bc businesses dont wanna make it

Price floors

Minimum price that can be charged for a good or service

pro- Helps business owners with low incomes

con- bad for consumers bc not cheap

invisible hand

the market moves as needed

do we ever reach equilibrium?

no we are always adjusting towards it

do suppliers and demanders strive for equilibrium?

no they are just trying to maximize utility