oligopoly

normative statement

policy/opinion - should

positive statement

true/false

economics

science of choice, how human beings coordinate their wants and desires given decision-making mechanisms, social customs, and politics driving our reality  - organized common sense

three essential econ questions

what and how much to produce, how to produce it, for whom to produce it (need scarcity)

microeconomics

all about individual choice, studying pricing policies of firms, and how markets allocate resources

marginal cost

 cost above or below the cost you incurred

marginal benefit

the additional benefit above what youre deprived

opportunity costs

the benefit you might have gained from choosing the next be alternative

implicit costs (non-contractual or imputed)

costs that are associated with a decision that are not included in normal accounting costs

market force

an economic force that is given a relatively free rein by society to work through the market

invisible hand

the price mechanism: the rise and fall of prices that guide our actions in a market (adam smith)

economic model

framework that places generalized insights of theory in more specific contextual setting

economic principle

a commonly held economic insight stated as a law or principle

experimental economics

a branch that studies the economy through controlled experiments, theorems: 1. If the quantity supplied is greater than demanded, the price falls, 2. when the demand is greater than supplied, the price rises

three categories of economics

positive (what is and how it works), normative (what the goals of economy should be), and the art of economics (application of knowledge learned in positive economics to achieve the goals one has determined in normative econ, all about policy)

impartial spectator tool

each person places himself in a position of third-person examiner and judges a situation from everyone’s perspective

production possibility curve

measures the maximum combo of outputs that can be obtained from given inputs, slopes down from left to right - it demonstrates there is a limit to what you can achieve given existing resources, institutions, and technology, and every choice you make has an opportunity cost - get more of something by giving up something else (technology shifts ppc outward)

comparative advantage

the ability to be better suited to the production of one good than to the production of another good

product efficiency

achieving as much output as possible from a given amount of inputs or resources

inefficiency

getting less output from inputs that if devoted to other activities would produce more

efficiency

achieving a goal using as few inputs possible

Adam Smith argued

humans proclivity to trade leads to individuals using comparative advantage, as long as people trade, the market will guide people

laissez-fare

an economic policy of leaving coordination of individuals’ actions to the market  -trade allows for higher productivity and specialization and allows countries to consume beyond their notrade production possibility curve

globalization

the increasing integration of economies, cultures, and institutions globally - globalized world - economies are integrated (make goods cheaper by global expansion)

exchange rates

the value of a currency relative to the value of foreign currencies

law of price

the wages of workers in one country will not differ significantly from the wages of equal workers in another institutionally similar country

market economy

based on private property and the market in which individuals decide how, what, and for whom to produce (working for wages, property rights, markets for goods and services, voluntary exchange between buyers and sellers, people have to be able to own private property): do anything you want to earn a living and do anything you want to pay

self-interest

businesses produce goods and services that they believe people want

socialism

based on individuals’ goodwill toward others, not on their own self-interest - society decides what, how, and for whom to produce: takes into account other people’s needs: gov has power: planners, not prices, coordinated people’s actions

capitalism

based on the market in which the ownerships of the means of production resides with a small group of individuals called capitalists: promotes being selfish and relies on markets and competition

tradition-based societies

social and cultural forces create an inertia predominating over economic and political forces

US gov divided into 3 sectors

businesses, households, and government

factor market

gov taxes and oversees the interaction of business and households in the goods and factor markets

entreprenuership

the ability to organize and get something done

consumer sovereignty

the consumer’s wishes determine what is produced

profit

What remains from total revenues after the appropriate costs have been subtracted

business

private producing units in society: responsible for 80+% of US production, decides what to produce, how much to, and for whom to based on self-interest.  Must provide physical goods and services. Guided by consumer sovereignty. Three primary forms of business: proprietorships, partnerships, and corporations (also low profit limited liability company in some states) + now flexible-purpose corporation.

households

Groups of individuals living together and making joint decisions. Most powerful economic institution, vote with their dollars. Stockholders accept what their corporation does. Not active producers of output but passive recipients of income. Largest source of household income is wages and salaries. Still inequalities between men and women. 

government

A referee, deciding whether economic forces will be allowed to operate freely, and actor: various levels - federal state and local, mostly getting their money from taxes. Us is polycentric. A question is what role the gov should play. Provides a stable institutional framework that includes the set of laws specifying what can and cannot be done and ways to enforce those laws 

externality

An effect of a decision on a third party not taken into account by the decision maker

Market Failure

A situation in which the invisible hand pushes in such a way that individual decisions do not lead to socially desirable outcomes

demerit good or activity

A good or activity that government believes is bad for people even though they choose to use the good or engage in the activity

private good

A good that, when consumed by one individual, cannot be consumed by another individual

merit good or activity

A good or activity that government believes is good for you, even though you may not choose to consume the good or engage in the activity, get subsidies or tax benefits

government failure

A situation in which the government intervention in the market to improve market failure actually makes the situation worse

macroeconomic externality

An externality that affects the levels of unemployment, inflation, or growth in the economy as a whole

global corporation

A corporation with substantial operations on both the production and sales sides in more than one country

3 different entitlements for private property

1. property owner can consume their own private property,

2. property owner can exclude others from their property,

3. right to transfer property to someone else - exchange creates value for informed consumers and sellers

3 types of societies

-tradition: based on religion and family, time vacuum

-central planning: socialism, gov has authority

-market: invisible hand, free market, what the US has

4 conditions for price systems

-people work for wages (must be accepted)

-winners/losers (or else market economy would not succeed)

-a place to buy and exchange (market)

-private property: consume, exclude, exchange 

point inside ppc

resources are unemployed and inefficient

point on ppc

all resources are efficient

point outside ppc

a combination not attainable in current economy

demand

buyers, not imperative, it is simply the preference for a good/service.

supply

sellers

law of demand

as prices decrease, greater quantities are demanded (positive statement)

3 elements of demand/supply

buyers/consumers, sellers/firms, and the marketplace

drives of demand (concurrent shifts)

taste, level of income (normal/inferior good), price of the product (complementary.substitutes), consumer expectations, taxes and subsidies

normal good

when income goes up, a greater quantity is demanded

inferior good

when income goes up, a lower quantity is demanded

individual vs horizontal demand curve

demand for one person vs horizontal sum of everyone’s individual demand curve

shifter of supply

technology in the industry (improvement shift right, decline shift left), increases and decreases in the cost to produce the supply, demand/supply curve shows us what the demand/supply will be at different price levels, weather

equilibrium (tatonnement, clears)

market in equilibrium means the market is at rest or has cleared, when people want to buy and sell at the same price and quantity - no tendency for price/quantity to change, all else equal

English Auction

ascending price, last bidder wins

Dutch Auction

descending price, first bidder wins

First Price Auction

highest bidder wins

Second Price Auction

highest bidder wins, but pays the second highest price

substitution effect

when the price of a substitute goes down, the other good is quantity demanded less

income effect

when income rises, the quantity demanded for normal goods goes up

what effects demand?

advertising, science, religion, governments, celebrities, policy wonks, arbitrage, greed, boycotts, taxes, and other unknown factors

policy wonks

people who have an excessive interest in the specialized details of a particular subject or field

concurrent demand/supply shift

when they both shift

network externality

the phenomenon that the greater use of a product increases the benefit of that product to everyone without them paying for it

rational self-interest

people make choices based on costs and benefits, people buy something if benefits outweigh costs - not necessarily greed

policy options if the equilibrium price is not liked

shift demand, shift supply, government price controls (but expect a shortage with ceilings, black market, and allocation by sellers’ preferences)

with gov price controls, expect

shortage with ceilings, allocation by sellers’ preferences, and black markets

scalping

second market transactions

price ceiling

occurs underneath equilibrium, creates a shortage - gov thinks this prevents sellers from taking advantage of costumers, but then there is no incentive to bring more supply to an area (allocation or misallocation because of bigotry) and black market forms: an illegal market where people trade at a price that is above the ceiling price, actual cost + cost to get it might be higher than ceiling

price floor

creates a surplus, government sets a minimum price (attractive to sellers, not buyers): If the suppliers can hold the surplus of goods or if the government can destroy it, or send it to another country, then the price floor will work. Or, if the government enters the market as a buyer, they can raise the price to the price floor level and not create a surplus. 

how to deal with surplus?

store, destroy, allocate elsewhere, increase demand, decrease supply

minimum wage

creates more people seeking work and less demand (unemployment)

Elasticity of demand

percent change in quantity/percent change in price

variations of elasticity

supply, income (P = income), market share (Q = SOM), advertising (P = advertising budget), and cross (two goods involved)

Elasticity

sensitivity to changes in prices

Elastic

when E > 1 and customers are very responsive to a change in price, always will have a negative sign but it is absolute so ignore, total revenue decreases because price goes up and quantity demanded falls a lot

Inelastic

E < 1, revenue increases - price goes up, quantity demanded falls but not by much, very vertical

Perfectly Elastic

E is infinity, horizontal line that violates law of demand, Quantity does respond o changes in price

Unit Elastic

E = 1, the percentage change in quantity is equal to the percentage change in price

Perfectly Inelastic

E = 0, Quantity does not respond at all to changes in price

the elasticity of a good depends on

the amount of substitutes

in the red vs in the black

in the red means costs exceed revenue, in the black means revenue exceed costs

burglaries/other crimes where money/goods stolen

Involuntary wealth transfers

arbitraguers

buying something low price in market one and taking it over and selling it where the market is higher

elasticity is effected by

 -number of substitutes 

-degree of necessity

-proportion of budget

-time period over which elasticity is measured

-permanent versus temporary changes (sale)

-psychological price points

movement in demand/supply curve

The graphical representation of the effect of a change in price on the quantity supplied/demanded

equilibrium quantity

 The amount bought and sold at the equilibrium price

equilibrium price

The price toward which the invisible hand drives the market.

excess supply

Situation when quantity supplied is greater than quantity demanded

excess demand

Situation when quantity demanded is greater than quantity supplied.

fallacy of composition

The false assumption that what is true for a part will also be true for the whole