Economics ch1A UNDONE

Define Wants.

• unlimited → devlop new wants when one is satisfied

• Not backed by purchasing power

• Human desire for goods and services

Define resources.

• use to produce goods and services to satisfy human wants

• Limited relative to human wants

Define Scarcity.

Definition: when the limited availability is insufficient to satisfy unlimited human wants

• Quantity available is less than the quantity desired

• Every country and individual faces scarcity, no matter rich or poor, resources are limited, relative to their unlimited wants

• Scarcity can’t be solved

Define Choice

Scarcity implies people have to face trade offs.

Individuals: what wants to satisfy and what to give up

Society: solve the three basic economic concepts

Economics

Allocation: what and how to produce?

Distribution: For whom to produce

Opportunity Cost

Value of the next best alternative forgone when a economic decision is made

Full Opportunity Cost/ Economic Cost

Non-monetary/ implicit : do not involve the actual transfer of money (value that could have been received if the next best alternative option forgone had been chosen instead)

Monetary/ explicit: involves actual transfer of money

Time cost

Value of the next best alternative use of the time forgone → income forgone or the value of the activity forgone

What is the condition for full cost to be lower when taking the high money cost option?

When the time cost saved is greater than the extra money cost

Sunk cost meaning

Resources spent in the past that are no longer available for choice

Should not be considered when making a decison

Changes in op cost

• HVOF change = op cost change

• Value of chosen option change = op cost unchanged bc HVOF unchanged

Economic goods

• resources used for production are scarce

• Opportunity cost is involved in production

• People are willing to pay a monetary or non monetary price for it

• Fresh air in polluted cites

Free goods

• Resources used in production are no scarce

• Do not involve opportunity cost in production

People are not willing to pay a non-monetary or monetary price for it

Seawater in oceans or fresh air in the countryside

Free goods vs free of charge goods

• Free goods are free of charge, but free of charge goods might not be free goods

• Some free of charge goods are econ goods known as common pool resources

• Natural resources unowned by anyone

• Scarce due to overuse and depletion

Present vs Future consumption

• Trade off between present and future consumption

• Choose to consume more or less than what they have now through the financial market

  • Borrowers: forgo future consumption for present consumption

  • Lenders: forgo present consumption for future consumption

• Humans prefer to consume sooner than later due to impatience

Define interest.

• Value of present consumption is higher than the value of future consumption

  • Borrowers are willing to pay a premium for choosing present consumption

  • Lenders require a compensation for forgoing present comsumption

• Interest can be expressed in real goods and money

• Definition:

  • For lender: the compensation for deferring consumption of goods or the use of resourceS

  • For borrower: the cost of earlier availability of goods ad services

Interest in a Barter Economy

Real goods

Interest in a money economy

Money

What if the interest rate increases?

Affects lenders and borrowers

Lenders: return on lending rises → Willingness increases

Borrower: cost of borrowing rises → willingness decreases

• Present consumption decreases and future consumption rises

• Borrowing is discouraged and lending is encouraged

What if interest rate decreases?

Affects both lenders and borrowers

• Lenders: return on lending decreases → willingness decreases

• Borrowers: cost of borrowing decrease → willingness increases

Borrowing is encouraged and lending is discouraged.

Present consumption rises and future consumption falls

Assumptions in Standard Economic Theories?

1. Ceteris Paribus

   1. When testing out economic theories and models, many variables may interfere with the outcome when testing the validity of the hypothesis

   2. Assumption of ceteris paribus assumes all the other factors constant

   3. When testing income change and education, working experience and economic performance should be assume as constant factors

2. Rational Economic Decision Making

   1. individuals are assumed to act in their best interest

   2. Consumers: maximize utility; Firm: maximize profits

Microeconomics

• individual markets → behavior of individual decision making units

Macroeconomics

• broad and overall picture of economy

• Use aggregates to study factors affecting the economy

Positive Economics

• Based on descriptive statements, predictions and propositions

• Used to describe, predict or explain economic events

• Testable and can bee refutable by facts

• Does not involve value judgements or personal preferenes

Normative Economics

• Based on what should or be ought to be

• Formulate economic policies

• Involve value judgements or personal preferences

• Not testable or refutable by facts