ECON TEST 1

• Econ - social science where due to finite amount of resources optimal choices are being made using the scientific method

  • Optimal choice based in scarcity

• Consensus is bad

• Micro vs Macro

  • Micro: Decisions made by individuals, firms, or governing bodies

  • Macro: Aggregates--totalling--and their limitations; HOW do the groups handle the issues as a whole

• Classical vs Keynesians + other influences 

• Organizations must make decisions on allocating limited resources

• “TINSTAAFL”

  • “There is no such thing as a free lunch”

• Theories, Principles, and Models

  • Model - an attempt to form a graphical (mathematical) representation of a complex situation to predict something

    • Model human behavior

    • Some become theories and others law

  • What’s the difference?

    • Law can be proven over and over again

    • Theories are not yet proven to be laws 

      • Laffer Curve 

        • 

        • Can be used to demonstrate optimal tax rates to benefit the gov’t

        • Taxing more can be detrimental to revenue as it reduces the economy

        • Not a curve but still useful

  • Assumptions must be made for initial descriptions 

    • Leads to peer review 

    • Makes models less realistic 

• PPC/PPF illustrate production choices 

  • Production-possibility frontier/curve

    • What can be produced is in the curve

    • Beyond the frontier (curve) is not possible unless expansion occurs

      • Economic Growth - makes the unattainable attainable 

        • Increased efficiency 

        • Better technology 

        • Higher birth rates 

      • Can also be shrunk (economic decay)

        • “Dark ages” 

        • Theft, murder, etc

        • Loss of human knowledge

    • How much should we produce?

      • Does what we want as a society change over time?

      • Influenced by culture

        • game stop - loss of physical games

    • Assumes we are using all our resources 

    • Closer to the curve = more efficient and things on the curve are equal

      • Further evaluated with judgment calls (i.e. resource 1 is better than resource 2) 

  • Makes assumptions and explains production choices

    • Full employed resources

    • Fixed resources (quantity and quality) 

    • Fixed tech

    • Two goods

    • Fixed time period

  • 

• Advantages for deciding which efficient point to choose 

  • Absolute Advantage - can produce more units of a good/service with fewer resources (better) 

    • Gaston (from Beauty and the Beast) is better at everything, but shouldn’t necessarily do everything (constrained by time) 

  • Comparative Advantage - can produce a good at a lower cost (cheaper) 

    • China/Taiwan > US production due to cost 

    • Increase in supply typically makes a decrease in wages

    • Substitution Effect - decrease in sales for a product as people go towards a cheaper alternative 

  • Specialization of Trade 

    • Gaston is the best at “everything,” but he should do whichever one he’s better at/more productive at

    • Everything else is left to comparative advantage

  • Division of Labor 

• Societal “Indifference Curve”

  • Represents a series of things that consumers would be indifferent to 

  • Used in tangent with the PPF to determine which choice is the best 

  • Alone, all points are equal/up to the consumer when on the line   

  • Compares max usage of resources to society’s wants to find the best and actually attainable point along the PPF

• Praxeology - study of human action, based on notion that humans engage in purposeful behavior (humans do things for a reason) with two main assumptions: 

  • Individuals act rationally and self-interestedly in order to maximize their “utility” 

    • Measured with utils--unit of measurement economists use to gauge satisfaction

  • Ceteris paribus - all else is held constant; all are equal

    • If you say this then you can “never” be wrong

    • Used to isolate one variable to study why it happens/changes

  • Redefined to ^^ by French social philosopher Alfred Espinas, developed by multiple schools

    • Holds flaws and disagreements due to the differences between sociologists and economists in understanding human behavior (economists generally require rationally-acting subjects) 

    • Austrian School of thought - created by Ludwig von Mises

      • Irrational Action can be explained 

        • Asymmetrical information - imbalance of information

          • Adverse selection

            • Group has little info and will enter markets they should avoid (make less than optimal decisions)

            • Uninformed/no guidance 

            • 2008 housing crash

          • Moral hazard

            • Believes that they are shielded from risk, so they engage in risky behavior

            • Football players - started to have more fatal injuries AFTER starting to wear protective helmets/pads 

      • Utility - overall level of satisfaction (measured in utils)

        • Not always monetary profit, but is often substituted 

      • Time Preference/MANY NAMES

        • Current valuation placed on receiving a good at an earlier/later date

        • Not necessarily good or bad

        • High Time Preference 

          • Instant gratification

          • Child w candy bar

            • Will eat the candy bar at the present instead of waiting for another one 

        • Low Time Preference 

          • Adult w candy bar

          • Delayed gratification

• Pitfalls to Sound Economic Reasoning

  • Biases

  • Logical Fallacies - breakdown in overall logic/reasoning 

    • Fallacy of composition 

      • What’s true for the part is true for the whole 

    • Post hoc fallacy

      • High time preference pedo !

      • Post hoc, ergo, propter hoc (after this, therefore, because of this)

        • Something happened, thus it must be the cause 

    • Broken Window Fallacy 

      • NEW SUIT-AH 🥐🕺

      • Physical destruction of property destroys wealth 

        • Requires stimulation of the economy to bring it back

      • Government spending has 3 sources: 

        • Tax, borrowed, or printed

  • CORRELATION IS NOT CAUSATION 🗣

• Leads to differing statements

  • Positive economic statements

    • Based on factual easy checked facts

  • Normative statements

    • Has value/judgment/opinions attached to them 

    • Fact: soobin is the best Opinion: soobin is not the best

• Marginal Analysis 

  • Marginal = extra/additional 

  • Marginal Benefit, MB

    • Satisfaction from a product or service

  • Marginal Cost, MC 

    • The cost of the product/service 

  • Marginal Utility = change in utility 

    • With each increase in quantity, the benefit will be smaller and smaller until the cost overpowers it 

• Marginal cost increases; marginal benefit decreases as quantity increases 

  • When the two lines meet, this is the optimal allocation; MB=MC

• Individual’s Economizing Problem 

  • Limited Income - linear model 

  • Unlimited Wants 

  • Budget line 

    • Attainable and unattainable options 

    • Tradeoffs and opportunity costs 

    • Make the best choice possible 

  • Change in income 

• Society’s Economizing Problem 

  • Land

    • Fixed 

    • Building up for more land 

  • Labor

  • Capital (Physical/Human)

    • Human - ability to understand/overall skills current economic conditions

  • Entrepreneurial Ability

    • Finite amount of entrepreneurial ability 

    • Innate or social 🤷

  • Time

Ch3 Market Systems 

• Market - where ppl come together for goods and services 

• Economic system 

  • Coordinating mechanism of institutional/gov’t arrangements 

    • Free Markets vs Socialism/Communism 

    • Gov’t vs. Private Ownership 

    • Central Planning vs. Market Signs

      • Central planning - designs of how things are meant to work 

        • Pushed back by human’s desire to do what serves them 

        • Some central planners work with users for optimal results 

  • Presented in graphs with the opposing points^ 

    • Both ends of the spectrums will typically agree with each other but from different perspectives

  • US is in a mixed market of free and controlled 

• Adam Smith - Wealth of Nation (1776)

  • Written to investigate why some nations get ahead of others 

    • Collection of observations 

    • Viewing that countries that support certain ideas will get ahead 

      • Private/Intellectual Property 

      • Freedom of enterprise and choice 

      • Self-interest

      • Competition 

      • Markets and prices 

  • The “Invisible Hand” vs. The “Iron Fist” 

    • The people, processes, and drive that leads people to create things through cooperation 

      • Firms exist in to solve the inefficiencies of free markets 

  • Marxian comparatively saw growth through emotional motivators (potentially envy) 

    • This MIGHT be envi

    • Bogourgieses - rich bitches 🔪 

  • Goods and services that create a profit will be produced 

    • Consumer Sovereignty (Dollar Votes) 

      • How consumers determine which goods will be produced and what products/industries survive 

• Rights vs. entitlements 

  • John Locke - 

    • Positive rights: gov’t guarantees something 

      • Housing, vacation time in employment 

    • Negative rights: gov’t cannot take it away from you 

      • Life, liberty, and property

• Markets

  • Demand Function/curve

    • Schedule or curve

    • Amount consumers are willing and able to purchase at a given price

      • Is a negative curve as consumers want more products for less money 

        • The first instance of the product has the most utility, from then on there is less and therefore “should cost less” 

    • Other things equal (Ceteris Paribus)

    • Individual Demand vs. Market Demand

      • As you earn more money something 

Ch4 Supply and Demand Model 

• Law of Demand

  • Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls.

  • Ceteris paribus 

  • Reasons:

    • Common sense

    • Law of diminishing marginal utility

      • Point where you don’t want to consume anymore 

    • Income effect and substitution effects

• Demand:

  • What someone is willing and able to pay for something

•  “Change In” and “Change In Quantity” 

  • Change in (demand/supply)

    • ONE of the curves shifts to the left of the right along the quantity axis -- only one of the curves moves 

    • A shift is caused by determinants 

    • DEMAND DETERMINANTS

      • Change in consumer tastes and preferences

        • Tuna is more expensive now because people like sushi 

      • Change in number of buyers 

      • Change in income 

        • Normal goods 

          • When income goes up, demand goes up 

          • Steak (you will buy more steak if you have more money)

        • Inferior goods 

          • If income goes up, you won’t buy more 

          • Kraft Mac and Cheese (you won’t buy anymore if you have more money)

      • Change in prices of related goods 

        • Complements

          • Something you purchase together 

          • NOT inputs (like eggs going into cake) 

        • Substitutes 

      • Change in consumers’ expectations 

        • If there is a hurricane, people will stock up on water in expectation 

        • Future prices 

        • Future income

    • SUPPLY DETERMINANTS

      • Change in resource prices

      • Change in technology

      • Change in the number of sellers

        • More - right

        • Less - left

      • Change in taxes and subsidies

      • Change in producer expectations

        • Needing time to produce products that will be needed in the future 

  • Change in quantity 

    • When the “change in” curve moves, the quantity changes (horizontal axis)

• Markets:

  • Bids lower than asking price

  • Only after a trade there is equilibrium

  • Price is only a determining factor if its in ANOTHER market--it is a product in any other situation 

  • One change in quantity and one for demand/supply 

    • Change in (increase of) demand -> increase of quantity/equilibrium 

  • Market Equilibrium 

    • Where a consummate trade is equal for supply and demand

  • Supply-side Failures:

    • When a firm does not pay the fullcost of producing its output

External costs of production is not reflected in supply

• Private Goods 

• Produced in the market by private firms 

• Offered for sale 

• Characteristics (private goods do not struggle with) 

  • Rivalry 

    • 2 individuals/firms can not consume the same good 

  • Excludability

    • Individuals/firms that don’t pay can be excluded from consuming 

• Public Goods 

  • Provided by government

    • Offered for “FREE” (TINSTAAFL)

  • Externalities

• What is economics / the economizing problem?

The “economizing problem” is that individuals, firms, and governments have unlimited wants

but are bound by scarce resources. Economics is a social science concerned with making optimal choices under conditions of scarcity.

• Opportunity Cost
  the loss of potential gain from other alternatives when one alternative is chosen. HW question 4.

• Models / Theories / Laws & Assumptions (purposeful behavior, ceteris paribus, and various models)
  ceteris paribus - all else is the same

  • Models - economists do it with models

  • Simpler models are often less realistic

• Praxeology
  Humans act rationally and logically

• Cost / Benefit Analysis
  

• Marginal Analysis
  

• Asymmetric Information + Moral Hazard / Adverse Selection
  Adverse selection - not enough info (people who entered the stock market w/o sufficient knowledge)

  • Moral hazard - continues to do risky behavior when there are no consequences

• Logical Fallacies (Post Hoc, Composition, etc)
  Post hoc - fallacy in which an event is presumed to have been caused by a closely preceding event merely on the grounds of temporal succession

  • The fallacy of composition arises when an individual assumes something is true of the whole just because it is true of some part of the whole.

• Correlation vs. Causation
  Correlation is NOT causation

• PPF Curve + Assumptions.  Basic understanding.  What does it represent?  Why does it bow from the origin?
  Bows at origins because it takes more resources to switch to a new product

  • Represents the possible combinations of two product

• Centrally Planned Economies (Command and Control) vs. Free Market (Invisible Hand / Adam Smith) Economic Systems
  

• Self Interest.  Dollar Votes.  Consumer Sovereignty.
  

• *** SUPPLY AND DEMAND *** (KNOW THE DETERMINANTS OF EACH!!!)

  • "Change In" vs. "Change in Qty", Increase / Decrease along Q (x axis)

  • Consumer vs Producer Surplus

  • Ceteris Paribus

  • Price Ceilings vs. Price Floors (Shortages / Surpluses)

  • Dead Weight Loss

• Market Failures
  Resources can be over-allocated/under-allocated and positive/negative externalities can affect it.
  
  Demand-Side Failures: free rider problem + can’t charge consumers what they are willing to pay for the product
  
  Supply-Side Failures: a firm doesn’t pay for full cost of producing output; costs of producing supply is not shown in supply

• Rivalry / Excludability / Free Rider Problem / Public vs Private Goods

  • Rivalry

 2 individuals/firms can’t consume the same good

• Excludability 

firms/companies who do not pay are excluding from using 

• Free Rider Problem 

People who enjoy benefits without paying or compensating.

• Public vs Private Goods
  Public Goods: goods that are non-excludable and non-rivalrous
  Private Goods: goods that are excludable and rivalrous

• Time Preference
  High Time Preference: Instant gratification; spending immediately; Keynesians
  Low Time Preference: Delayed gratification; savings/future plans 

• Laffer Curve (basic understanding
  Used to understand optimal rates (at the peak) for things like taxes