ECON 101

Economics Definitions

  • Economics: The study of the choices people make to effectively use resources to meet their wants and needs.

  • Economic Choices:

    • If Benefits (X) > Costs (X): Do activity X.

    • If Costs (X) > Benefits (X): Do not do activity X.

    • If Marginal Benefits (X) > Marginal Costs (X): Do X.

  • Example: Policy speed limit on Edmonton to Calgary.

    • Factors to consider: costs, time, gas, housing, food, congestion, environmental effects.

    • Benefit: Safety.

Branches of Economics

  • Microeconomics: Study of individual economic units such as households and firms.

  • Macroeconomics: Study of the entire economy, focusing on issues such as unemployment and inflation.

Judging Economic Allocations

  • Allocations can be assessed based on:

    1. Efficiency: Maximizing the present value of net benefits.

    2. Equity: Fair distribution of goods and services.

    3. Moral and Political Consequences.

Positive vs Normative Economics

  • Positive Economics:

    • Focuses on statements that can be tested by observing facts.

    • Example: If coffee prices rise, demand decreases.

  • Normative Economics:

    • Involves value-based statements about what ought to be.

    • Example: Taxes should redistribute income.

Economics as a Science

  • Economics is a social science explaining how people act.

  • It uses models and theories to describe behavior:

    • Models: Simplified descriptions covering wide possibilities.

    • Testing: Theories are empirically tested against observed data.

Common Fallacies in Economics

  • Correlation Fallacy: Believing correlation implies causation.

  • Post hoc Fallacy: Assuming a preceding event causes a subsequent one.

  • Fallacy of Composition: Believing what is true for an individual applies to a group.

Production Possibilities Frontier (PPF)

  • Definition: Graphical representation of the maximum combinations of goods produced with available resources.

  • Opportunity Cost: The benefit forgone by not choosing the next best alternative.

  • Example: Considering the costs of a lecture comparatively to working and studying.

Example: Freedonia's Production Possibilities

  • Production possibilities for laptops and pizzas:

    • A: (0 Laptops, 35 Pizzas)

    • B: (1 Laptop, 33 Pizzas)

    • C: (2 Laptops, 28 Pizzas)

    • D: (3 Laptops, 21 Pizzas)

    • E: (4 Laptops, 12 Pizzas)

    • F: (5 Laptops, 0 Pizzas)

  • Points A-F: Attainable and efficient; Point G: Unattainable.

Supply and Demand Basics

  • Supply Function: Illustrates quantity producers are willing to sell based on price.

  • Law of Supply:

    • Higher prices lead to more quantity supplied.

    • Lower prices lead to less quantity supplied.

Factors Influencing Supply

  1. Technology: Improvements increase supply.

  2. Input Costs: Increase in input costs decreases supply.

  3. Number of Firms: More firms lead to increased supply.

  4. Expectations: Producer expectations can affect current supply.

  5. Natural Events: Environmental changes can impact supply.

  6. Complementary Goods: Higher prices for one good can affect the supply of another.

  7. Substitutes in Production: If substitute prices change, supply can be affected.

Market Equilibrium

  • Equilibrium Price: Where quantity demanded equals quantity supplied.

  • Surplus and Shortage: When the market doesn't clear, prices may fluctuate due to excess supply or demand.

Consumer and Producer Surplus

  • Consumer Surplus: Difference between what consumers are willing to pay versus what they pay.

  • Producer Surplus: Difference between what producers are paid and their willing price.

  • Example scenarios for calculating consumer surplus based on demand curves.

Economic Forces

  • The market functions like an 'invisible hand' to allocate resources effectively but can sometimes fail due to various societal forces, including:

    1. Information problems

    2. Market failures

    3. Legal and political factors.

Price Controls

  • Price Floors: Minimum price limits (e.g., minimum wage).

  • Price Ceilings: Maximum price limits can lead to shortages.

Elasticity

  • Price Elasticity of Demand: Measures the responsiveness of quantity demanded to price changes.

    • Formula: % Change in Quantity Demanded / % Change in Price.

Consumer Behavior Principles

  • Consumer Objective: Maximize utility given income constraints.

  • Utility: Satisfaction or fulfillment received from consumption.

  • Marginal Utility: Change in utility from consuming an additional unit.

Production Theory

  • Input Types: Land, labor, capital, and entrepreneurship.

  • Cost Structures: Fixed vs variable costs and their implications for short-run vs long-run analysis.

Market Structures

  1. Perfect Competition: Many firms, no control over price.

  2. Monopoly: Single firm controls price and supply.

  3. Monopolistic Competition: Many firms sell similar but differentiated products.

  4. Oligopoly: Few firms have market power and are interdependent.

Long Run vs Short Run Analysis

  • In the long run, all costs are variable, and firms can enter or exit markets.

Conclusion

  • Understanding these fundamental economic concepts and theories is crucial for analyzing market behaviors and decisions.