Economics: social science concerned with making optimal choices under conditions of scarcity.
Economic perspective: individuals and institutions making decisions by comparing marginal benefits and marginal costs
Scarcity and Choice: Resources are limited, requiring choices.
Opportunity Cost: The next best alternative foregone when a decision is made.
Utility: Satisfaction obtained from consuming a good or service.
Marginal Analysis: Decision-making by comparing marginal benefits and marginal costs. (ideally MB = MC)
Microeconomics vs. Macroeconomics: Focus on individual units vs. the economy as a whole (aggregate of a company).
Other things equal assumption (ceteris paribus): assumption that factors other than those being considered did not change
Positive vs. Normative Economics: Fact-based analysis vs. opinion-based analysis.
Budget line: combinations of products a person can purchase with a specific amount of money, given products prices (know graph)
Economizing problem: limited income and unlimited wants
Four economic resources:
Land: natural resources
Labor: mental or physical exertion used to produce product
Capital (investments): manufactured aids used in production (machinery)
Entrepreneur ability: person who starts and runs the business (MOST IMPORTANT)--- cereal entrepreneur: innovations continue to many businesses
Production Possibilities Curve (PPC): attainable occurs below the curve, unattainable is above the curve (rightward shift shows growth)
Law of increasing opportunity costs: more of a particular good produced, marginal opportunity cost increases
Economic Systems: who owns and controls everything.
laissez-Faire Capitalism: government is uninvolved with economy
Command system: government owns everything; resources are publicly owned
Ex: north korea
Market System: individuals own most resources (MOST COMMON)
Characteristics:
private property
freedom of enterprise- freedom to start businesses without permission
freedom of choice- choose what job you want
Self-interest- maximise utility
Competition- regulatory mechanism of market system
market and prices- regulate system
Essay Question Define specialization and 3 ways it is good for the economy: specialization: use of resources to concentrate on one product
3 ways its good for economy: fosters learning by doing, utilizes differences in ability, saves time
Monetary system: helps facilitate trade, replaced barter
Barter: trading goods
2 problems with barter: coincidence of wants and divisibility of value
5 fundamental questions:
What goods and services will be produced?
What will create profit?
How will the goods and services be produced?
How can we produce in the least costly manner?
Who will get the goods and services?
Who is willing and able to buy?
How will the system accommodate change?
Are we in it for the long run or the quick buck?
How will the system promote progress?
How will society be a better place after business is created?
Creative destruction: when there is an advancement, the new product destroys demand for the old one.
Customer sovereignty: customer = king
Dollar votes: every $ spent on a product votes for the businesses success
Creative destruction: new version
The Invisible Hand by Adam Smith: as you pursue profitability, there is an invisible hand guiding you to make society a better place
Circular Flow Model: Interaction between businesses and households in product and resource markets.
4 components:
Business: buy resources, sell products
resource market: households sell, businesses buy
Households: sell resources, buy products
product market: businesses sell, households buy
Market: place where potential buyers and sellers come together
Ex: stock market, amazon, websites
Law of Demand (through the eyes of the consumer): Price and quantity demanded are inversely related. (price falls, demand rises)
Change in quantity demanded: move along existing curve vs change in demand: shifts entire curve
Essay question Describe the demand curve and give 3 reasons why it is sloped the way it is: downward sloping, graphically represents inverse relationship between price and quantity demanded. 1. Law of diminishing marginal utility: as we consume more units, the satisfaction decreases 2. Income effect: income level stays the same, price levels go up so demand decreases. 3. substitution effect: buyers have more incentive to substitute a product whose price has fallen
Shift right = increase in demand
Shift left = decrease in demand
Essay Question Name and explain determinants of demand and supply Determinants of Demand:
Consumer tastes
Number of buyers: larger # of buyers, increases demand
Income: rise in income, increase in demand
Normal goods: goods you buy if you have income (brand names)
Inferior goods: goods you buy when income is low (offbrand)
Prices of related goods
Complementary good: goods consumed together (ex: pasta and sauce, demand for one goes up, so does demand for the other)
Substitute goods: goods that replace on another (ex: sprite or starry, demand for one goes up, demand for another goes down)
Expectations
Future prices: future prices go up, demand goes up
Future income: future income goes up, demand goes up
Law of Supply (through the eyes of the business owner): Price and quantity supplied are directly related. (price goes up, business supplies more)
Supply curve: upward sloping
Productive efficiency: producing goods in the least costly way
Allocative efficiency: producing the right mix of goods
Shift right = increase in supply
Shift left = decrease in supply
Determinants of Supply:
Resource prices: higher prices, raise production costs
Technology: advancement in technology makes production faster and quicker
Taxes and subsidies: higher taxes decrease supply, higher subsidies increase supply
Prices of related goods: takes resources away from one item so the supply of the other decreases
Producer expectations: if you think price increase in future, cut back on production for more money in future
Number of sellers: increase in sellers, supply goes up
Market Equilibrium: Point where quantity demanded equals quantity supplied.
Surplus: above equilibrium
Shortage: below equilibrium
Price Ceilings: max legal price seller will charge for a good ex: rent
Price floor: min legal price seller can charge for a good ex: agriculture
Consumer surplus: difference between what a customer is willing to pay and what they actually pay
Producer surplus: difference between the actual price a producer receives and the min price they would accept
Efficiency loss:
Underproduced, the price of a product goes up, purchasing power goes down (takes up too much of our income)
Overproduced, price goes down, business makes smaller profits (wasted resources)
Externalities: effects you even if you weren’t involved with buying or selling
Positive Externalities: Benefits to third parties (ex: education, vaccinations).
Negative Externalities: Costs to third parties (ex: pollution).
Public good vs. private good
Private good: manufactured by for-profit company ex: legos
Rivalry: the individual who bought the good is the only one who has it and is benefitting from it
Excludability: targeting small groups of not everyone can have the product (ex: higher price point- lamborgini)
Public good: good provided by government- for benefit of all people ex: park, police, fire department
Non-rivalry: many people can benefit from good at same time
Non-excludability: people are not excluded if they “pay” or not
Free-rider problem: people who don’t pay, can still benefit ex: seeing fireworks from disney parking lot
Cost-benefit analysis: lower taxes, more money in pocket, buy more private goods
Quasi-public goods: both public and private goods ex: education (public and private schools)
Government failure: inefficient outcomes caused by government
Voting problems
Principal agent problem: once in office, keep powerful groups in favor of you to stay elected
Special interest effect: small groups with large influence to sway public opinion ex: NRA
Collective-action problem
Earmarks
Rent seeking behavior
Limited and bundled choice: a few choices for candidates and all in one side (no way to mix ideas) ex: trump and biden
Regulatory capture: at some point government gets involved
Political corruption: absue of powers from elected officals
Define specialization and explain three ways it benefits the economy.
Describe the demand curve and provide three reasons why it is downward sloping.
Identify and explain the determinants of supply and demand.
Define public and private goods and examples. And 2 basic characteristics and explain