Econ Chapter 1

Foundations of Economics

- Incentives- motivate you to make positive or negative choices

- Changing incentives modify behavior

- Ex. grades are a positive an negative incentive

- Trade-o s

- Opportunity cost

- Marginal thinking- weighing benefits and costs

- Benefits should outweigh costs

- The principle that trade creates value

- Laissez Faire- a policy or attitude of letting things take their own course, without interfering.

Implicit vs Explicit Costs

- Implicit Costs- - Explicit + Implicit Costs

Opportunity Cost

- Opportunity Cost is Opportunity lost - Opportunity Cost- what you give up in favor of gaining something else

- Ex. getting up to go to school, but losing sleep (losing sleep is the opportunity cost)

- Ex. Time is money, when you choose to do something, you are losing time (losing time to potentially do something else is the opportunity cost)

Shortage vs Scarcity

- Scarcity- limit of resources, leading us to make choices

- Economics is about the choices we make because of scarcity

- Scarcity & Shortage are NOT the same

- Both we don't have enough

- Shortage is temporary

- Scarcity is permanent

Ceteris Paribus

- Ceteris Paribus- A shorthand indication of the e ect of one economic variable on another, provided all other variables remain the same

- One thing changes at a time

- Focus on one thing changing at a time

Economic Assumptions

- Every Human is rational

- We are all selfish

Factors of Production

AKA resources

- Land- anything that grows; oil, gas, actual land - Labor- working; wage earning activities - Entrepreneurship- innovators that produce/business owners - Capital- man made things that help us produce things; Physical, tools, machinery, factories

Questions to Ask

- What to produce?

- Ex. what to produce with what we have; we have eggs, milk, butter

- How to produce?

- Ex. How to produce with the supplies we have; we have a frying pan, bowl,

- For whom to produce?

- Ex. Who do I produce this for and how much should I give them; do I serve others, how much of the eggs should I serve them

- Why do we answer these questions?

Because of scarcity

Economic Systems

- Mixed- Most economies fall into this category. Government is roughly 50% involved.

- Ex. United States

- Traditional- Farm countries. Lack of innovation and change. Trades are passed down. - Command- Government or state owns factors of production. Government is 100% involved. Centralized authority makes command most flexible as changes are made quickly.

- Ex. Soviet Union, North Korea

- Market- Factors of production are owned privately. Government is roughly 0% involved. Encourages innovation the most. Changes are made naturally.

Production Possibilities Curves (PPC)

-

- Curve shows limit of what we can produce - Any point on the curve is e cient production - Points inside of the curve is ine cient production - Curve represents scarcity under current conditions - An ine cient point may be due to unemployment

- If we change the conditions, possibilities may be bigger or smaller

- Production method, technology, resources (like workforce, natural resources, ect.) will optimize possibilities

- Comparative Advantage- if the opportunity cost of producing the good or service is lower for that individual than for other people.

- Absolute Advantage- the ability to produce more of a good or service with a given amount of time and resources

Seminar 2: Supply & Demand

Vocab

- Inputs- - QD- Quantity Demanded- demand of the product at the specific price level - QS- Quantity Supplied - Only price changes QD and QS, otherwise it is Supply and Demand being changed - EP- Equilibrium Price - EQ- Equilibrium Quantity - Equilibrium is when QD = QS

Law of Demand

- When Price goes down, Quantity Demand goes up - Each point is QD, the whole curve is Demand in general for the product

Law of Supply

- When Price Increases, Quantity Supplied Increases

Change in Supply and Demand

Changes in Demand: SPICE

- S(ubstitutes)- Cheaper product is in demand

Ex. When price of water goes down, demand for milk goes up

- P(opulation/preferences)- When more people come in, more items will be sold

- I(ncome)- Income goes up, want for higher quality items. Demand for inferior goods goes down.

- C(omplements)- wouldn’t buy one item without the other

Ex. Price of computers goes up, demand for computer software goes down

- E(xpectations)- Expect that product will go on discount; Price is up, Demand is down

Ex. Luxury shoes will go on sale soon when they go out of season, so I will not buy it rn

Changes in Supply: COTTEN

- C(ost of inputs)- Cost of ingredients goes up, Price goes up, Demand goes down

- O(pportunity cost of an alternative product)- When another product is more popular with the audience and so one switches to that product

- T(axes/subsides)- product will be more expensive; Price up, Demand down

- T(echnology)-

- E(xpectations)- Expect to make more money in the future; Price up in the future, Demand down now

Ex. war is coming, and normal producers of oil will not be able to sell oil. I an oil producer, will save my oil to sell for bigger profit

- N(umber of producers)- More sellers, Demand down for specific seller

Indeterminate

- Does the price stay the same?

Indeterminate

- When we have a double shift down, price is indeterminate - When we have a double shift up, quantity is indeterminate

Price Floor

- Price Floor must be above equilibrium for it to be e ective - Price Floor leads to surplus - QS > QD

Seminar 3: Trade

Vocab

- Absolute Advantage- producer can provide a good or service in greater quantity for the same cost, or the same quantity at a lower cost, than its competitors - Comparative Advantage- producing something if he can produce it at lower cost than anyone else - Opportunity Cost- the loss of potential gain from other alternatives when one alternative is chosen - Tari s- Taxing imported products - Terms of trade - Quotas- a government-imposed trade restriction that limits goods imported or exported - Input Questions- Finding the resources; if output is fixed - Output Questions- Finding the outcome; if input is fixed

Trading

- Mercantilism- belief in the benefit of trading -

Note: Always emphasize “same amount of resources” in absolute value

PPC won't change in trades because no qualifications are met for a change