Micro-Economics

Economic policy

Monetary-federal reserve

Control money supply and interest rate

Money supply-dollars in circulation

Price stability is low inflation 2-3%

Fiscal-

Decides what tax code is and what budget is

Determines government revenue and government spending

Pandemic caused inflation spike

Increased intrest, people borrow money less, people spend less money, reducing inflation

Expendeture- money spent

Recession- reduced employment,reduced gdp

Soft landing- fixing inflation no recession]

Done by gerome powell

Federal fund rate- baseline intrest rate set by federal reserve

.25% is the usual intrest rate change

Economics- The study of human choice under conditions of scarcity(none infinite)how to aquire and distrube the resources

Micro- individul consumer, household,person, firm

Macro- level of city nation state

Model- Simplified representation of a complex phenomenon

Constrained optimization–all market actors are contrained optimizers

Trying to optimized something with hardships

Optimize-make as good as possible

Constrain-the hardship

Representational decisions-pragmatic choices about what to represent and how to represent it

Example subway map

Salient -most noticable

Verisimilltude- appearing to be real or true

How to break down concepts?

Ontological-

Abstract mental models-

Schematized-to arrange in scematic form

San francisco bay model-concrete model generate their own behavior gives example of what happens in reality

Mitochondria

Analogical model is found scaled are constructed both concrete

Computational model-computer created

Consumers-rational utility maximizers

Utility-preference satisfaction

How you prefer things to be

Rational-to proceed in the most efficient way

Constraint for consumers- budget

Producers-rational profit maximizers

Producers maximize profit

Producers are constrained by cost of the service they bring to the market aka cost of products

Optimal make more money with cheapest service

Positive vs. normative

Positve-how things rly r

Normative- how things should be

Theroretical-developing and expandning models that are designed to explain economic phenomenon cost and demand graph 

VS.

Empirical-observational u must observe actual economic activity

People are not like how the theory thinks them to be

People are emotional and not ratoinal

Consumers and producers meet in the market to make voluntary transactions

Enhanced utility of consumer and profit of producer

Business cycle-short run alteration between economic downturns and economic upturns

Depression- a deep and very prolonged downturn- very intense recesssion

Recession- periods of economic downtruns when output and employment are falling firms getting smaller or going out of business

Expansion- sometimes called recoveries are called recoveries, are periods of economic upturns when output and employment are rising.

Peak- point at which growth stops and shrinkage begins in a business cycle

Trough- contraction stops and expansion begins

Employment-total number of people currently working for pay

Unemployment- number of people trying to work but aren't currently employed

The labor force- the sum of employment and unemployment, everyone seeking employment

Unemployment rate- percentage of the labor force that is unemployed

Output- what we make/produce

Aggregate output- everything that we all make in total, economy total output within a given time period(falls during a recession, rises during expansions)

Gdp-gross domestic product- the value of all the products produced

Aggregate- all everything 

Inflation- price rise for everything

Deflation- prices falling for everything

The inflation rate- the annual percent change in the aggregate price level

Price stability- when the inflation is slow

Economic growth- increase in the maximum output of an economy,growth in being able to make more things

Production possibility curve- a model that helpseconomist think about the trade offs every economy faces. Helps understand three important aspects of the real economy,opportunity cost, and economic growth

Production possibility curve(PPC) def- illustration of the trade offs facing an economy that produces only two goods. It shows the maximum quanitity of one good tht can be produced for each possible quantity of the other good produced

Trade off- give up something in order to have something else

Productive efficiency- when an economy produces at a point on its production possibilities curve

Efficient- when there is no way to make anyone better off without making at least one person worse off

Inefficiency- people are who want jobs cant have them

PPC- is set to operate under the assumption that there is no unemployment aka the potential

Allocative efficiency- produces at a point along the PPC that makes consumers as well off as possible

The straight-line slope is equal to the opportunity cost

Opportunity cost are increase so that is why the graph line is curved

The more something is produced the more opportunity cost it takes up. If more of the good is needed it will take the resources that could have been used to produce other things

Sources of economic growth

• increase in resources:labor,land,capital,entrepreneurship

• Technology- the technical means for producing goods and services

Technology only increase the PPC of the production it helps produce

Sources of economic shrinkage

• Hardships

  • War

  • Natural disaster

  • Loss of technology

Trade- providing goods and services in return for goods and services

Gains from trade- people can get more of what they want through trade than they could if they tried to be self sufficient

Specialization- each person specializes in a task that he or she is good at preforming

Specialization produces more goods

Markets for jobs-job demand-a doctor is assured she can find a flight and a pilot is assured he can find a doctor as long as they know they can find an individual who specializes in the required field they feel comfortable with specializing only in their own field

Comparative advantage- producing a good or service with lower opportunity cost than other people

absolute advantage- producing a good or service if he or she can make more of it with a given amount of time and resources(not comparative advantage)

Terms of trade- the rate at which one good can be exchanged for another

Any price per good between the opportunity cost of the producer and tne opportunity cost of the buyer will make both sides better off than without trading

Trade is only good if the price of the good each person obtains from trade is less than his own opportunity cost of producing the good.

Competitive market- a market where there are many buyers and sellers of the same good or service

• No individual actions have a noticeable effect on the price at which the good or service is sold

• Not all markets apply to this rule(dominant companies like Coke or pepsi control the beverage market and individually can affect sales

Supply and demand model- model of a competitive market

• The demand curve

• The supply curve

• The factors that cause shifts in the curve of supply and demand

Demand schedule- a table of how much of a product consumers would want to buy at different prices

Quantity demanded- the amount consumers are willing and able to buy at some specific price

Demand curve- a graphical representation of the demand schedule(a way to show rls between quantity and demanded price)

Law of demand- The higher the price the fewer goods will be sold(only when all things equal)

When all things equal when price goes up the quantity demanded goes down

Change in demand- the increase in quantity demanded at any given price(the curve itself moves)

(change in quantity demanded)Movements along the demand curve, changes in the quantity demanded of a good that result in that good price(moves along the curve)

Rightward shift on demand curve -increase in demand

Leftward shift on demand curve- decrease in demand

5 principles that shift the Demand Curve

• Changes in the prices of related goods or services(polyester price goes up, cotton demand goes up)

• Changes in income

• Changes in taste

• Changes in expectations(if people expect the price to get lower later they will wait to buy and vice versa)

• Changes in the number of consumers

Substitutes- if a rise in the price of one good makes consumers more willing to buy the other good

Complements- when the fall in the price of one good makes consumers more willing to buy another because they are often sold together(milk and cookies, cars and gasoline)

Normal goods- goods that demand increase when consumer income rises

Inferior goods- demand decreases when income increases (less desirable than more expensive alternatives(people buy more bus rides when their income is low because they can't afford a car but when income increases they buy cars and demand for bus rides decreases.)

Individual demand curve- shows the relationship between quantity demanded and price for a particular consumer(negates the increase in population variable on the normal demand curve)

Quantity supplied- the amount of a good or service are willing to sell at some specific price

Supply schedule- how much cotton producers want to make at any given price

supply curve- shows the relationship between quantity supplied and the price(curves upward not downwards)

The law of supply- the higher the price the more producers are willing to produce

A change in supply- a shift in the supply curve, quantity supplied at any given price is changed

New technology means producers are comfortable making more products at any given price

Movements along the supply curve- changes in the quantity supplied arising from a change in price

Causes for shifts in the supply curve

• Changes in input prices-increase in price of vanilla beans will decrease supply of vanilla bean ice cream

• Changes in the prices of related goods or services-gasoline producers will make more gasoline when the other oils they make drop in price and vice versa

• Changes in technology- technological changes that make it easier for producers to produce more product will increase their want to produce

• Changes in expectation- producer will wait to sell th eir products til they can maximize profit future prices high- less supply for sell-future prices low more supply for sale now

• Changes in the number of producers-more producers more supply

Input-good or service used to make another good or service

Individual supply curve- supply curve for one producer

Equilibrium- when no individual would be better off doing something different

Free Response question

A competitive market is in equilibrium when the price has moved to a level at which the quantity of a good demanded equals the quantity of that good supplied.

Example: new register at grocery store opens and customers flock to that line until that line is the same length of the previously opened lines. No one can save time by going to another line(make themselves better off)

Equilibrium price/market-clearing price- the price that matches the quantity supplied and the quantity demanded-price that clears the market(every buyer willing to pay that price finds a seller willing to sell at that price.

equilibrium quantity- the quantity brought and sold at that price

You find the equilibrium price by combining the supply curve and demand curve and looking at the intersecting point(the equilibrium of the market)

Why do all sales and purchases in the market take place at the same price?

•  If both the buyer and seller have been around the location the transaction takes place at then they both have already made comparisons and know the actual value of the good(the market price)

Why does the market price fall if it is above the equilibrium price?  

• At that current price no consumers want to buy the 3.1 billions pounds of cotton that cost more than the equilibrium price

Why does the market price rise if it is below the equilibrium price? Producers must raise the price to lower demand

Surplus- when the quantity supplied exceeds the quantity demanded.surpluses occur when the price is above the equilibrium level

Shortage- a good or service when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level.

When demand for a good or service decreases the quantity supplied and the equilibrium quantity of the good or service both fall

An increase in supply leads to a fall in the equilibrium price and rise of the equilibrium quantity. A decrease in supply leads to a rise in the equilibrium price and a fall in the equilibrium quantity

When demand increases and supply decreases, the equilibrium price rises but the quantity is ambiguous

When demand decreases and supply increases, the equilibrium price falls but the change in the equilibrium quantity

When both demand and supply increase, the equilibrium quantity rises but the change in equilibrium price is ambiguous

When both demand and supply decrease, the equilibrium quantity falls by the change in the equilibrium price is ambiguous

The market is - private property- infrastructural system(roads, commercial zones where transaction takes place)

Micro day 2

Large corporations borrow money regularly to operate their business and less inflation mean lower interest and cheaper money borrowing

Consumers also can borrow money easier so they can spend more

Resources

• Land-

-expanses of geographic territory

-Things on the land trees,oil in unrefined form

Once resources are refined no longer land

• Labor

-Human labor

-price of labor is wage rate

-Selling energy,time, and effort

• Capital

-Factories,robots,equiment material goods and machinery used to make final goods and services sold to consumers by firms

• Entrepreneurship 

-Set of psychological traits

-Ways that people are that are good at running businesses

-Having the capacity of innovative thinking

-Tolerance for high level of risk

-Set of human characteristics

Market distortions-look up

Policies are made to stop companies from failings

Ceteris peribus/all else equal clause

-every economic law

Only has power when everything else is held equal

As price goes up demand goes down but only if things are qual

Mask price went up but demand didnt go down but consumers were more afraid of pandemic than prices so all things werent equal

Economics- the study of scarcity and choice

Individual choice- is decisions by individuals about what to do, which necessarily involve decisions about what not to do

Economy- system for coordinating a societies productive and consumptive activities

Market economy- the decisions of individual producers and consumers largely 

Command economy- where industry is publicly owned and there is a central authority making production and consumption decisions-centralized economy-soviet union

Incentives- rewards or punishments that motivate particular choices

Command economies failed because there was lack of incentives 

High prices and profits provide incentives for producers to make more of the most needed goods and services and to eliminate shortages.

Property rights- establish ownership and grant individuals the right to trade goods and services with each other-incentives to put resources to their best possible use

Marginal decisions- the decision of what to do with the next ton of pollution, the nest hour of ree time, and the next dollar of spending money

Look up marginal decisions

Look up margin

Marginal benefit- the gain from doing something one mroe time

Marginal cost- the cost of doing something one more time (benefit>cost keep doing it)

Marginal analysis- the study of the cfost and benefits of doing a little bit more of an activity vs a little bit less

Resource- anything that can be used to produce something else

Factors of production- the economy’s resources

Scarce- not avalible in an infinite amount

opportunity cost- the value of what you must give up when u make a particular choice

Economic aggregates- measures that summarize data across many different markets

Positive economics- economic analysis that is used to answer questions about the way the economy works, questions that have devinite right and wrong answers

normative economics- how the economy should work 

Normative example- should the toll be raised bearing in mind that a toll increase would reduce the traffic and air pollution near the road but impose some financial hardship on frequent commuters. 

Positive example- how much revenue will the tolls yield next year

If someone lives near the turn pike they care about airpollution and traffic noise, so they would want the increase. But a frequent commuter would not want the increase because they must pay more money. So they would hav different opinions on how economics  SHOULD be

Economic model- provide simplified representations of reality that answer what if questions

Business cycle- the alternation between economic downturns and upturns in the macroeconomy 

Depression-very deep and prolonged downturn

Recession- less prolonged economic downturns known(employment and production of goods are lowered)

Expansion(recoveries)- employment and production of goods increased

Price controls- when the government interventions to regulate prices

Price ceiling- upper limit imposed by government intervention causes (prices to go down)

• Usually enforced after natural disaster and price spikes

• Usually used to regulate rent

• Only have effect when its set below the equilibrium price

• Causes shortages sometimes less producers are willing to sell at the price ceiling while more consumers are willing to buy if applied in efficient markets

  • Shortages cause increase in opportunity cost:ex. Time spent looking for a rare apartment can be time spent making money

Price floor- lower limit imposed by government intervention causes (prices to go up)

• Used for agriculture to support farmers

• Used to support fast food workers

• Minimum wage- the lowest price ea worker can be paid

• Labor wage- workers are the sellers

• Leads to a surplus as producers are willing to produce more product with the extra money they make

  • Sellers cannot find buyers

  • People cant find jobs - they cant find employers willing to higher at that wage

• Inefficiency in price floors-

  • Inefficiently low quantity

  • Inefficient allocation of sales among sellers- those who would be willing to sell the good at the lowest price are not alway those who manage to sell it ex. Someone who tutors for $9 will now take the job of the person who tutors for 5$ because $9 is the minimum wage now

  • Wasted resources- when the surplus is destroyed it is pure waste/people who waste tme looking for jobs when they couldve haad a lower paying job before the price increase

  • Inefficiently high quality- sellers offer high quality goods at a high price although buyers would prefer low quality low price

  • Illegal activity- people who cant find jobs agree to work off the books

Governments still do price floors because: they benefit some influential buyers of a good

Price floors and ceilings both reduce the number of goods brought and sold

Inefficient allocation to consumers- people who want the good badly and are willing to pay a high price don't get it, and those who care relatively little about the good and are willing to pay only a low price, get it

Inefficiently low quality- sellers offer low-quality goods at a low price even thought buyers would rather have higher quality and are willing to pay a higher price for it.Ex: landlords do not care to fix apartments because they cant raise the rent to cover repair cost

Black markets- a market in which goods or services or services are bought and sold illegally either because it is illegal to sell them at all or because the prices changed are legally prohibited

Results of price ceilings

• Persistent shortage of the good

• Inefficiency arising from the persistent shortage in the form of inefficiently low quantity, inefficient, allocation, of the good to consumers.

• The emergence of illegal black market activity

Wasted resources-  people expend money effort and time to cope with the shortages caused by the price ceiling

Governments still do price ceilings because

• Government officials do not understand supply and demand

• Those who benefit from it may be more vocal than those who are harmed\

• People are scared of what would happen without price ceilings and base assumptions off of high black market prices.

Quantity control-

Quota- the government regulates the quantity of a good that can be bought and sold rather than regulating the price

Licenses- a permit to legally supply goods and services

Quotas established for temporary problems become hard to remove because it displeases the beneficiaries

Demand price- the price at which consumers will demand that quantity of a goods or services

Supply price- the price at which producers will supply a given quantity of goods or services

Wedge- the supply price of a good; that is, the price paid by buyers eds up being higher than that received by sellers.

Quota rent- the earnings that accrue to the liscense holder from ownership to the right to sell the good- equal to the market price of the liscense when the licenses are traded- money that exceeds the market price

Deadweight loss- the value of forgone mutually beneficial transactions- the missed transactions between producers and consumers due to quotas-when the demand price exceeds the supply price

Quotas dont have affects if set above equilibrium quanity

Quotas make incentive to evade them or break the law

Price gauging laws prevent sellers from raising prices above a certain amount when there is a natural disaster coming

Economy day 3

Market economy- people decide what to buy what to produce

Command economy- decisions about what to make and consume is made by centrallized government bureaus(socialisjm)(north korea)

3 questions

What goods and services should be produced?\

How should they(goods and services) be produced?

Who should get it?/how should they distribute it?

Adam smith-economist/philosopher →A theory of moral sentiments book

  The wealth of nations

Wealth of nations

• Reasons for richness

  • Division of labor

  • Private property

  • Specialization

David Ricardo

• Productive possibility model

PPC-productive possibilities model

Production is efficient when no resources have gon to waste. Any combination of figs and rabbits will use all the resources

Anything below line is possible but not efficient-feasible,non efficcient

Anything above the line isnt possible with the resources-non feasible-

Enhancing resources increase the PPC

Increase PPC is economic growth

trade

-means to which we can facilitate Consomution excess to what we produce

Opportunity cost+Advantage

Absolute- basketball and typing

Comparative- to have lower opportunity cost

Lebron has to give up 50 mil in basketball earnings to type crews only has to give up teacher salary

Specialization comparative advantage