Chapter 1 Micro

Market: group of buyers and sellers and the arrangement by which they meet to trade

Marginal: extra or additional

Marginal Benefit: MB, extra benefit

Marginal cost: MC, extra cost

Marginal Analysis: analysis that involves comparing marginal benefits and marginal costs

Most of economics involves analyzing how people make choices and interact in markets

Three important ideas about markets:

1. People are rational- doesn't mean that people always make the “best decisions, rational people weigh the cost and benefit

2. People respond to economic incentives- ex. Bank robberies, benefit is money from robbery, the cost is time in jail if caught 

3. Optimal decisions are made at the margin- some decisions are all or nothing(opening a new restaurant), others aren't (saving money), Optimal decisions occur when MB=MC, Businesses make careful calculations to see if MB=Mc, when they do this it is called marginal analysis

Scarcity: limited quantity of economic resources so can produce only limited goods and services

Trade Offs: producing more of one good or service means producing less of another good or service

Opportunity Cost: the OC of any activity is the highest valued alternative that must be given up to engage in that activity

Voluntary Exchange: both the buyer and seller of a product are made better off by a transaction

Equity: the fair distribution of economic benefits 

We live in a world of scarcity so every society must solve this problem

Because of scarcity every society faces trade offs

The best measure of the cost of producing a good or service is the value of what has been given up to produce it 

Trade Offs force society to make choices when answering the 3 fundamental questions of

1. What goods and services will be produced?- The choices of consumers, firms, and the government decide what will be produced, each of these decisions has a trade off and opportunity cost

2. How will the goods and services be produced?- firms choose, this choice involves a tradeoff between hiring human workers or getting robots

3. Who will receive the goods and services produced?- depends on how income is distributed, rich people can buy more goods, govt is intervening to make the distribution more even by imposing higher taxes on high income people

To answer the 3 fundamental questions, societies organize their economies in 2 ways, 

1. Centrally planned- govt decides how resources are allocated, Soviet union, fail to produce low cost high quality goods so standard of living is low, tend to collapse from dissatisfaction, govt answers all 3 questions, North Korea is the only completely centralized (Venezuela and Cuba have some)

2. Market- decisions of households and firms as they interact in markets determine the allocation of resources, USA,Canada,Japan, privately owned firms, firms go out of business if they do not produce the good that consumers want, Income is determined by what you have to “sell”, reward hard work, luck

3. The Modern “Mixed” economy- an economy in which most of the economic decisions result from the market but the govt plays a role in the allocation of resources, In the mid 1900s there was a great increase in govt intervention, raise incomes, social security, minimum wage, medicare, protect the environment

China has moved from being a centrally planned economy to being a mixed economy, means they have had rapid economic growth

Market economies are more efficient because they promote competition and facilitate voluntary exchange, there are 2 types

1. Productive- when a good or service is produced at the lowest cost, achieved when competition among firms forces them to produce goods at the lowest cost

2. Allocative- occurs when production is in accordance with consumer preferences, achieved when the combination of competition and voluntary exchange between firms and consumers results in firms producing a mix of goods that consumers prefer most

Markets don’t guarantee efficiency, inefficiency can arise from various sources such as lack of information, time, and government intervention

Even if an outcome is efficient doesn't mean it is equitable or fair

For some people equity means a more equal distribution of economic benefits, this would decrease efficiency because people have less incentive to open new businesses so less goods are produced

There is often a tradeoff between efficiency and equity

Economic Model (theory): a simplified version of reality used to analyze real-world economic situations

Economic Variable: something measurable that can have different values, such as the number of people employed in manufacturing

Hypothesis: a statement about an economic variable that may be incorrect or correct

Positive Analysis: analysis concerned with what is

Normative Analysis: analysis concerned with what ought to be 

The purpose of economic models is to make economic ideas sufficiently explicit so that firms and the govt can use them to make decisions

Economists rely on models to analyze real world issues such as tariffs and reducing pollution

US Bureau of labor statistics build models to allow them to forecast future employment demand

To develop a model

1. Decide on the assumptions to use- behavioral assumptions (firms maximize profits, consumers maximize satisfaction), forming and testing hypotheses tells us if the assumptions are to limiting or simplified 

2. Formulate a testable hypothesis- usually about a casual relationship for example robots and employment in manufacturing, refer to it being not rejected

3. Use the economic data to test the hypothesis- analyze statistics or data, correlation is not causation

4. Revise the model if it fails to explain the economic data

5. Retain the revised model to help answer similar economic questions in the future

For example, economists are studying whether or not putting in the minimum wage was good or bad. They compare the loss of jobs, inability to find a job to the gains of the workers now receiving minimum wage. This is a positive analysis. The decision on whether it was good or bad is a normative analysis because some people think that the losses of employers outweigh the gains of the workers and vice versa. Positive analysis cannot decide the issue by itself. 

Economics is a social science because it studied the actions of individuals, it puts more emphasis on how individuals decisions explain the outcomes such as prices or govt policies

Have studied why people have difficulty losing weight, how couples divide up house chores 

Also govt has used economic analysis to evaluate laws and regulations

Microeconomics: the study of how households and firms make choices, how they interact in markets, and how the govt attempts to influence their choices

Macroeconomics: the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth 

Economic model are used to analyze decision making in many areas, we group some of these areas together as microeconomics and macroeconomics

1. Micro- how consumers react to changes in product price, 

2. Macro- why economies experience periods of recession and increasing unemployment, 

Many issues have both microeconomic and macroeconomic aspects, for example the level of total investment by firms in new machinery and equipment helps determine how rapidly the economy grows is a macro issue but how much machinery the firms buy is a micro issue 

Economics is about making choices, they describe how individuals, businesses, and govt make choices analyzing the results of choices, then they advise on how better decisions can be made

1. Individuals- can use economic principles to improve how they make decisions such as career, gives you practical skills

2. Managers- use them to improve how they make decisions, such as what prices to charge for their products

3. Govt policymakers- use them to make decisions, such as whether to raise taxes on cigarettes

More chief executive officers of Fortune 500 firms majored in economics than in any other subject

The first step for many students is to seek a summer internship to decide if economics is right for them

Analyze data, teach, gather data, make decisions, forecast, and write reports

1. Firm, Company, or business- a firm is an organization that produces a good or service, to earn a profit, or a nonprofit firm (hospitals)

2. Entrepreneur- someone who operates a business, they decide what goods or services to produce and how, half businesses fail within 4 years, assume risk of opening a business

3. Innovation- an invention is a new good or process for making a good, an innovation is the practical application of an invention, or a significant improvement in a good, IBM compared to the very first computer

4. Technology- the processes firms use to produce goods and services, 

5. Goods

6. Services

7. Revenue- multiply the price per unit by the number of units sold

8. Profit- accounting profit excludes the costs of economic resources that the firm does not pay for explicitly, Economic profit includes that 

9. Household- all people occupying a home, supply factors of production (labor), also demand goods and services

10. Factors of production, economic resources, or inputs- used to produce goods or service, labor, capital, natural resources, and entrepreneurs, households earn income by providing one of these

11. Capital- physical capital such as manufactured goods that are used to produce other goods and services, trucks and warehouse, Total capital ina country is called capital stock

12. Human Capital- accumulated training skills that workers possess