Economics
The study of the allocation of resources and how individuals make choices to allocate those resources to satisfy unlimited wants.
Resources
Anything that can be used to produce something else.
Opportunity Costs
The highest valued alternative that must be given-up in order to partake in an activity.
Trade-Off
When you compare the benefits and opportunity cost of decision
Marginal Analysis
You will probably not make an all or nothing decision. You will make a decision based at the margin
How will you decide whether or not to study an additional hour?
Weigh the Marginal Benefits against the Marginal Costs.
Marginal Analysis Decision
You will continue to study so long as the marginal benefit of an additional hour studying is greater than or equal to the marginal cost.
This is one of our fist conditions in economics. An individual will continue any activity whether work, leisure, or consumption until the_______
MB = MC
Diminishing Marginal Benefits/Returns (DMR)
Each additional action provides less benefit than the previous.
Incentive
Anything offered to change individual behavior.
Concept of Equilibrium
An economic situation is in equilibrium when no individual would be better off doing something different.
Equity
Making situations more fair for people.
Efficiency
Making sure that all opportunities to make people better off have been fully exploited (No Waste).
Model
A simplified version of reality that is used to better understand the situation.
Economic Models
Allow us to hold other things equal or constant (ceteris parabus) and isolate the effect of a particular action or event.
Production Possibilities Frontier (PPF)
Shows the available combinations of two "goods" that can be produced given all available resources.
The Law of Increasing Costs
If the frontier is bowed out, the opportunity cost increases as more of one good is produced because resources are not easily transferable from one good to another.
Allows increased consumption of goods:
1.) Increase in population.
2.) Increase in amount of physical capital.
3.) Improvements in technology.
-These are the factors of long-run economic growth.
Comparative advantage (CA)
Determined by the lowest opportunity cost for production of that good.
Absolute Advantage (AA)
The ability to produce a greater quantity of goods relative to another producer.
No. For trade, we are concerned with the relative opportunity cost to see which is lower and for that, we look at the comparative advantage.
Does having an absolute advantage preclude any benefits from trade?
Sources of Comparative Advantage
- Available physical capital
- Available labor
- Climate: Tropical or Dry
- Laws: Credible enforcement of contracts
Positive Analysis
An economic analysis that describes the way a situation actually works.
Normative Analysis
An economic analysis that describes the way a situation should work.
Buy American Provision
Firms receiving economic stimulus (taxpayer funds) must try and purchase materials/equipment from other US companies first, before asking foreign based companies.
Reservation Price
The maximum amount you are willing to pay .
Marginal Benefit
Your reservation price.
Marginal Cost
The market price.
Consumer Surplus
The difference between what are willing to pay for a good or service and what you have to pay. I.e., the difference between your reservation price and the market price.
Market Consumer Surplus
Every individuals consumer surplus added together.
The Law of Demand
A higher price for a good or service, other things equal, leads people to demand a smaller quantity of the good or service.
Demand Schedule
How much of a good consumers are both willing and able to buy at different prices.
Factors that Shift the Demand Curve
Tastes and Preferences - Suppose a report indicates that chocolate has been linked to lower cancer rates.
Factors that Shift the Demand Curve
Income - An change in your income should influence your demand.
Factors that Shift the Demand Curve
Related Goods and their Price - Suppose the price of an alternate candy bar changes, this may influence your demand.
Factors that Shift the Demand Curve
Expected Future Price - Suppose you expect that the candy will cost more next week, this will increase your demand today.
Factors that Shift the Demand Curve
Demographics and Population - Suppose add another class to our candy experiment. The increase in number of buyers will influence demand.
Normal Good
A good or service that you increase your consumption of as your income rises. Example: Steak-Demand curve shifts right
Inferior Good
A good or service that you decrease your consumption of as you income rises. Example: Cup of Noodles-Demand curve shifts left
A movement along the demand curve
A change in the quantity demanded of a good that is the result of a change in that good's price.
Factors that Shift the Supply Curve
-Number of firms.
-Input costs: increases in the cost of labor or capital (machines/equipment).
-Technology: improvements in the production process.
-Expected future price of the product the firm sells.
-Substitutes in the production process.
When the supply curve shifts
There's a change in the amount supplied to the market at ANY price level.
The Equilibrium Price
The quantity demanded equals the quantity supplied and the market is said to be in equilibrium.
Consumer Surplus
The area under the demand curve and above the price line.
Producer Surplus
The area above the supply curve and below the price line.
Total Surplus
Equal to consumer surplus + producer surplus.
At market equilibrium_________
no one can be made better off without making someone else worse off. i.e. The gains from trade and total surplus have been maximized.
Property Rights
Allows individuals the right to sell their goods in the market place. This gives them ownership ship rights over goods.
Market Signaling
Once property rights are secure a market price works to signal the value of goods/services. This signal allows individuals/firms to make decision on whether to sell or hold a product