Ch. 1Opportunity cost:The value of the thing you didn’t doCh. 2Market economy v. centrally-planned economy (pg. 9)Productive efficiency v. allocative efficiency (pg. 11)Ch. 3Market Forces:Set of buyers (demand) and sellers (supply)..whose actions affect the price of a product or serviceLaw of Demand: (pg.71)At lower prices, larger quantity will be demandedAt higher prices, smaller quantity will be demandedAs price changes the quantity demanded will changeAll else held equal (ceteris paribus) (pg. 71-72)Demand Curve: (pg. 71)Change in priceA change in price causes a movement along the demand curveThis is a “change in the quantity demanded”(pg. 71)Substitution EffectIncome EffectWhen the whole curve shifts, it’s a change in demandChange in price causes movement along the curveThat’s a change in Q demandChange in something else..like, income…causes the entire curve to shiftThat’s a change in DFirst Demand shift factor:A change in income (pg. 73)For most goods, increase in income means an increase (shift right) in demand“normal” goodsFor a few goods, increase income means a decrease (shift left) in demand“inferior” goodsSecond demand shifter:A change in the prices of related goodsA change in the price of one good, Good X, can cause a change in the demand for Good y..ComplementsThings we buy together to use togetherHot dogs & hot dog bunsChips and salsaSubstitutesThings we buy instead of each otherDiet Coke & diet PepsiNook & kindleThird demand shift factor: (pg.74)A change in tastes and/or preferencesTaste change…something becomes more popular…demand for the good will shift right (increases)The Atkins Diet falls out of tasteFourth demand shifter: (pg. 73)A change in expectations (price)Expect the price to be higher in the future, demand shifts right (increases)…you demand more today before the price goes upexpect the price to be lower in future, demand shifts left (decreases) as you demand less today9/17/14 (After 1st Exam)Ch. 5Equilibrium – gives you the efficient quantity and the efficient priceDemand curve – value or BENEFIT people see in this goodSupply curve – costs associated with this goodMarket Failure – situation where the market..left to its own devices fails to produce the efficient level of output (pg. 140)Justifies government intervention in the marketCorrect/Best/OptimalGovernment intervention in the economy-price floors or price ceilings-can reduce economic efficiencyGovernment intervention may actually increase economic efficiency and enhance the well-being of society (pg. 138)Public Goods – provided by local governmentstate highway, street light (pg. 151)Public goods characterized by:Non-rival consumptionMost goods if, I “consume” it no one else can “consume” itThat’s RIVALPublic goods, one person “consuming” it doesn’t prevent another person from “consuming” the same goodThat’s NON-RivalNon-exclusionMost goods, if you pay for it you get it, and if you don’t pay for it you don’t get itThat’s EXCLUSIONPublic goods, in many cases you cant keep someone from “getting” the good just because they didn’t pay for itThat’s NON-ExclusionExcludable: New shirt; ticket to a concert(The class I’m sitting in right now – not the information)Free-Rider Problem & Mosquito SprayingBecause of the free-rider problem, there would be no demand..And therefore no supplySo the market would “fail” with this goodSo we take the decision out of the hands of the marketWhat is/is not public good?National defense v. Fire ProtectionNon-rival consumption?Non-excludable?Health Care?Four Categories of Goods (pg.154)TL – Private Goods:Starbucks’ LattesLevis JeansTR – Common Resources:Fish in the oceanBL – Quasi-Public GoodsCable TVBR – Public Goods:National DefenseMosquito SprayingIs the internet a public GOOD?Externalities (pg. 138)Unintended consequenceCost of benefits caused by a transaction that aren’t part of the transactionA benefit or a cost that affects someone who is not directly involved in the production or consumption of a good/serviceNeighbor buys/plants apple treeCosts $300Branches hang over your propertyEveryday apples fall on in your yardPositive ExternalityNeighbor buys/plants apple treeCosts $300Branches hang over your propertyEvery morning sap falls all over your carNegative externalityPrivate v. External Cost & BenefitPositive ExternalitiesYou’re trying to sell your houseYou go n vacation and come back a week later(remodeled house)Negative ExternalitiesPollutionThe “transaction” is the thing causing the pollutionThe “spillover effect” is the polluted air or waterPrivate costs:Cost of productionExternal Costs:Costs of polluted waterSocial Costs = Private costs + External costs (pg. 139)Social costs are the full resource costs of an activity including the externalitySupply curve represents private costs to producersexternal cost: shift up of SP, demand doesn’t change, new equilnegative externalityquantity in market is reducedDemand curve represents private benefits to consumers9/22/14 Ch. 5 Cont’dMarket FailureSituation where the market... left to its own devices,, fails to produce efficient level of outputCorrect/best/optimalPg. 138-140 all graphsExternal Costs –External –Mr. PigouA.C. PigouEconomist who pioneered idea of using taxes/subsidies to address externalitiesReuters—Senators Boxer and Sanders introduce climate change legislation in congress..aimed to reducing greenhouse emissions by 80% by 2050Ch. 6Price elasticity – how demand responds to priceA change in the price will cause change in quantity demandedElasticity = responsivenessWhen price changed, does quantity demanded respond by changing a little or a lot?The bigger your “response”, the more “elastic” demand isResponse:Buy more or buy lessbuy more or buy lessBuy or don’t buy—periodIf the price changes and you buy the same amount you were going to buy anyways, you didn’t respond to that price changeYour demand is not responsiveYour demand is not “elastic”If you buy a little more or a little less, you had some response in price changeSomewhat responsiveSomewhat elasticWhy do we care?Elasticity of demand determines whether you earn more revenues/..By selling more units at a lower per-unit price, orBy selling fewer units at a higher per-unit priceAlso determines size or marginWhat makes a good have a demand that’s elastic or inelastic?Number of substitutesLots of substitutes: demand is