Random Economics NotesChapter 1: Ten Principles of Economics- People face trade offso National defense vs. consumer goodso Efficiency – society gets maximum benefit from scare resourceso Equality – benefits are distributed uniformly among members- The cost of something is what you give up to get ito Compare costs and benefits of alternative courses of actiono Opportunity cost – what you give up to get that item- Rational people think at the margino People want to achieve their objectiveso Marginal change – small incremental change to existing plan of action Already doing but increase/decrease (small changes) Marginal benefit needs to exceed the marginal cost- People respond to incentiveso Incentive – something that induces a person to act (reward)- Trade can make everyone better offo Trade allows each person to specialize in what they do besto Market economy – decisions of central planner are replaced by decisions of millions of firms and households Contain many buyers and sellers of goods and all of them are mainly interested in their own well beingo Adam Smith wrote Wealth of Nations Invisible hand (laissez faire) prices are the main determinant Market prices reflect both the value of a good to society and the cost to society of making the goods- Governments can sometimes improve market outcomeso Property rights – individuals can control and own scarce resources Aims to promote equality and efficiencyo Market failure – market on its own fails to produce an efficient allocation of resources Externality – impact of one person’s actions on the well being of a bystander o Market power – ability of a single person to influence market pricesChapter 2: Thinking Like an Economist- Economist as a scientist – trying to explain the worldo Devise theories, collect data, and analyze data- Circular flow diagram – visual model of the economy that shows how dollars flow through markets among households and firmso Firms produce goods and services using inputs Factors of production (inputs) – land, labor, capital o Markets for goods and services – households=buyers, firms=sellerso Markets for factors of production – households=sellers, firms=buyers- Production Possibilities Frontier – graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and the available technology firms use to turn these factors into outputo Cannot produce points outside the frontiero Points on the production frontier represent efficiency Efficient – if economy is getting all it can from the scarce resources it has available Inefficient points – points inside the frontiero Only way of producing more of one good is to produce less of othero Opportunity cost = slope of the production possibilities frontier Steep if OC is high, flat if OC is small- Microeconomics – study of how households and firms make decisions and how they interact in specific markets- Economists as policy advisers – when they are trying to improve the worldo Positive statements – claims that attempt to describe the world as it is o Normative (prescriptive) – make a claim about how world should beChapter 4: The Market Forces of Supply and DemandDemand- Market – group of buyers and sellers of a good or serviceo Buyers determine the demand for the producto Sellers determine the supply of the product- Competitive market – describes market in which there are so many buyers and so many sellers that each doesn’t have an impact on the market priceo Price takers: must accept the price the market determines- Price of good mainly determines how much quantity is demanded- Law of demand – when price of a good increases, the demand decreases- When the quantity demanded is altered, the demand curve shifts- Normal good – increase in income leads to an increase in demand (steak)- Inferior good – increase in income leads to a decrease in demand (spam)- Substitutes – increase in the price of one causes increase in other’s demando Pizza and hamburgers (used in place of one another) Increase in price of pizza, increases demand for hamburgers, shifting the demand curve to the right (more now want other)- Pizza increases price, quantity decreases, hamburger demand increases, quantity hamburger increases (opp)- Complements – increase in price of one causes a decrease in other’s demando Peanut butter and jelly (used together) Increase in the price of peanut butter, less amounts of jelly will be sold, shifting the demand curve to the left - Decrease in Q of PB, decrease in the Q of jelly- Taste, future expectations, income, and number of buyers all effect demandSupply- Law of supply – when the price of a good increases, the quantity supplied of the good will increase/when price falls, quantity supplied falls too-Shifts in the supply curve are caused by input prices, technology, expectations, and number of sellersEquilibrium-Equilibrium – where quantity demanded and supplied are equalo Surplus = quantity supplied > quantity demandedo Shortage = quantity demanded > quantity suppliedChapter 5: Elasticity and it’s Application- Elasticity – measure of the responsiveness of the quantity demanded or quantity supplied to a change in one of its determinantso How much the quantity demanded responds to price change Elastic – responds to the change in price Inelastic – quantity barely responds to price changeo Things that effect elasticity Availability of close substitutes, necessities vs. luxuries, definition of the market, time horizon- More elastic if there are substitutes, more luxury, narrow market, more elastic in the long run- Price elasticity = % change in quantity demanded/% change in priceo Change in demand divided by change in price Always positive numbers, use absolute valueo Elastic – greater than 1 Perfectly elastic - horizontalo Inelastic – less than 1 Perfectly inelastic - verticalo Unit elasticity – equal to 1- Revenue – amount paid by buyers and received by sellers of goodo Revenue = price X quantity (R=PQ)- Normal goods have positive, inferior goods have negative elasticity - Income elasticity – how quantity demanded changes as consumer income changes, calculated same way just with change in income- Cross price elasticity – measures how much the quantity demanded of one good responds to changes in the price of another goodo Substitutes have positive,
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