10 Principles of Economics 03 10 2014 Microeconomics is the study of how households and firms make decisions and how they interact in markets Macroeconomics is the study of economy wide phenomena including inflation unemployment and economic growth Ten Principles of Economics 1 People Face Trade offs 2 The Cost of Something is What You Give Up to Get It 3 Rational People Think at the Margin 4 People Respond to Incentives 5 Trade Can Make Everyone Better Off 6 Markets Are Usually a Good Way to Organize Economic Activity 7 Gov ts Can Sometimes Improve Market Outcomes 8 A Country s Standard of Living Depends on Its Ability to Produce Goods and Services 9 Prices Rise When the Government Prints Too Much Money 10 Society Faces a Short Run Trade off between Inflation and Unemployment Vocab resources the members of society Scarcity the limited nature of society s resources Economics the study of how society manages its scare resources Efficiency the property of society getting the most it can from its scare Equality the property of distributing economic prosperity uniformly among Opportunity cost whatever must be given up to obtain some item Rational people people who systematically and purposefully do the best they can to achieve their objectives Marginal change a small incremental adjustment to a plan of action Incentive something that induces a person to act Market economy an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services Property rights the ability of an individual to own and exercise control over scarce resources resources efficiently Market failure a situation in which a market left on its own fails to allocate Externality the impact of one person s actions on the well being of a bystander Market power the ability of a single economic actor to have a substantial influence on market prices Productivity the quantity of goods and services produced from each unit of Inflation an increase in the overall level of prices in the economy Business cycle fluctuations in economic activity such as employment and labor input production Thinking Like an Economist 03 10 2014 Vocab Positive statements claims that describe how the world is Normative statements claims that describe how the world should be Factors of production the resources that the economy uses to produce goods and services They include labor land capital buildings machines used in production Production Possibilities Frontier PPF a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology Circular flow diagram a visual model of the economy that shows how dollars flow through markets among households and firms Why do economists disagree They may disagree about the validity of alternative positive theories about how the world works Economists may have different values and therefore different normative views about what gov t policy should aim to accomplish The Market Forces of Supply and Demand 03 10 2014 Vocab Market a group of buyers and sellers of a particular good or service Competitive market a market in which there are many buyers and sellers so that each has a negligible impact on the market price DEMAND overlap QD the amount of a good that buyers are willing and able to purchase Law of Demand the claim that other things being equal the QD of a good falls when the price of the good rises Demand curve a graph of the relationship between the price of a good and the quantity demanded Normal good as your income goes up your desire for this good also goes Inferior good as your income goes up your desire for this good decreases Substitutes two goods for which an increase in price in one leads to an increase in demand for the other decrease in demand for the other Complements two goods for which an increase in price in one leads to a GOODS up SUPPLY Qs the amount of a good that sellers are willing and able to sell Law of Supply the claim that other things being equal the Qs of a good rises when the price of that same good rises Supply schedule a table that shows the relationship between the price of the good and the Qs the Qs Supply curve a graph of the relationship between the price of the good and EQUILIBRIUM Eq a situation in which the market price has reached the level at which quantity supplied equals quantity demanded Eq Price the price that balances the quantity supplied equals quantity Eq quantity the quantity supplied and the quantity demanded at the eq demanded price The Market Forces of Supply and Demand 03 10 2014 DEMAND Vocab The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase at alternative prices Law of demand the claim that the quantity demanded of a good falls when the price of the good rises other things equal Demand schedule a table that shows the relationship between the price of a good and the quantity demanded Demand Curve Shifters Number of buyers o An increase in the number of buyers causes an increase in quantity demanded at each price which shifts the demand curve to the right Income o Demand for a normal good is positively related to income o Demand for an inferior good is negatively related to income roman noodles as your income goes up your Q demanded for these noodles goes down Prices of Related Goods o Substitutes an increase in the price of one causes an increase in demand for the other ex hot dogs and hamburgers o Complements an increase in the price of one causes a fall in demand for the other ex coffee and sugar Tastes Expectations o Ex if people expect their incomes to rise their demand for meals at expensive restaurants may increase now No of buyers shifts the D curve causes a movement along the D curve shifts the D curve shifts the D curve shifts the D curve Expectations shifts the D curve In Summary Price Income Price of related goods Tastes SUPPLY Vocab In Summary The quantity supplied of any good is the amount that sellers are willing and able to sell at alternative prices Law of supply the claim that the quantity supplied of a good rises when the price of the good rises other things equal Supply schedule a table that shows the relationship between the price of a good and the quantity supplied Price Input prices Technology No of sellers Expectations causes a movement along the S curve shifts the S curve shifts the S curve shifts the S curve shifts the S curve
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