Chapter 1 Ten Principles of Economics The word economy comes from the Greek word okonimos which means the one who manages the household In a lot of ways economies have much in common with households Scarcity of resources roles chores allocation etc Economics is the study of how society manages its scarce resources Principle 1 People face trade offs There ain t no such thing as a free lunch Principle 2 Cost of something is what you give up to get it Opportunity cost Principle 3 Rational people think at the margin Marginal differences in choices Principle 4 People respond to incentives Principle 5 Trade can make everyone Better off Principle 6 Markets are usually a good way to organize economic activity Principle 7 Governments can interfere with markets Principle 8 Standard of living depends on ability to produce goods and services Principle 9 Prices rise when the government prints too much money Principle 10 Society faces short trade off between inflation and unemployment Accompanying Lecture Notes Micro Macro What individuals consume How Markets work What strategies companies employ National or Global concerns like Unemployment Government policies Econometrics statistics Graduate level studies Making economics more empirical rather than theoretical Labor Factors of Production Raw Materials Human Capital skills intellect Physical Capital tools machinery Entrepreneurship sales marketing A Production Possibility Curve lets the analyst know which production outputs are possible given the circumstances We say a combination of product 1 and product 2 is efficient if All factors of production are used All factors are used in their most productive employment Chapter 2 Thinking like an Economist As we use models to examine various economic issues throughout this book we will see that all the models are built with assumptions Just as a physicist begins the analysis of a falling marble by assuming away the existence of friction economists assume away many of the details of the economy that are irrelevant for studying the question at hand Circular flow diagram how the economy is organized and how participants in the economy interact with each other The inner loop represents the flows of inputs and outputs The outer loop represents the corresponding flow of dollars This is useful to keep in mind when thinking about how the pieces of the economy fit together Accompanying Lecture Notes Production Possibility Curve 1 Opportunity Cost 2 Marginal Principal a Total Cost b Fixed Cost Variable cost c Marginal Cost 3 Diminishing Return Opportunity Cost the cost of foregoing your next best opportunity Sometimes when we choose an opportunity we give up other opportunities which have costs associated Accountant explicit and precise costs Economist Accounting costs Opportunity costs Marginal Principle Used to maximize profits Costs o Fixed Costs FC Do NOT change with quantity o Variable Costs VC DO change with quantity o Quantity Q the amount we produce o Total Costs TC fixed costs variable costs o Marginal Costs MC the change in total cost when we produce ONE additional unit Marginal cost is the slope along the total cost curve approximately MC will always have an opposite curve than the TC curve Convex or concave If the TC is a straight line than so is the MC curve Percentage change in price P2 P1 X s 100 P2 P1 Price 1 and Price 2 P1 Slope intercept Y MX B Y vertical axis X horizontal axis M slope B Y intercept M vertical change Horizontal change Rise Y2 Y1 Run X2 X1 Need these two for exams Practice problem P1 30 Q1 60 P2 20 Q2 80 1 Calculate percentage change in price 2 Find the equation of the slope Price is the vertical axis quantity is the horizontal axis For exam be able to differentiate between Fixed Costs and Variable Costs TR total revenue MR the change in TR when we sell 1 additional unit Profit abbreviated as pi Marginal Principle the optional level of an activity occurs where MR MC Q where MR intercepts with MC You never want MR to be less than MC Diminishing Returns increasing a production input eventually results in diminishing increases in output Only occurs in the short run Short run the time period in which at least one production input is fixed Long run the time period in which all production inputs are adjustable Chapter 3 Interdependence and the Gains From Trade Economists use the term comparative advantage when describing the opportunity cost of two producers The producer who gives up less of other goods to produce good X has the smaller opportunity cost of producing good X and is said to have a comparative advantage in producing it In our example the farmer has a lower opportunity cost of producing potatoes than the rancher An ounce of potatoes costs the farmer only ounce of meat but it costs the rancher ounce of meat Conversely the rancher has a lower opportunity cost of producing meat than the farmer An ounce of meat costs the rancher 2 ounces of potatoes but it costs the farmer 4 ounces of potatoes Thus the farmer has a comparative advantage in growing potatoes and the rancher has a comparative advantage in producing meat Unless two people have exactly the same opportunity cost one person will have a comparative advantage in one good and the other person will have a comparative advantage in the other good For both parties to gain from trade the price at which they trade must lie between the two opportunity costs Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage Accompanying Lecture Notes Gains From Trade A country has absolute advantage in the production of a good if it can use fewer resources per unit of output Than a competitor A country has comparative advantage if it has a lower opportunity cost than a competitor By specializing in the good in which they have comparative advantage trading countries are both able to increase their consumption The comparative benefit view means economists see trading in terms of how to make both sides benefit from the trade Understand how to do the opportunity cost for the bread shirts kent akron example type of problem How the Market Works Consumer Behavior Demand Curve Producer Behavior Supply Curve Assumptions Many firms many buyers Known Good Known production process Chapter 4 The Market Forces of Supply and Demand In this chapter we assume that markets are perfectly competitive highest form of competition Two characteristics that must be met are 1 the