Chapters 1 and 2 What is economics The study of how society manages its scares resources equilibrium When supply demands ceteris paribus Holding everything else constant calculating slopes direct vs indirect relationships Chapter 3 opportunity cost The cost of the next best thing Always in terms of the other good PPF efficient inefficient unattainable comparative advantage Whoever has the lower opportunity cost of that one good Leads to specialization specialization Achieve the most efficient outcome Chapters 4 6 and 7 law of demand Quantity demanded of good increases as prices of those good decreases Price and Demand move in opposite directions individual vs market demand One person s demands vs the sum of all individual demands determinants of demand what are they 1 Price of Related Goods Substitute if price goes up fro a substitute then demand for the good goes up as well Complements if price for a complement goes up the demand for the good goes down 2 Market Demand of buyers as market increases so does demand 3 Taxes on Buyers Always shift to the left demand decreases 4 Subsidies on the Buyer Always shift to the right demand increases 5 Income Normal income increases demand increase Inferior income increases demand decreases 6 Tastes 7 Expectations law of supply As prices increase the supple increases Price and Supple move in the same direction determinants of supply what are they 1 More input supplies Increases supply 2 Taxes in Seller Always shift to the left decrease 3 Subsidies on the Seller 4 Input Prices Always shift to the right increase Prices increases then supple decrease 5 Technology Technology increases supple increase 6 Number of sellers More sellers more supple surplus When supply then demand consumer surplus Consumer Surplus amount the buy will pay amount sold for TOP triangle producer surplus Producer Surplus amount paid Amount willing to sell for BOTTOM triangle Total Surplus CS PS shortage When demand supply Chapters 5 8 and pp 128 131 Elasticity The responsiveness of a variable to change Ed change Qd change P perfectly elastic elastic unit elastic inelastic perfectly inelastic Perfectly Elastic no matter the Q Price is always the same Elastic Ed 1 Unit Elastic Ed 1 Inelastic Ed 1 Perfectly Inelastic Ed 0 price elasticity of demand cross elasticity of demand Cross price Elasticity The responsiveness of one good as the price of another changes EC change Q of good A change P of good B Ex a 10 means a 1 increase of price of B leads to a 10 increase of Qd of A Substitutes Complements 0 not related income elasticity of demand EY change Qd change income normal good 0 EY 1 Necessity 1 EY Luxury inferior good price elasticity of supply Es change Qs change Price Time effects elasticity of supple What makes demand supply more or less elastic 1 Availability of Close Substitutes More substitutes more elastic 2 Necessity vs Luxury Necessity inelastic Luxury elastic 3 Definition of Market Narrow more elastic Broad less elastic 4 Time More time more elastic 5 Percent of your Budget that you re spending less less elastic more more elastic Chapter 10 11 and pp 484 490 market failure When markets do no produce at socially optimal outcomes Due to externalities public goods asymmetrical information socially optimal quantity private cost and private value Private cost Supply curve Private Value demand curve Socially Optimal Quantity social cost demand private value Social value supply private cost Cost Value external costs and external benefits External Costs The cost of the negative impact on others Social cost private cost External Benefit the social private value social cost Social Cost cost of producing cost to bystanders Private cost PC external costs EC social value Private costs external benefit externalities positive and negative Externality the impact of one person s actions on the well being of a non market participant Positive Externality Negative Externality internalizing an externality versus regulation versus a combination Internalizing an Externality Altering incentives so that people take into account for the external effects of their actions 1 Taxes Subsides taxes external cost subsides external benefits 2 Persuasion 3 Voluntary Agreement 4 Coarse Theorem Command and Control Incentives and regulations Combination Cap and trade IF can costless bargain then the external problem can be solves voluntary agreement always will lead to an effective outcome public goods nonexcludable nonrival vs private goods Public Goods non excludable Non rival one person s use doesn t diminish another s Leads to market failure when there is little incentive to pay for it benefit cost of production government should provide for it Cost Benefit Analysis Private Good excludable rival free rider problem A person who receives the benefit of a good but avoids paying for it leads to market failure Result the good isn t produces asymmetric information causes solutions Difference in access to information Can cause market failure Signaling Adverse Selection Informed party tries to reveal private information to the uniformed party Screening uninformed party tries to induce informed party to reveal private information hidden characteristic adverse selection When the seller knows more about the attributes of the good they are selling Adverse Selection leads to buying the wrong good Ex used cars hidden action moral hazard principal agent problem When one person knows more about the action they are taking Moral Hazard tendency of a person who is imperfectly monitored to engage in undesirable behavior Principal Agent Problem when a principal can not monitor their agent there is the hazard that they might do something immoral Solutions better monitoring higher wages above the equilibrium delayed payment Chapter 13 economic profit vs accounting profit explicit cost implicit cost normal profit Implicit Costs Opportunity Costs Explicit Costs input costs the require money Total Cost explicit costs implicit costs Economic profit TR TC Accounting Profit TR explicit costs money only Normal profit 0 fixed input input of production that doesn t change in the short run only the money needed to start variable input input of production that does change in the short run short run vs long run Short run fixed and variable inputs Long Run only variable inputs total cost total variable cost total fixed cost TC FC VC average total cost average variable cost average fixed cost marginal cost ATC AFC AVC or change TC
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