Chapters 1 and 2- What is economics?The study of how society manages its scares resources- equilibriumWhen supply= demands- ceteris paribusHolding everything else constant- calculating slopes: direct vs. indirect relationshipsChapter 3- opportunity costThe cost of the next best thingAlways in terms of the other good- PPF: efficient, inefficient, unattainable - comparative advantageWhoever has the lower opportunity cost of that one goodLeads to specialization- specializationAchieve the most efficient outcomeChapters 4, 6, and 7- law of demand: Quantity demanded of good increases as prices of those good decreasesPrice and Demand move in opposite directions- individual vs. market demandOne 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 down2. Market Demand (# of buyers)- as market increases, so does demand3. 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 increasesPrice and Supple move in the same direction- determinants of supply: what are they?1. More input supplies- Increases supply2. Taxes in Seller- Always shift to the left, decrease3. Subsidies on the Seller - Always shift to the right, increase4. Input Prices- Prices increases, then supple decrease5. Technology- Technology increases, supple increase6. Number of sellers- More sellers, more supple- surplusWhen 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- shortageWhen demand > supply Chapters 5, 8 and pp. 128-131 - ElasticityThe responsiveness of a variable to changeEd = % change Qd % change P - perfectly elastic, elastic, unit elastic, inelastic, perfectly inelasticPerfectly Elastic: no matter the Q, Price is always the sameElastic: Ed > 1Unit Elastic: Ed= 1Inelastic: Ed < 1Perfectly Inelastic: Ed = 0- price elasticity of demand- cross elasticity of demandCross price Elasticity: The responsiveness of one good as the price of another changes EC= % change Q of good A % change P of good B+ = Substitutes- = Complements0 = not related Ex: a “10” means a 1% increase of price of B leads to a 10% increase of Qd of A- income elasticity of demandEY= % change Qd % change income+ = normal good0 < EY < 1 Necessity1 < EY Luxury - =inferior good- price elasticity of supplyEs = % change Qs % change PriceTime effects elasticity of supple- What makes demand/supply more or less elastic?1. Availability of Close Substitutes- More substitutes = more elastic2. Necessity vs. Luxury - Necessity = inelastic- Luxury = elastic3. Definition of Market- Narrow = more elastic- Broad = less elastic4. Time- More time = more elastic5. Percent of your Budget that you’re spending - less = less elastic- more = more elasticChapter 10, 11 and pp.484-490- market failureWhen markets do no produce at socially optimal outcomesDue to: externalities, public goods, asymmetrical information- socially optimal quantity & private cost and private valuePrivate cost: Supply curvePrivate Value: demand curveSocially Optimal Quantity: social cost = demand (private value) Social value = supply (private cost)Cost=Value- external costs and external benefitsExternal Costs = The cost of the negative impact on others Social cost – private costExternal Benefit: the social – private value- social costSocial Cost = cost of producing + cost to bystandersPrivate cost (PC) + external costs (EC)- social valuePrivate costs + external benefit- externalities: positive and negativeExternality: the impact of one person’s actions on the well being of a non-market participantPositive Externality: Negative Externality:- internalizing an externality versus regulation versus a combinationInternalizing 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 benefits2. Persuasion3. Voluntary Agreement4. Coarse Theorem- IF can costless bargain, then the external problem can be solves- voluntary agreement- always will lead to an effective outcomeCommand and Control- Incentives and regulationsCombination- Cap and trade- public goods (nonexcludable, nonrival) vs. private goodsPublic 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 problemA 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 & solutionsDifference in access to information- Can cause market failureSignaling (Adverse Selection) : Informed party tries to reveal private information to the uniformed partyScreening: 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 sellingAdverse Selection: leads to buying the wrong goodEx: used cars- hidden action - moral hazard: principal-agent problemWhen one person knows more about the action they are taking Moral Hazard: tendency of a person who is imperfectly monitored to engage in undesirable behaviorPrincipal Agent Problem: when a principal can not monitor their agent there is the hazard that they might do something immoralSolutions:- better monitoring- higher wages (above the equilibrium)- delayed paymentChapter 13- economic profit vs. accounting profit: explicit cost, implicit cost, normal profitImplicit Costs: Opportunity CostsExplicit Costs: input costs the require moneyTotal Cost: explicit costs + implicit costsEconomic profit: TR – TCAccounting Profit: TR – explicit costs (money
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