Micronomics Chapter 1 The Nature of Economics Limited resources unlimited wants All decisions in which we consider a cost and a benefit can be considered economic decisions Benefits costs Self Interest and Rationality Rational assumption people don t intentionally make decisions that leave them worse off The Power of Economic Analysis Policy and Incentives Incentives reward or punishment for engaging in a particular active influence decisions Profit is a very powerful incentive in the U S market economy Defining Economics Scarcity will always exist it is NOT a shortage It affects both rich and poor Economics the study of how people allocate their limited scarce resources to satisfy their unlimited wants the study of how people make choices Micronomics study of decision making by individuals or households and by firms Macronomics study of behavior of the economy as a whole o You can t isolate one without the other Economics as a Science Models simplified representations of the real world used as the basis for predictions or explanations useful if they predict economic outcomes accurately Ceteris Paribus Assumption Latin all other things equal Variable well defined item that can take on different values o Dependent left hand side variable of interest o Independent freely change analyze effects of this change on dependent variable Direct relationship two variables move in the same direction positive slope Inverse relationship two variables move in the opposite direction negative slope Positive vs Normative Economics Positive written in a way that allows it to be tested true or false Normative statements that can t be proven true or false should or ought to Types of Economies Market economy o When everyone does what s in their own best interest the economy thrives o Prices and quantities set in relatively free markets o Institutions laws protect private property and enforce contracts o Very decentralized Command Economy Soviet Russia o Central Government makes all output pricing and allocation decisions o Lots of information is required tough to maintain eventually failed o Black market can develop o Lack of profit and innovation incentives Micronomics Chapter 2 Scarcity and the World of Trade Offs Production any activity that results in the conversion of resources into products that can be used in consumption production input outputs goods Resources or factors of production inputs that are used to produce things that people want Input types o Land land natural resources o Labor people employees o Physical capital K all manufactured resources machines buildings mechanical o Human Capital person s training and education o Entrepreneurship risk taker could lose a lot of time and money make business equipment decisions With each choice made we give up some alternative Opportunity cost the highest valued next best alternative that must be sacrificed to obtain something or to satisfy a want Production Possibilities Curve Limited resources and unlimited wants Scarcity Choices Opportunity Cost The production possibilities curve PPC represents all possible maximum combinations of total output that can be produced Along the PPC there is a fixed quantity of inputs being used efficiently PPC is used to demonstrate related concepts of scarcity choice and trade offs at two levels individual and societal Efficiency a given level of inputs is used to produce the maximum output possible Alternatively the situation in which a given output is produced at minimum cost Law of Increasing Relative Cost as society attempts to produce more of a good the opportunity cost of additional units of that good generally increases accounts for bowed shape of the PCC Economic Growth illustrated by an outward shift of the PPC occurs over a period of time o Caused by increase in resources and technology or education Capital Goods and Growth o Consumer goods goods produced for personal satisfaction o Capital goods goods used to produce other goods o We produce capital goods to increase future production and consumption Specialization Leads to greater productivity We do specialize Trade allows consumption to be increase and varied Absolute advantage if you have absolute advantage you can produce more output with the Comparative advantage the ability to produce a good or service at a lower opportunity same input cost This is always a relative concept Division of Labor Rational individual choose their comparative advantage and specialize Specialization leads to division of labor increases overall production assembly line Trade among Nations Economic efficiency improves overall output increases but PPC for individual country doesn t shift because of trade consumption increases Sources of Comparative Advantage individual and national Chapter 3 Demand and Supply Micronomics Markets arrangements that individuals have for exchanging with one another o Represent the interaction of buyers and sellers o Not necessarily a physical location Ebay Amazon In a market based economy prices are determined by the force of supply and demand o Demand buyers consumers o Suppliers firms producers sellers Demand Quantity demanded the amount of a good or service that consumers wish to purchase given a certain income price P and time period Demand schedule a table showing price and quantity demanded relationship of a good ceteris paribus all other things equal ONLY examining P and QD Demand curve the graphical relationship of the demand schedule Price is on the vertical axis and quantity is on the horizontal axis First Law of Demand When the price of a good rises we have a lower quantity demanded and vice versa demand curse is negatively sloped Quantity demanded is inversely related to price holding other factors constant Market Demand the demand of all consumers in the marketplace for a particular good or Demand curves not static we can move along the demand curve or the entire curve could service shift Change in Quantity Demanded MOVEMENT along a demand curve caused by CHANGE in the PRICE of the good o Price increases move up and left along the demand curve decrease in quantity o Price decreases move down and to the right increase in quantity demanded o Whole curve SHIFTS left or right caused by CHANGE in non price factors or CHANGE in PRICE of OTHER goods demanded Change in Demand o Demand Shifts o Income Normal goods are goods in which demand increases as income rises Most goods are normal goods Inferior goods are goods in which demand