Mid Term 1 Material:-Econ is a science—the study of….-Positive Statement Causation. This can be proved.Normative Statement Opinion, cannot be proved. -Fallacy of Composition Just because it’s good for you, doesn’tmean it’s good for everyone. Example: Stealing someone’s internet is good for you but isn’t good for the person you’re stealing it from. -Ignoring Secondary Effects People don’t anticipate the unintended consequences of their decision or action.-Self Selection Choosing what group you want to be in when being studied—going to Chipotle and asking if the customers like Chipotle or Moe’s better.-Opportunity Cost Measures of the value of the next best thing—the value of the thing you gave up to do something else. -Sunk Costs Costs that you cannot get back. Example: standing in line for a half na hour at the grocery store—you cannot get back the thirty minutes.-Marginal Analysis As you go, you think of the next value of the next unit. A product becomes worth less to us as we gain more of it. -Law of Diminishing Marginal Returns-If we’re getting something for free, we keep consuming it until our marginalutility equals zero-Comparative Advantage Producing something because you have the lower opportunity cost of producing that good—you don’t lose as much-Absolute Advantage One person is absolutely better than someone else at producing a prodct-PPF Curves Anything on the curve itself is producing at its full potential and is reaching maximum efficiency.-Anything that’s under the curve is producing inefficiently and has someresources that are unemployed-Anything outside of the curve is unreachable-Slope = Marginal rate of transformation-Bowed Out = Increasing opportunity cost—as you make more of one good,you’re giving up more of the other one-What shifts the PPF?TechnologyResourcesRules-Economic Systems How price affects the market economy-What shifts the Demand Curve?Income, tastes, price of related goods, expectations, number andcomposition of consumersWhen you change the PRICE, it moves along the demand curve-What Shifts the Supply Curve?Technology, Prices of inputs, Price of alternative goods, producerexpectations, number of producersA change in prices moves along the supply curve-If price goes up, you want to sell more, If prices goes down, you want to sellless. If the demand curve shifts out, it’s a price increase, so they change theamount of their supplyALWAYS TRY TO BE AT EQUILIBRIUM WITH SUPPLY AND DEMAND-Price floors lead to surpluses-Price Ceilings Lead to shortagesElasticities:-Elastic Demand If the prices goes up by 10%, then the demand for the product will go down by 10%-Inelastic Demand If the prices goes up by 10%, quantity demanded will go down less than 10%.-People’s demand for a good isn’t affected by changes in price-If your income goes up, you buy more of a normal good and less of an inferior good.-Normal good: stuff you want; luxury-Inferior good: Ramen noodles, Mac and Cheese-Cross Price Elasticity-If the price of y rises, people will buy more of x SUBSTITUTES-If the price of y lowers, people will buy more of x COMPLEMENTS-If we have an elastic demand, and we raise our price, total revenue will fall-If we have an inelastic demand, and we raise our price, total revenue will increaseEQUATION TO KNOW*-Price Elasticity of Demand (Q2-Q1)/(Q1+Q2) / (P2 – P1)/(P1+P2)-Consumers want to spend their money in a way so they get the most utility possible-When you consume more and more of something, you get less and lessmarginal utility-If price goes up, buy less of EVERYTHING Income Effect-If price goes up, buy less of THAT ONE THING Substitution Effect-On a Graph:- Consumer Surplus Above the price and below the demand curve- Producer Surplus Below the price and above the supply curve- Total Surplus CS + PS- Deadweight Loss Whenever equilibrium is not “right”Goods and Services are scarce because resources are scarce-Labor –any human input into something (physical or mental)-Capital—physical thing that is used to produce something-Natural Resources *(land) –anything you take directly from the earth-Enrepreneurial ability—brings everything together and manages it-We can see, feel, and touch a good but a service is intangible-Almost all goods and services are scarce because EVERYTHING HAS A COST-“There are no free lunches”-Households are the consumers—individual people-They are the consuming unit and indirectly own their own stuff-Firms demand labor-Demand resources and produce goods and services-Circular Flow Model –among decision makers we see a flow of resources, products, income, and revenue. -Main interaction is between Households and Firms-Households supply resources to resource market and earn an income-Demand goods and services from product market, spend income-Firms demand resources to produce goods and services; pay for resources-Supply goods and services to product market; earn revenueModel A simplified explanation on how things work –tells something interesting about what’s going on—relationship between price and quantityScientific Method:1. Identify the question and define relevant variables2. Specify assumptions3. Formulate a hypothesis4. Test itMarginalism The process of analyzing the additional or incremental costs or benefits arising from a choice or decision-Ice cream stores like to have “free ice cream” days. More people show up for this day in poor neighborhoods than in rich ones. -Rich neighborhoods have a high opportunity cost to get this ice cream on thespecific day because they have a full paying job and can’t leave itAbsolute Advantage To be “absolutely” better at something.Comparative Advantage To be comparatively better at something—having the lower opportunity cost of producing something compared to someone else-Specialization says that if we all specialize in what we’re good at then as a group we can produce more stuff. Economics The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided-Goal for a PPF curve is to be on the curve itself—outside of the curve is impossible and inside the curve means you’re not efficient and not using enough of your resources. -If we start producing more of one item we’re giving up producing more ofanother—Law of Increasing Opportunity
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