Chapter 1 What is economics The study of economics the study of human behavior and the choices that we make in the presence of restraints Free good anything that is full abundant in nature that even if the price was zero you can still get as much as you wanted Ex dirty air saltwater sunshine Scarce good any good that has a price attached to it limited amount less available in nature Where do constraints come from Unlimited wants and desires with the allocations of scare resources Resource an input used to produce economic goods Land labor skills natural resources and capital Scarcity and Poverty are NOT the same There are multiple poverty lines for every country Poverty is opinionated Scarcity is FACT based There is scarcity at ALL economic levels The distinctions between needs and wants helps us understand why is is impossible to define poverty Rationing allocating a scare good among those who want it Ex price first come first serve lottery and arbitrary Economic theory Set of definitions postulates and principles assembled in a manner that makes clear the cause and effect relationship Economic guideposts 1 Everything has a cost there is ALWAYS a tradeoff a Cost of making that trade Opportunity cost 2 Individuals choose purposely therefore economically a Essentially people are rational 3 INVENTIVES MATTER i opportunity cost the most highly valued thing you give up when you choose once option over another a You can make people do whatever you want them to you just have to give them the right incentive 4 Economic thinking is marginal thinking a People make decisions at the margin additional i cost benefit analysis 5 Information is a costly good 6 Remember the secondary effects Secondary effects the indirect impact of an event or policy that may not be easily and immediately observable PITFALLS of economic thinking 1 Violating the Ceteris paribus condition Ceteris Paribus all else equal a If you violate it can lead to erroneous conclusions 2 Good intentions do not guarantee good outcomes 3 Association not causation 4 Fallacy of composition what is good for the individual is good for the group Chapter 2 Tools of an Economist Trade creates value a Voluntary exchange b Transaction cost the time effort and other resources need to search out negotiate and to complete an exchange Middle man helps reduce transaction costs between buyers and sellers by arrangement for trade Property rights in a Free Market Elements rights to exclusive rights to use of property Legal protection against others using it without owner s permission Rights to transfer sell exchange or mortgage property Good things that result from having them 1 2 3 Incentives to consider the desires of others before they use their property Incentives to take care of property protects the value for the future Incentives to conserve Predictions Possibilities Curve a graph that shows all the goods and services combinations that can be produced in an economy given limited resources and a fixed level of technology Y axis investment goods and serves Comparative advantage comparative advantage Absolute advantage has an absolute advantage X axis consumer goods and services TWO types of PPC 1 LINEAR resources are equally well suited to produce either good or service 2 NON LINEAR resources are not equally well suited some are better for investment goods than consumer goods vice versa If you want to produce more you in efficient and inside the curve To produce more of one and less than another you are on the production possibility frontier In the production of a good or service the person that has the LOWER opportunity cost has the The production of a god or service the person who produces a good better uses fewer resources If it better to specialize or to do a little bit of it all If you have the absolute advantage you have a HIGHER opportunity cost So you give up more when you spread thinly Law of comparative advantage A p principle that states that individuals firms regions or nations can gain by specializing in the production of goods that they produce cheaply at a low opp cost in exchange of them for goods they can NOT produce cheaply at a high opp cost now Economic Organization Markey organization aka capitalism an economic system in which productive resources are owned privately and goods and resources are allocated through market prices Socialism a type of economic organization in which 1 2 Resource allocation is determined by centralized planning rather than market forces the ownership and control of the basic means of production rest with the government Chapter 3 Supply Demand and the Process Market The Market Determines Price The law of demand states that there is an INVERSE relationship between the price of a good and the quantity of it buyers are willing to purchase As the price of a good increases consumers will purchase less of it and vice versa Demand Schedule Supply of all the various quantities of goods or services that consumers are willing to buy at various prices without a special time place or population The DAMAND CURVE Slopes downward because of substitution when goods get more expensive we substitute out of them and into the relatively cheaper goods The Law of Diminishing Marginal Utility With each increased increment the marginal utility decrease Consumer Surplus The difference between how highly we value something and the price we ACTUALLY pay This is below the demand curve but above the market price Change in Quantity Demanded Slide on demand curve This is when consumers buy less of a good when prices change Change in Demand Shift on Demand curve When buying behavior changes for any other reason BUT PRICE Shifts right with increase and left with a decrease Law of Demand tells us direction Elasticity of Demand tells us how much more or less and tells us the magnitude Consumer Response The more elastic the more consumer response The more inelastic the less consumer response Goods that have few substitutes are INELASTIC even if the price changes you re still going to buy them Elastic is determined by the number of close substitutes A schedule of all the carious quantities of a good or service that producers are willing and able to sell at various prices but at a specified time place and population Supply Schedule Law of Supply There is a positive and direct relationship between price and Quantity demanded As production increase the cost of limited resources increases When the price of a good is above a cost of
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