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 marginal utility 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 some resources 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 Technology Resources Rules Economic Systems How price affects the market economy What shifts the Demand Curve Income tastes price of related goods expectations number and composition of consumers When you change the PRICE it moves along the demand curve What Shifts the Supply Curve Technology Prices of inputs Price of alternative goods producer expectations number of producers A change in prices moves along the supply curve If price goes up you want to sell more If prices goes down you want to sell less If the demand curve shifts out it s a price increase so they change the amount of their supply ALWAYS TRY TO BE AT EQUILIBRIUM WITH SUPPLY AND DEMAND Price floors lead to surpluses Price Ceilings Lead to shortages Elasticities 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 increase EQUATION 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 less marginal 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 revenue Model A simplified explanation on how things work tells something interesting about what s going on relationship between price and quantity Identify the question and define relevant variables Scientific Method 1 2 Specify assumptions 3 Formulate a hypothesis 4 Test it Marginalism 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 the specific day because they have a full paying job and can t leave it Absolute 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 of another Law of Increasing Opportunity Cost You give up more and more as you go down the PPF slope Inside the curve also means that not all resources are being employed Economic Growth An increase in the total output of an economy Occurs when a society acquires new resources or when it learns to produce more existing resources Things that can shift