Chapter 1 Guidelines to economic thinking 1 There are always tradeoffs The opportunity cost is the best next alternative you give up o For example The opportunity cost of going to an 8am class is the extra sleeping time you would have gotten at least for me 2 Individuals choose purposefully People try to get the most benefits for the least cost 3 Incentives Matter As the incentive goes up you will be more likely to do something or try to and vice versa The incentive doesn t have to be money example extra credit food bonuses Everyone has different incentives 4 Think on the margin not in total or on average Marginal means additional or incremental Marginal benefit is additional benefit Marginal cost in additional cost example if you travel 3 blocks to save 20 on a 100 purchase then there is no reason why you shouldn t do it to save 20 on a 1000 purchase Rule to live by continue to engage in an activity as long as the expected marginal benefit is greater than the expected marginal cost 5 More information leads to better decision making but more information is costly to get Refer back to 1 through 4 6 Many choices create a secondary effect The primary effect of a choice is often immediate and visible The secondary effect usually comes later and is not as visible 7 Value is subjective Value is determined by the purchaser o For example you might 8 Economic thinking is scientific thinking Economists use data and info generated by people to explain and predict actions Fallacy of Composition what is good for one is good for the group When people trade everyone involved gains something Chapter 2 voluntary trade creates wealth and promotes economic progress o With or without production voluntary trade is expected to benefits both parties involved example if you cook I ll do the dishes o transaction cost monetary or nonmonetary barrier that lowers the benefits of trade Potential trades finished good exchanged for money o Finished goods exchanged trough barter o o businesses buying resources o consumers buying products Specializing on something is beneficial for both parties Property Rights 1 Common rights everybody owns it 2 Private rights only one person owns it Property rights change the incentives for individuals Sometimes changing the property rights might get people to act differently Public property is usually not taken care of However we have more incentive to take care of and preserve our private property Incentives when you implement private property rights Give proper care Much stronger incentive to conserve for the future Strong incentive to use resources in ways other people value Mitigate minimize possible harms to others Production Possibilities Curve Measures how much of a certain product you can produce along with another product To produce one of more you have to produce less of the other and vice versa Anything inside the curve is inefficient Anything outside the curve is unattainable given the resources Anything on the curve is efficient It can shift out growth produce more It can shift in shrink produce less Chapter 3 Consumer Choice and the Law of Demand Law of demand The inverse relationship between price and quantity demanded when price rises quantity demanded falls The demand curve is downward sloping The marginal benefit you receive from an item falls as you gain more of that item How do consumers react to price changes when the price of one good falls people substitute away from relatively more expensive goods to the relatively cheaper goods substitution effect When the price of one good falls real consumer income rises so people buy more it s like getting a raise income effect Both of these also cause the demand curve to be downward sloping The demand curve represents your willingness to pay not how much you actually paid Consumer surplus the difference between what you re willing to pay and what you actually pay Consumer surplus is the area below demand out to quantity and down to price andrewrussel net Changes in Demand Versus Changes in Quantity Demanded Demand is the relationship between price and quantity demanded when price changes quantity demanded changes but demand does NOT change This is movement ALONG the demand curve The curve doesn t move the point on the curve does When something else changes demand changes o typical something else changes Income Number of consumers Price of related good substitutes and complements Expectations Demographics Tastes and preferences This is movement of the entire curve A way to think about the difference between demand and quantity demanded o Why is the consumer buying more or less o o If price is the reason then quantity demanded changes move ALONG the curve If it s something else then demand changes move curve The price of one good can be intimately tied to the demand for another good An increase in price for the first good will increase demand for the second good and vice versa substitute EXAMPLE an increase in the price of cereal will increase the demand for oatmeal Since cereal is more expensive people will start buying oatmeal instead Complement are goods that are usually consumed at the same time An increase in price for the first good will decrease demand for the second good EXAMPLE an increase in the price of shoes will decrease the demand for socks Since less people can afford shoes they ll buy less socks since they are complements Producer Choice and the Law of Supply Law of Supply The positive relationship between price and quantity supplied when price rises quantity supplied rises An increase in price gives incentive to produce more Producer Surplus the difference between Changes in supply vs changes in quantity supplied When price changes quantity supplied changes but supply does not change o this is a movement ALONG a supply curve When something else changes supply changes o This is movement of the ENTIRE curve something else changes Resource prices Technology Nature Political Taxes A way to think about the difference between supply and quantity supplied o Why is the firm producing more or less o o If price is the reason then quantity supplied changes move ALONG the curve If it s something else then supply changes move curve How Market Prices are Determined Supply and Demand Interact equilibrium the only point on the graph in which the demand and supply lines meet Any point not on the equilibrium is either shortage or surplus Adam Smith said that personal self interest guides the market by an invisible
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