Micro Econ 01 23 2015 First 2 days we discussed about the syllabus and clicker questions Referred to as economizing behavior try to get the most benefits for Day 3 Individuals choose purposefully the least cost or effort Also known as rational behavior Example drug addict Alfred Marshall it is deliberateness and not selfishness that is the incentive of the modern age Incentives matter As the incentive goes up you will be more likely to do something or try to and vice versa The incentive does not have to be money Think on the margin not in total or on average Marginal means additional or incremental Example water diamond paradox Rule to live by continue to engage in an activity as long as the expected marginal benefit is greater than the expected marginal cost More information leads to better decision making but more information is costly to get 1 There are always tradeoffs 2 Individuals choose purposefully 3 Incentives matter 4 Think on the margin Many choices create a secondary effect The primary effect is often immediate and visible The secondary effect usually comes later and is not as visible 01 23 2015 Value is subjective Beauty is in the eyes of the beholder Value is determined by the purchaser Economic thinking is scientific thinking Economists use data and information generated by people to explain and predict actions Pitfalls to avoid in economic thinking don t make these errors Violation of Ceteris Paribus o Ceteris Paribus is Latin for other things being constant o We want to isolate variable so we typically allow only one to change at a time o Example stomach ache Good intentions do not necessarily result in good outcome o example using someone else s device for clicker credit Association is NOT causation Fallacy of composition o Assumption what s good for the individual is good for the group o Making this assumption when it s false is the fallacy Some tools of the Economist 01 23 2015 Trade creates value Two opposing views of trade When people trade on person gains and the other person loses o Referred to as a zero sum game When people trade both parties gain o Wealth is actually created by trade Voluntary trade creates wealth and promotes economic progress With or without production with or without money exchanges voluntary trade is expected to benefit both parties involved Potential trades 1 Finished good exchanged through barter 2 Finished goods exchanged for money 3 Businesses buying resources 4 Consumers buying products What could reduce the value created from a voluntary transaction A transaction cost is a monetary or nonmonetary barrier that lowers the benefits of trade Example surfing the web looking for airline tickets The importance of property rights 2 kinds of property rights Common rights everybody owns it Private rights only one person owns it U S Constitution amendment IV 01 23 2015 Incentives created by private property rights Give proper care Conserve for the future Use resources in ways other people value Mitigate possible harm to others Violating property rights can create undesirable behavior Production possibilities curve PPC also called PP Frontier Graph grossly simplifying the world usually a company does more than 1 item This graph is just a simple 2D model efficient point is one that is on the curve B unattainable is one that is outside the curve Y inefficient is one that is inside the curve X The PPC can shift Graph of growth and regress Shift out growth produce more Shift in shrink produce less Trade output and living standars law of comparative advantage make the good for which you have a low opportunity cost and trade for the good for which you have a high opportunity cost o Translation make something you are good at and trade for something you are not good at 01 23 2015 Importance of comparative advantage Low opportunity cost o Comparative advantage Specialization Division of labor Voluntary trade o Increased wealth Self sufficient is the quickest and most absolute path to prosperity Chapter 3 Economic Organization The law of demand The inverse relationship between price and quantity demanded when prices rises quantity demanded falls Quantity demanded is a number its how many units of a good you bought Graph The demand curve is downward sloping 01 23 2015 Why is the demand curve downward sloping Diminishing marginal utility o the marginal benefit you receive from an item falls as you gain more of the item o the only way to get you to buy more is to lower the price Marshmallow example demonstration How do consumers react to price changes 1 When the price of one good falls people substitute away from relatively more expensive goods to the relative cheaper goods o Called the substitution effect 2 when the price of one good falls real consumer income rises so people buy more it s like getting a raise o called the income effect both of these also cause the demand curve to be downward sloping The demand curve represents your willingness to pay your maximum price not how much you actually paid What if the actual price is lower than your willingness to pay In economics we call this difference consumer surplus CS Graphically CS is the area below demand out to quantity and down to price Graph CS Changes in demand versus changes in quantity demanded Demand is the relationship between two variable price and quantity demanded changes 1 when prices changes quantity demanded changes but demand does NOT change o this is movement along a demand curve 2 when something else changes demand changes i e the relationship changes o this is movement of the entire curve Another way to think about the difference between demand and quantity demanded why is the consumer buying more or less o If price is the reason then quantity demanded changes move along the demand curve o If any variable besides price is the reason then demand changes shift the demand curve 01 23 2015 The price for one good can be intimately tied to demand for another good Substitute An increase decrease in price for the first good will increase goods used in place of each other decrease demand for the second good Complement An increase decrease in price for the first good will decrease goods usually consume at the same time increase demand for the second good 01 23 2015 Producer choice and law of supply goal explain and predict firm behavior The law of supply o The positive relationship between price and quantity supplied when price rises quantity supplied rises o Quantity supplied is a number
View Full Document
Unlocking...