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ECON 2306:Study Guide
Economics
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economics is the study of the allocation of limited resources to unlimited human wants
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scarcity & choice
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opportunity cost is the next best alternative
scarcity forces choices
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Rational Behavior
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How you can best achieve your goal using the least amount of effort/resources.
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Marginalism
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the process of analyzing the additional costs or benefits arising from a decision
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why study economics?
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1) makes you a better citizen
2) you can make money
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Macro
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agrogance, unemployment, inflation
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micro
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indiv. products
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positive statement
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hypotheticallytestable
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normative statement
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is not testable (opinion)
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full employment
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use all of society's resources within societally acceptable standards
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full production
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using all your resources
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prod. efficiency-
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least cost
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allocative efficiency
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things people want
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Allocative Efficiency
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produce where p=mc
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Command System
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Allocation of resources is heavily controlled by government instead of free market forces. (North Korea)
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Market System
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Capitalism. Private ownership of resources and use of markets and prices to coordinate/direct economic activity.
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traditional system
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economic system in which elders make decisions
power through family
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Characteristicsof a market system
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1)private property2)freedom of net. and choice
3) self interest
4) competition of interests
5) market and market prices
6) reliance on capt and tech
7) specialitzation
8) division of labor
9) geographic speculation
10)money
11) active but limited gov.
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private property
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ability to own things; three rights: right to use, right to trade, right to deny
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freedom of nt. and choice
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ability to use the resources as you see fit
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self interest
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do what you want with your money
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competition of interests
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monopoly isn't competition of interest; keeps prices low
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markets and prices
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competetion of interests; keeps prices pushed low
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reliance on capt and technology
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b/c there is competition, firms are going to try to innovate new technologies to keep prices low
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specialization
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one particular labor (what you do best)
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division of labor
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dividing up tasks into smaller tasks; increasing production
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geographic specialization
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reasons why things are produced in the areas they are
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money
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its a medium of exchange; eliminates the double coincidence
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active but limited gov
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nothing small, a min. amount it HAS to do; has to enforce property rights & has to enforce contracts
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what to produce?
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a profitable outcome; market restraints what to produce; PROFIT DETERMINES WHAT TO PRODUCE
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how to produce
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least cost; have productive efficiency
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who gets what is produced
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who is willing to pay
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how to accommodate change
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profits and pricing change peoples motive
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individual markets
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institution that brings many buyers and sellers together
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demand
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schedule or curve that shows various amounts of a product consumers are willing and able to purchase at differing prices
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law of demand
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price and quantity relationship
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law of demand justifications
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1) common sense
2) decreasing marginal utility
3) income effect; price goes down income is coming up
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determents of demand
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-popularity
-related goods
-income
-tastes and preferences
-expected price
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determents of demand
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-popularity (# of consumers)
-related goods
-income
-tastes and preferences
-expected price
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supply
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schedule of curve showing the quantity that producers are willing to make available for sale at different prices
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Law of supply justifications
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1) potential higher profits
2) to pay higher resource costs
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determents of supply
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- # of firms
- change in technology
- change in price of resources goes up; decrease to the left/ go down; increase; to the right
-taxes and subsidies
- price of other goods
- expected future prices
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price floor
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surplus
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general measure
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how much does quantity demand change when price changes
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Elastic
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3>1
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Unitary
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3=1
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Inelastic
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3<1
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perfectly
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3=0
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midpoint formula
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used for calculating elasticity. avg of 2 prices and 2 quantity
Change in Q / Sum of Q/2 -divided by- Change in P / Sum of P/2
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elasticities over a straight line demand formula
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Q1-Q2/Q1+Q2
OVER
P1-P2/P1+P2
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income elasticity
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normal; income goes up, buying goes up 3y>0
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inferior elasticity
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income goes down; buying goes up 3y<0
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cross price elasticity
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3xy>0 substitue
3xy<0 Compliment
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the sky is blue
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positive and true
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the sky is red
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positive and false
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the sky is nice when its blue
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normative
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uneployment is orse now than 2 years ago
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positive and false
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taxs=es are higher under obama than they were under bush
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positive and flase
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aliens visit the earth 100's of times a year
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positive and truth indeterminate
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government is bad
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normative
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gov. debt is higher today than it was 10 years ago
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positive and true
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the gov should run a balanced budget for the economy to do better
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normative
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inflation hurts the economy
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normative
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inflation has been increasing
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positive and flase
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inflation hurts the avg worker the most
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normative
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Conditions of Pure Monopoly
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1. Single Seller
2. No Close Substitutes
3. Price Maker
4. Blocked Entry
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Barriers to Entry
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1. Economics of Scale- Certain number to enter
2. Legal Barriers- copyright, licenses, pattens
3. Essential Resources- control a certain resource you can control price
4. Strategic Barriers- convincing your product is important
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Productive Effieciency
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The production of a good in the least costly way; occurs when production takes place at the output at which 'average total cost' is a minimum and 'marginal product' per dollar's worth of input is the same for all inputs
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Dynamic Adjustments
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Have ability to restore efficiency when disrupted by changes in economy.
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Consumer Surplus
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The difference between the price a consumer is willing to pay and the price actually paid
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Price Discrimination
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Charging a different price to a different customer
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3 conditions needed for Price Discrimination
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1. Market power (ability to set price)
2. Distinguishable Customers
3. Prevention of Resale
EX: movie tickets, airline pricing, coupons, qty. discounts, financial aid for college
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Natural Monopoly
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Large economy of scale
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