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57 Cards in this Set
- Front
- Back
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Chapter 1 |
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Key Economics Ideas |
* Economics is the study of how people (and other living creatures) make choices
* We use models to help simplify our analysis * There is not always perfect agreement on the answers to all questions that economist study! . |
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Marginal |
* Marginal = incremental, small changes or ∆Q=1
* You weigh the marginal costs and benefits when making a decision. (Ponder this) * Optimal decision is where MC=MB of the last unit |
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Three questions all society must ask |
1. What Goods and Services Will Be Produced? 2. How Will the Goods Be Produced? 3. Who Will Receive the Goods and Services? |
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1. What Goods and Services Will Be Produced? |
* Individuals, firms, and governments must decide on the goods and services that should be produced. * An increase in the production of one good requires the reduction in the production of some other good. This is a trade-off, resulting from the scarcity of productive resources. * The highest-valued alternative given up in order to engage in some activity is known as the opportunity cost. * Example: the opportunity cost of increased funding for space exploration might be giving up the opportunity to fund cancer research. |
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2. How Will the Goods Be Produced? |
* A firm might have several different methods for producing its goods and services.
* Example: A music producer can make a song sound good by * Hiring a great singer, and using standard production techniques; or * Hiring a mediocre singer, and using Auto-Tune to correct the inaccuracies. * Example: As the cost of manufacturing labor changes, a firm might respond by * Changing its production technique to one that employs more machines and fewer workers; or even * Moving its factory to a location with cheaper labor |
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3. Who Will Receive the Goods and Services? |
* The way we are most familiar with in the United States is that people with higher incomes obtain more goods and services.
* Changes in tax and welfare policies change the distribution of income; though people often disagree about the extent to which this “redistribution” is desirable. |
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Efficiency and equity |
* Efficiency is concerned with the optimal production and allocation of resources given existing factors of production. See: Different types of efficiency
* Equity is concerned with how resources are distributed throughout sociey |
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Normative vs Positive economics |
* Economists try to mimic natural scientists by using the scientific method. But economics is a social science; studying the behavior of people is often tricky. |
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Building models |
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The role of assumptions |
* People are rational
* People respond to incentives * People make decisions on the margin * Assumed conditions that impact the experiment, model or interpretation of events. * What are the three key assumptions you have already been asked to accept in economics? * Market-based economies are efficient * Market- based economies promote equity * There is a trade-off between efficiency and equity |
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Chapter 2 |
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Assumptions of the PPF
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* Two GOODS OR Services
* Fixed Quantity of Resources and Technology * Full and Efficient use of resources * In a constrained time period |
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Graphing of the PPF |
sheet |
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How to calculate opportunity cost from a PPF |
the cost of gaining one more item compared to the loss of not producing something else |
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Scarcity |
* The fundamental problem underlying all economic decisions
* Unlimited wants exceed limited resources * Scarcity Implies Choice * All CHOICES require a TRADE-OFF * The Most valued TRADE-OFF is your OPPORTUNITY COST * When you make a decision because of scarcity you incur a Cost * Land (rent) * All raw material created by nature * Labor (wages) * Physical work that goes into production process * Capital (interest) * Physical Assets that are used in the production process like tools, machinery, factory * Human Capital ($) * Entrepreneurship (profit) * The innovative and inventive thinking and management of a business |
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Application of the trade project – in class Adam and Eve application |
look at sheet |
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Circular flow and the broad categories of factors of production and their payment |
p. 51 in book |
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The role of government in a market system (pp 56-58)
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Protect private property enforce contracts and property rights |
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Chapter 3
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Assumptions |
* The Market is Efficient
* Clearly defined private property rights * Purely (Perfectly) Competitive Markets assumptions * Informed buyers and sellers –no asymmetric information * Many buyers and sellers * No barriers to entry or exit * Buyer and Sellers are both willing and able to participate in the market |
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Law of Demand |
* The Law of Demand
* the higher the price of a good, the smaller the quantity demanded. * In a given time period * Other things remaining the same (ceteris paribus), * probably the most universally valid and strongly supported proposition in economics * The market demand curve is the summation of all of the individuals curves of consumers who are willing and able to participate in the market |
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Law of Supply |
* The Law of Supply
* As Price increases there is an increase in Quantity Supplied * Ceteris Paribus * In a given time periof * This is a positive relationship between price and Quantity supplied * The supply curve is the plotted relationship between Quantity Supplied and Price |
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Substitution and Income effect |
* Substitution Effect
* Substitute away from the higher price goods to an acceptable lower price substitute good * Income Effect * When prices rise the purchasing power of one’s income falls so buy less |
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Difference between changes in Qd vs change in demand and Changes in Qs vs changes in supply |
* Change in the price of the good itself does not shift the demand curve
* Movement along the demand curve * Changes in any other factor (variable) results in the entire demand curve shifting * this effects the quantity demanded at each price * Changes in the price of the good is a movement along the supply curve * Changes in other factors like technology, input prices and other supply factors cause a shift in the supply curve |
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Variables graphing and interpretation of graphs
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Changes in the entire Demand Curve |
* Change in the price of the good itself does not shift the demand curve
* Movement along the demand curve * Changes in any other factor (variable) results in the entire demand curve shifting * this effects the quantity demanded at each price |
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Factors the Change the Supply Curve |
* The PRICE OF THE GOOD DOES NOT Shift the supply curve
* RESOURCE PRICES * TECHNOLOGY * WEATHER DISRUPTIONS * POLICTICAL DISRUPTIONS * TAXES and REGULATION * THE NUMBER OF FIRMS * PRICE EXPECTATIONS |
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Impact of shifting supply and demand at the same time... how does the magnitude of the change impact the outcome? |
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There will be a graphing question on your exam. |
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Chapter 4 |
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• Consumer and supplier surplus – define and be able to calculate |
Consumer surplus- Difference bewteen hightest price the consumer will pay and the actual price he pays Producer surplus- the willingness of firms to supply a product at differnt prices Economic surplus equals the sum of consumer surplus and producer surplus. triangle to the left |
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• Dead weight loss |
The reduction in econmic surplus resulting from a market not being in the competitive equallibrim
measured from the intersection to the top and bottom of the new price point |
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• Graphs for price ceilings (shortages) Price floors *(surpluses) and tax incidence. Be able to calculate changes in consumer and supplier surplus dead weight loss.For tax incidence –Calculate tax burden and deadweight loss. See handout we did in class |
handout |
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• Pay attention to the unintended consequences (secondary effects) of interfering with the market |
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• Black markets |
A market that operates outside the legal system. * The primary sources of black markets are:* Evasion of a price control (illegal workers) * Text example: Maximum black market price for illegally rented “rent controlled” apartments |
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• Results of Price controls
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some win some lose there is a loss of econmic efficenticy
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• Applications (for example burden of an excise tax) |
Excise taxes are taxes paid when purchases are made on a specific good, such as gasoline. Excise taxes are often included in the price of the product. There are also excise taxes on activities, such as on wagering or on highway usage by trucks. |
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Chapter 5 |
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• What is market efficiency -graph |
mb = MC |
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• Graphing of efficiency and externalities where there are spillover cost spill over benefits. How we resolve the problem when there are spill-overs. |
benefits to society that are evaluated in the private demand curve |
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• The role of property rights |
Things that are unclaimed by property rights are hurt by popultion and other thiings |
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• The Coase Theorem |
* Efficient out can be reached through bargaining (no government intervention)
* Assumption * Clearly defined property rights * Low (or no) transaction costs associated with the transfer. * All parties to the agreement must have full information about the costs and the benefits * Parties must be willing to accept the agreement * There is an optimal level of reduction … but it is not zero reduction |
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• Note: There is a lot of new vocabulary in this chapter. (i.e. spill-over cost social costs social benefit provide benefit |
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• Causes of externalities |
* Externalities arise because of incomplete property rights, or from the difficulty of enforcing property rights in certain situations.
* Suppose a farmer and a paper mill share a stream. * If no-one owns the stream, the paper mill will discharge waste into the stream, making it unusable for the farmer. * If the farmer owns the stream, he can * Prevent the mill from discharging into the stream, or * Allow the mill to discharge for a fee, if that is beneficial to him. * Either way, good property rights avoid the market failure. * Property rights: The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it. * |
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• Four categories of goods |
p. 155 Private- big macs shoes Quasi-public goods- cable toll roads Common resources- tuna in the ocean public land Public goods- national defence court systems |
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Chapter 6 |
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• Assumptions |
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• Calculations of own price elasticity
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• Problem solving with the coefficients you have generated.
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• Assumptions implied when calculating an elasticity |
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• Total Revenue and Own Price Elasticity What happened on a simple linear demand curve as you work your way up the graph? |
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• Explanation of the determinants of elasticity (what makes a product more elastic or inelastic) |
* Many close substitutes
* Definition of the market * The more narrowly defined the good the more elastic because there are more substitutes * DIAL SOAP vs.. The SOAP Market * Large percentage of income being spent on the product (share of the consumers budget) * Significant time to search the market (passage of time) * Short run vs. long run. * Luxuries vs Necessities |
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• Cross Price and Income Elasticity define and calculate |
* When we examined demand in Chapter 3, we discussed substitutes and complements. |
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• Price elasticity of supply |
Elasticity of supply measures the responsiveness of quantity supplied to a change in price. Percentage change in quantity supplied = * Elasticity* of supply Percentage change in price |
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• Review class handout. |
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allocative efcientcy |
a type of economic efficiency in which economy/producers produce only those types of goods and services that are more desirable in the society and also in high demand. According to the formula the point of allocative efficiency is a point where price is equal to marginal cost (P=MC)or (AR=MC). |
