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Economics

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The study of decision making, the study of how people allocate their limited resources to satisfy their unlimited wants.

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Policy

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An action taken by someone (government, firm, parent, etc.) to influence behavior.

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Prices

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The ratio at which 2 goods are exchanged in a market. Could be dollar or barter trade.

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Scarcity

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Refers to the limited nature of society's resources, given society's unlimited wants and needs. Farmer and river irrigation example.

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Microeconomics

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The study of individual units that make up the economy.

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Macroeconomics

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The study of the overall aspects and workings of the economy.

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Five Foundations of Economics

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1. Incentives 2. Trade-offs 3. Opportunity Cost 4.Marginal Thinking and 5. Trade

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Incentives

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Factors that motivate a person to act or exert effort. Positive encourages good behavior with rewards while negative discourages bad behavior with penalty.

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Direct Incentives

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Included incentive of a policy. Example: Cigarette price rise with intention of lowering the amount bought.

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Indirect Incentives

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Unintended incentive of a policy. Example: Cigarette price rise with an unintentional result of raising the amount of alcohol bought due to its now relatively low price in comparison to cigarettes.

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Trade-offs

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To achieve one goal economic agents must give up something else.

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Opportunity Cost

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The highest-valued alternative that must be sacrificed in order to get something else. How much of the y-axis good we give up if we follow the PPF line down and to the right. Benefit - Cost of the highest alternative. Kanye West versus Metallica cost example.

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Marginal Thinking

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Requires decision makers to evaluate whether the benefit of one more unit of something is greater than its costs. Example: should i do more or less of something.

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Trade

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The voluntary exchange of goods and services between two or more parties. When voluntary creates gains for everyone.

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Markets

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Places that bring buyers & sellers together to exchange goods.

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Economic models

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Simplified ways to describe the world since the economy is too complicated to completely analyze it in entirety for every economic question.

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The Scientific Model (for Economists) Steps

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1. Observe a phenomenon 2. Develop a hypothesis 3. Construct a model to test this hypothesis 4. Design and perform experiments to test how well the model works

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Create a hypothesis

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Step 2 in The Scientific Method (for Economics). Explain what you observe and why they might happen. Needs to be a positive statement and must be falsifiable.

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Positive Statement

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A hypothesis that can be tested and validated. It describes "what is".

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Normative Statement

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A hypothesis that cannot be tested or validated. It describes "what should be", more of an opinion than a fact. Example: Women should get paid as much as men.

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Create a model to test the hypothesis

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Step 3 in The Scientific Method (for Economics). Models are simplified versions of reality to analyze specific components of an economy. A good model is easy to understand, can get a useful answer from it, flexible to changing world.

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Production Possibility Frontier (PPF)

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A model that illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently. Example: Straight line graph versus curve line graph with fur hat and vodka production, grew with technological advancement factored in.

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Efficient Point

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A point on a PPF curve that shows the most efficient number of goods with most resources used.

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The Law of increasing relative cost

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The opportunity cost of producing a good rises as a society produces more of it. A bowed off (or curved in a circle-like way) PPF demonstrates this law.

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Ceters paribus

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The latin concept under which economists examine a change in one variable while holding everything else constant. Used for PPF variables.

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Absolute advantage

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Refers to the ability of one producer to make more than another producer with the same quantity of resources.

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Consumer goods

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Goods that are produced for present consumption..

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Capital goods

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Goods that help produce other valuable goods and services in the future.

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Investment

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The process of using resources to create or buy new capital.

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Endogenous factors

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Variables that can be controlled for in a model.

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Exogenous factors

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Variables that cannot be controlled for in a model.

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An Efficient Point

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A point on the PPF where all resources are being used efficiently.

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An Inefficient Point

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A point below or inside the PPF where not all resouces are being used efficiently.

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Specialization

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Using all your resources in order to efficiently produce one good to then trade and everyone will have more of each good collectively.

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Planned Economics

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Economics where decisions regarding production are set by a central authority. Ex: Socialism Communism.

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Market Economics

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Economics where resources are allocated among households and firms with little to no government intervention. Ex: Most, US.

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Market

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Where the exchange of goods and services through prices established by the market. A grouping of buyers and sellers.

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Competitive Market

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A market with many buys and sellers, such that each has only a small impact on the market price and output. Key components: 1. Similar (homogeneous) goods 2. Many participants. No market is perfectly competitive.

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Imperfect Markets

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Markets in which either buyer or seller has influence on market price.

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Monopoly

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When a single company supplies the entire market for a particular good. Ex: Diamonds.

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Oligopoly

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Monopoly but with a few suppliers instead of only one. These few can coordinate. Ex: soda or oil industries.

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Quantity Demand

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The amount of a good or service purchased at current price.

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Demand

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The relationship between prices and the quantity demanded.

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Demand Curve

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A graphical representation between the prices in the demand schedule and the quantity demanded at those prices. Quantity demanded changes along the demand curve while changes in demand shift the curve.

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Law of Demand

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Quantity demanded falls when prices rise and quantity demanded rises when prices fall. Refer to ceteris paribus. In reality this is always true.

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Demand Schedule

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A table that shows the relationship between price and quantity (demand).

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Market Demand

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The sum of all individual quantities demanded by each buyer in a market at each price. Ex: 50 sudents each demand 2 rings at $3, the market demand is 50 x 2 = 100 rings at $3.

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Demand Curve will shift if:

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1. Change in income 2. Related good's price changes 3. Changes in Taste 4. Future expectations 5. Number of buyers changes

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Change in Income

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Will cause the Demand Curve to shift. With a higher income, you have ore money to spend and assuming prices stay constant it is likely the change the goods you buy. Refer to Normal and Inferior goods.

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Normal good

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A good that people buy more of as their income increases. Ex: Cars

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Inferior good

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A good that people buy less of as their income increases. Ex: Top Ramen.

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Related good's price changes

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Will cause the Demand Curve to shift. Demand for some goods depends on the availability and price of other goods. Refer to Compliments and Substitutes.

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Compliments

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Two goods that are used together. When the price of a complementary good rises, the demand for a related good goes down. Ex: Coffee and Creamer.

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Substitutes

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Two goods that are used in the place of each other When the price of a sub. good rises, the quantity demanded falls and the demand for the related good goes up. Ex: Doritos and Fritos

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Changes in taste

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Will cause the Demand Curve to shift. Tastes changing over time. Ex: clothing going "out of fashion".

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Buyer's Future Price Expectations

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Will cause the Demand Curve to shift. Buyers expecting a good's price to go up in future, demand more of it. When they expect the price to go down in future demand lowers.

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Number of Buyers changes

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Will cause the Demand Curve to shift. If there are more buyers of a good there will be a greater demand, if there are less then there will be a lower demand.

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Supply Curve will shift if:

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1. Cost of inputs changes 2. Technology/Production Process changes 3. Taxes & Subsidies 4. Number of Firms in an Industry changes 5. Future Price Expectations

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Cost of inputs changes

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Will cause the Supply Curve to shift. Cost of resources used in the production process changes, it becomes cheaper or more expensive to produce a good. If inputs become more expensive, then sellers tend to demand higher prices, and vice versa.

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Techonolgy/Production Process changes

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Will cause the Supply Curve to shift. As technology improves, firms require less inputs to produce a good, meaning firms are willing to accept sell at a lower price.

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Taxes & Subsidies

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Will cause the Supply Curve to shift. Taxes shift curve to the left (sellers demand higher prices) and subsidies shift curve to the right (sellers accept selling at lower prices). Basically same effect as change in cost of inputs.

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Number of Firms in an Industry changes

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Will cause the Supply Curve to shift. More suppliers means more supply in the market.

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Seller's Future Price Expectations

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Will cause the Supply Curve to shift. If a firm expects the price to be higher in future, they may wish to sell less now so they can sell more later and vice versa. Ex: Halloween Candy.

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Quantity Supplied

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The amount of a good or service that producers are willing and able to sell at the current price.

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Supply

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The relationship between prices an quantity supplied.

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Supply Curve

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A graphical representation of a supply.

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Law of Supply

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The quantity supplied of a good rises when the price of the good falls, and quantity supplied falls when the price of the good falls. Refer to ceteris parabus.

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Supply Schedule

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a table that shows the relationship between the price of the good and the quantity supplied.

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Market supply

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The sum of the quantities supplied by each seller in the market at each price.

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Equilibrium

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Occurs when at the market price the quantity supplied equals the quantity demanded. This occurs at the point where the demand curve and the supply curve intersect.

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Equilibrium Price

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The price at which the quantity supplied is equal to the quantity demanded. Also known as the market clearing price.

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Equilibrium Quantity

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The amount at which quantity supplied is equal to quantity demanded.

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Law of Supply and Demand

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The market price of any good will adjust to bring the quantity supplied and the quantity demanded into balance.

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Shortage

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Where the quantity supplied is less than the quantity demanded. Qsupplied - Qdemanded = Size of Shortage. As price ^, demand v then Qs ^ and Qd v.

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Surplus

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Where quantity supplied is greater than quantity demanded. Qdemanded - Qsupplied = Size of Surplus. Firms: Price v, Qd ^ and Qs v.

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If Demand increases and supply stays the same

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Demand curve shifts to the right, Equilibrium Quantity ^ & Equilibrium Price v.

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If Demand decreases and supply stays the same

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Demand curve shifts to the left, Equilibrium Quantity v & Equilibrium Price v.

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If Supply increases and demand stays the same

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Supply curve shifts to the right, Equilibrium Quantity ^ & Equilibrium Price v.

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If Supply decreases and demand stays the same

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Supply curve shifts to the left, Equilibrium Quantity v & Equilibrium Price ^.

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If Supply and Demand increase

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Both curves shift to their own right, Equilibrium Quantity ^ & Equilibrium price depends on effect of each increase and which is greater, remains the same if each has same effect.

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If Supply and Demand decrease

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Both curves shift to their own left, Equilibrium Quantity v & Equilibrium price depends on effect of each increase and which is greater, remains the same if each has same effect.

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