Eco 100
Example of a normative statement
"The government should increase the state pension" It cannot be proved.
the unfair-competition argument
"free trade is desirable only if all countries play by the same rules" - increase in total surplus for the country
The protection-as-a-bargaining-chip argument
"trade restrictions can be useful when we bargain with our trading partners" - the threat may not work
market's equilibrium
- The point where the supply and demand curves intersect - a situation in which the price has reached the level where quantity supplied equals quantity demanded
Three steps to analyzing changes in equilibrium
1. Decide whether the event shifts the supply curve, the demand curve, or, in some cases, both curves 2. Decide whether the curve shifts to the right or to the left 3. Use the supply-and-demand diagram • Compare the initial and the new equilibrium • Effects on equilibrium price and quantity
Effects of a tariff
1. Increase the domestic price of the protected good 2. Increase domestic production of the good 3. Decrease consumption of the good 4. Decrease consumer surplus 5. Increase producer surplus 6. Tariff revenue 7. Production inefficiency 8. Welfare loss
Ten Principles of Economics
1. People face trade-offs 2. The cost of something is what you give up to get it 3. Rational people think at the margin 4. People respond to incentives 5. Trade can make everyone better off 6. Markets are usually a good way to organize economic activity 7. Governments can sometimes improve market outcomes 8. A country's standard of living depends on its ability to produce goods and services 9. Prices rise when the government prints too much money 10. Society faces a short-run trade-off between inflation and unemployment
Consider smartphone demand in the market for smartphones. What happens if: 1. price of smartphone falls 2. producers announce the price will fall next month 3. the price of a call made from a smartphone fall 4. the price of a landline call increases 5. an increase in memory makes smartphones more popular
1. quantity demand increase 2. quantity demand will decrease because they will just wait until the next month to buy it 3. quantity demand will increase 4. quantity demand for a smartphone increase. 5. quantity demand increase
To reach this highest form of competitive (perfectly competitive), a market must have two characteristics
1. the goods offered for sale are all exactly the same, and 2. the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price
developed economies
A classification for high-income industrialized nations, which have high living standards and the most technically developed infrastructure
price floor
A legal minimum on the price at which a good can be sold (protect producers)
A, B, and C want to buy books, while D, E, and F want to sell them Each person has different valuations 50, 40, 30 for A, B, C 10, 25, 32 for D, E, F If all of these people are in the same room, what might we expect to happen?
A lot of talk, and perhaps some consensus would emerge about an appropriate price.
Circular Flow
A model of the movement of goods, services, resources, and money in an economy.
shortage
A situation in which quantity demanded is greater than quantity supplied
surplus
A situation in which quantity supplied is greater than quantity demanded
allocative efficiency
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it. Occurs when those who value the goods the most are those that consume them The difficulty of this is that value is subjective and hard to observe by third parties
tariff
A tax on imported goods
you are considering calling a friend on your cell phone. You decide that talking with her for 10 minutes would give you a benefit that you value at about $7. Your cell phone service costs you $40 per month plus $0.50 per minute for whatever calls you make. You usually talk for 100 minutes a month, so your total monthly bill is $90 ($0.50 per minute times 100 minutes, plus the $40 fixed fee). Under these circumstances, should you make the call?
Although the average cost of a 10-minute call is $9, the marginal cost - the amount your bill increases if you make the extra call - is only $5 So the marginal benefit of $7 is greater than the marginal cost of $5
free market
An economic system in which prices and wages are determined by unrestricted competition between businesses, without government regulation or fear of monopolies.
price ceilings
Are maximum prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them. (protect consumers)
normal good example
As your income grows, you're more likely to buy more expensive things like the new iphone
Capital goods and services
Bought by businesses to be used to increase efficiency or enhance production
Markets
Bring buyers and sellers together to exchange goods and services
central planning
Detailed economic processes and goals developed by government; usually associated with communist economies
A trade-off society faces is between efficiency and equality
Efficiency means that society is getting the maximum benefits from its scarce resources. Equality means that those benefits are distributed uniformly among society's members
Economy can be viewed as a circular flow
Factor markets - factors traded for income goods market - incomes traded for goods income = output (Say's Law) A larger flow = more output Government is in the middle of the circular flow
Modern circular flow
Factor markets: households- supply factors of production to Factor Markets Firms - hire factors of production Goods Market: Households - buy goods and services Firms - sell products and services
True or False: A decrease in supply of notebooks lowers the quantity of notebooks supplied but not the quantity demanded.
False A decrease in the supply of notebooks will cause the supply curve to shift to the left, resulting in a movement along the demand curve. Provided the demand curve is downward-sloping, both the quantity of notebooks demanded and the quantity supplied will decrease.
Suppose the demand for classical music concert tickets is downward sloping and the supply of classical music concert tickets is upward sloping. Lovers of classical music persuade Congress to impose a price ceiling of $40 per concert ticket. True or False: If the equilibrium price of concert tickets were $50, a price ceiling of $40 will cause more people to attend classical music concerts than if there is no price control.
False When the government imposes a legal maximum on the price of a good, this is known as a price ceiling. If the price ceiling being imposed is below the equilibrium price, the price ceiling is binding and causes a shortage in the market. So, if the equilibrium price is $40 or below, a price ceiling of $40 is not binding and has no effect on the number of people attending musical concerts. However, if the equilibrium price in the absence of price controls is above $40 per ticket, then imposing a price ceiling of $40 will cause quantity demanded to exceed quantity supplied, causing a shortage of tickets and a decrease in the number of people who attend classical music concerts.
taxes
Fees for the support of government required to be paid by people and businesses.
GDP
Gross Domestic Product- the total market value of all final goods and services produced annually in an economy This goes for all spending no matter the situation such as whether it's just for buying jewelry or buying a tent because your house burned down.
Markets take many forms
Highly organized markets for example would be the markets for many agricultural commodities like farmer markets. In these markets, buyers and sellers would meet at a specific time and place where an auctioneer helps set prices and arrange sales. More often though, markets are less organized. Like how the market for ice creams is less organized since the location of sellers are in different location and offer somewhat different products. they each have their own prices for the cone and each buyers can decide how much ice cream to buy at each store
law of demand
Holding all else equal, when the price of a good rises, consumers decrease their quantity demanded for that good basically the higher the price, the quantity demanded will fall
Using the PPF, we can calculate opportunity costs
If we are efficiently producing 9 bikes, and 3 smartphones - what are the opportunity costs of producing more smartphones? Opportunity costs only apply if we are producing efficiently to begin with and are defined in terms of foregone goods Also the more you need to factor in, the more complicated the graph will become and the more smartphones you produce the less bikes you also produce.
International trade flow
Imports - things U.S. consumers buy from other countries Exports - things U.S. firms sell to people in other countries Corresponding flow in financial markets poorly understood what it means when we have a "trade deficit"
Difference in values
Is this policy fair? If not, who pays too much and who pays too little? Does it matter whether Paula's low income is due to a medical disability or to her decision to pursue an acting career? Does it matter whether Peter's high income is due to a large inheritance or to his willingness to work long hours at a dreary job?
four factors of production
Land (all natural resources) Labor (work and time effort) Capital (machinery and other goods - "physical" or "human") Entrepreneurship (a recent addition to the factors of production)
the infant-industry argument
New industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations.
When government policies are designed those two goals of equality and efficiency often conflict
One example would be equalizing the distribution of economic well-being where some of these policies such as welfare system try to help members of society who are msot in need but requires those more financially successful to contribute more than others to support the government. Reducing efficiency as it reduces the reward for working hard and as a result people work less and produce fewer goods and services
example of a positive statement
Online shopping increased by 50% this christmas season
Suppose the government imposes a binding price floor in the cheese market and agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor,______ benefit from this new policy and_______ lose.
Producer of cheese, Taxpayers If the government purchases all the surplus cheese at the price floor, producers benefit and taxpayers lose. As can be seen from the following graph, when the government imposes a binding price floor, such as P1P1, producers would produce QSQS, increasing their total revenue substantially. However, consumers would buy only QDQD, so they are in the same position as with the basic price floor. Taxpayers lose because they would be financing the purchase of the surplus cheese through higher taxes.
standard of living
Quality of life based on ownership of necessities and luxuries that make life easier.
Economic Tasks
Satisfy productive and allocative efficiency simultaneously that is, produce what is most wanted efficiently Different economic systems do this in different ways either by central planning or markets Markets tend to do well, at least in part because they economize on what has to be known
7. Agreement and disagreement among economists Suppose that Bob, an economist from an AM talk radio program, and Cho, an economist from a school of industrial relations, are arguing over budget deficits. The following dialogue shows an excerpt from their debate: Cho: Most people recognize that the budget deficit has been rising considerably over the last century. We need to find the best course of action to remedy this situation. Bob: I believe that a cut in income tax rates would boost economic growth and raise tax revenue enough to reduce budget deficits. Cho: I actually feel that raising the top income tax rate would reduce the budget deficit more effectively. Despite their differences, with which proposition are two economists chosen at random most likely to agree?
Tariffs and import quotas generally reduce economic welfare. While many economic questions are open to debate, the field is largely in agreement on some points. For example, two economists chosen at random are most likely to agree that tariffs and import quotas generally reduce economic welfare. Indeed, one survey that 93% of economists agree with this proposition. It would be harder to find two randomly chosen economists who both agree with either of the other propositions.
Tax Wedge Equation
Tax wedge = Pbuyers - Psellers = Tax
expectations
The anticipations of consumers, firms, and others about future economic conditions. If you expect to earn a higher income next month, you may choose to save less now and spend more of your current income buying ice cream
producer surplus on a graph
The area below the price and above the supply curve
consumer surplus on a graph
The area under the demand curve and above the market price is equal to total consumer surplus
If a nation has high and persistent inflation, the most likely explanation is
The central bank creating excessive amounts of money
The quantity demanded in a market is the sum of the quantities demanded by all the buyers at each price. Thus, the market demand curve is found by adding horizontally the individual demand curves. At a price of $2.00, Catherine demands 4 ice-cream cones and Nicholas demands 3 ice-cream cones. The quantity demanded in the market at this price is 7 cones.
The graph shows the demand curves that correspond to these demand schedule to find the total quantity demanded at any price, we add the individual quantities which are found on the horizontal axis of the individual demand curves the market demand curve shows how the total quantity demanded of a good varies as the price of the good varies
number of buyers
The greater the number of buyers in a market, the larger is the demand for any good. Example: If Peter were to join Catherine and Nicholas as another consumer of ice cream, the quantity demanded in the market would be higher at every price, and market demand would increase
When the price of an apple rises, people decide to eat fewer apples. At the same time, apple orchards decide to hire more workers and harvest more apples. Where's the incentive in this?
The higher price of apple in the market provide an incentive for consumers to consume less while the incentive for sellers would be to produce more in order to bring the price down and bring the number of consumers up.
input price
The price of a good that is used in the production of something else. When an input price into the production of good X goes up, the supply of good X contracts; when an input price into the production of good X goes down, the supply of good X expands If the cost of the production is too high, the less of the product will be produced
True or False: As long as the supply curve is upward-sloping, a decrease in the demand for notebooks leads to a fall in both the quantity demanded and the quantity supplied of notebooks.
True A decrease in the demand for notebooks will cause the demand curve to shift to the left, resulting in a movement along the supply curve. Provided the supply curve is upward-sloping, both the quantity of notebooks demanded and the quantity supplied will decrease.
flow from a firm to a household
When Poornima (a household) supplies her labor to any firm, labor is an input (a factor of production) that flows from a household to a firm. When the aspirin is provided to Poornima (a household), the aspirin is an output that flows from a firm to a household. Pillmart Pharmacy (a firm) pays Manuel (a household) $350 for his labor. Therefore, the $350 is a payment that flows from a firm to a household. Manuel (a household) pays PC Pros (a firm) $300 for software. Therefore, the $300 is a payment that flows from a household to a firm.
What cause inflation?
When a government creates large quantities of the nations money, the value of the money falls
Show the change in the market for laptop computers that is consistent with the following statement: "When a technological advance improves the features of laptop computers, the price of laptop computers rises, and the price of a used desktop computer falls."
When a technological advance improves the features of laptop computers, the demand for laptop computers increases, shifting the demand curve to the right. The result is a rise in both the equilibrium price and quantity of laptop computers.
Show the change in the market for restaurant meals that is consistent with the following statement: "When an economic boom raises people's income, the price of restaurant meals rises."
When an economic boom raises people's income, the demand for restaurant meals increases if restaurant meals are a normal good. This leads to an increase in both the equilibrium price of restaurant meals.
Show the change in the market for electric cars that is consistent with the following statement: "When the price of electric cars is expected to rise in the near future, the present price of electric cars rises."
When buyers expect the price of electric cars to rise in the future, they may want to buy the cars now at lower prices. This leads to an increase in demand for electric cars, causing the equilibrium price to rise. At the same time, when sellers of electric cars expect the price to rise in the future, they would want to lower current supply of cars to save it for later. The decrease in supply will lead to a rise in the equilibrium price.
gains from trade
When tasks are divided according to who can provide them at the lowest cost, specialization occurs—which can lead to greater output.
Show the change in the market for building materials that is consistent with the following statement: "When there is a coup in a country rich in iron ore, the price of building materials rises."
When there is a coup in a country rich in iron ore, the supply of iron ore will be disrupted. This will shift the supply curve for iron ore to the left. Because iron ore is an input of building materials, the supply of building materials will decrease, leading to a rise in the equilibrium price of building materials.
Suppose Rajiv is currently using combination D, producing one train per day. His opportunity cost of producing a second train per day is
When using combination D, Rajiv is producing one train and 19 drums per day. Producing a second train per day would require him to move to combination C, reducing his production of drums to 16 per day. Since this change involves producing 3 fewer drums per day (19−16=319−16=3), the opportunity cost of producing the second train per day is 3 drums per day.
price taker
a buyer or seller that is unable to affect the market price At the market price, buyers can buy all they want, and sellers can sell all tehy want.
inferior good
a good for which, other things equal, an increase in income leads to a decrease in demand Example: bus rides, as your income falls, you're less likely to buy a car or take a cab and more likely to ride a bus
normal good
a good for which, other things equal, an increase in income leads to an increase in demand they're the norm
substitute
a good that can be used in place of another good
production possibilities frontier
a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
market
a group of buyers and sellers of a particular good or service the buyers as a group determine the demand for the product and the seller as a group determine the supply of the product
decrease in supply
a leftward shift of the supply curve
competitive market
a market in which there are so many buyers and so many sellers that each has a negligible impact on the market price. Each seller of ice cream has limited control over the price because other sellers are offering similar products. A seller has little reason to charge less than the going price, and if he charges more, buyers will make their purchases elsewhere. Similarly, no single buyer of ice cream can influence the price of ice cream because each buyer purchases only a small amount
monopoly
a market where there are many buyers but only one dominant seller. This seller is able to set the price because they're the only seller in the area that has the product the buyers are looking for.
incentive
a positive or negative environmental stimulus that motivates behavior
increase in supply
a rightward shift of the supply curve
market failure
a situation in which the market on its own fails to produce an efficient allocation of resources
marginal change
a small incremental adjustment to a plan of action
demand schedule
a table that shows the relationship between the price of a good and the quantity demanded, holding constant everything else that influences how much of the good consumers want to buy
supply schedule
a table that shows the relationship between the price of a good and the quantity supplied, holding constant everything else that influences how much of the good producers want to sell (Price increase, quantity increase/price is vertical axis, quantity is horizontal)
A market economy rewards people according to their
ability to produce things that other people are willing to pay for
One possible cause of market failure is
an externality, which is the impact of one person's actions on the well-being of a bystander. An example would be pollution as the productions of good pollutes the air and creates health problems for those who live near the factories
shifts the demand curve to the right is called
an increase in demand
Inflation
an increase in the overall level of prices in the economy
national-security argument
an industry vital to national security should be protected from foreign competition, to prevent dependence on imports that could be disrupted during wartime
principle of increasing costs
as the production of a good expands, the opportunity cost of producing another unit generally increases
Competition
because each buyers knows that there are several sellers from which to choose, and each seller is aware that his product is similar to that offered by other sellers. As a result, the price and quantity of ice cream sold are not determined by any single buyer or seller. Rather, price and quantity are determined by all buyers and sellers as they interact in the marketplace
Government
collect taxes: income taxes (federal), corporate taxes (federal), sales taxes (State) Make transfer payment (social security, unemployment insurance, subsidies, etc.) Buy goods and services of its own.
When a fall in the price of one good raises the demand of another good, the two goods are called
complements
tastes
consumer preferences; likes and dislikes in consumption; assumed to be constant along a given demand curve
any changes that reduces the quantity demanded at every price shifts the demand curve to the left is called a
decrease in demand
7. Agreement and disagreement among economists Suppose that Bob, an economist from an AM talk radio program, and Cho, an economist from a school of industrial relations, are arguing over budget deficits. The following dialogue shows an excerpt from their debate: Cho: Most people recognize that the budget deficit has been rising considerably over the last century. We need to find the best course of action to remedy this situation. Bob: I believe that a cut in income tax rates would boost economic growth and raise tax revenue enough to reduce budget deficits. Cho: I actually feel that raising the top income tax rate would reduce the budget deficit more effectively. The disagreement between these economists is most likely due to
difference in scientific judgement There are two main reasons that economists tend to disagree: differences in values and differences in scientific judgments. In this case, the economists disagree due to differences in scientific judgments because they disagree about a factual matter: the type of tax policy that would lower the budget deficit. In contrast, disagreement due to differences in values reflect differing assessments on fairness or equity
Perception versus reality
differences in scientific judgments and differences in values, some disagreement among economists is inevitable. Yet one should not overstate the amount of disagreement. Economists agree with one another to a much greater extent than is sometimes understood.
When a country allows trade and becomes an importer of a good,
domestic consumers of the goods are better off, and domestic producers of the goods are worse off
we often break the global economy into development classes
emerging markets developed economies
The invisible hand does not
ensure that everyone has sufficient food, decent clothing, and adequate healthcare
Compensation of factors
factors gets paid different sorts of income land - rent labor - wages capital - interest entrepreneurship - profit/loss these concepts apply globally
technology
for turning inputs into ice cream is another determinant of supply basically how much it helps to reduce the amount of labor necessary to make ice cream an advance in technology would raise the supply of ice cream
Income for supply factors of production is ultimately spent on
goods
Consumption goods and services
goods and services that individuals and governments buy and use in the current period Services today represent about 75% of yearly output in value. Banking, insurance, health care, education, etc. Manufactured stuff is about 12% of what is made every year in value
Because rational people make decisions by comparing costs and benefits, they respond to
incentives
Payment for goods and services ultimately becomes
income
shifts in the demand curve
income, prices of related goods, tastes, expectations, number of buyers
The government printing more money will
increase the demand for goods and services, leading to higher prices, firms producing more goods and services which requires more workers and will lead to lower unemployment levels in the short run long run - increase in the price level has no effect on unemployment level
Benefits of International Trade
increased variety of goods, lower costs through economies of scale, increased competition, enhanced flow of ideas
Suppose Sharon is currently using combination D, producing one car per day. Her opportunity cost of producing a second car per day is 2 balls per day. Now, suppose Sharon is currently using combination C, producing two cars per day. Her opportunity cost of producing a third car per day is 6 balls per day. From the previous analysis, you can determine that as Sharon increases her production of cars, her opportunity cost of producing one more car
increases because you're sacrificing the production of more balls in exchange for more cars
Most economists describe the short-run effect of monetary injection as
increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services Higher demands may over time cause firms to raise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services More hiring means lower unemployment
a marginal change is one that
incrementally alters an existing plan
Rational people often make decisions by comparing
marginal benefits and marginal costs
factor market
market in which firms purchase the factors of production from households
number of sellers
market supply depends on the number of these sellers if Ben or Jerry were to retire from the ice-cream business, the supply in the market would fall
Import quotas are:
maximum limits on the quantity or total value of specific products imported to a nation
complements
pairs of goods that are used together, such as gasoline and automobile
rational people
people who systematically and purposefully do the best they can to achieve their objectives
Emerging markets
places where consumer incomes and buying power are increasing because of economic expansion.
efficiency from production possibility model
points within the curve of the production possibility model are inefficient points on the curve is efficient points beyond the curve is unattainable
government intervention in markets
price ceilings price floors taxes each causes a dead weight loss generically: redistribution of benefits does not outweigh the loss in markets implication: Price supports for agriculture? benefit farmers, but hurt consumers more. Import quotas for cars? help american car producers but hurt consumers more there are circumstances when this isn't true
Things that can change demand
price of related goods future prices income changes expected future income number of buyers preferences, (you're more likely to buy an ice cold drink when it's hot out)
law of supply
producers offer more of a good as its price increases and less as its price falls. Basically if the price of ice cream were to increase, sellers would produce more ice cream and alternatively if the price of ice cream were to decrease, sellers would produce less ice cream. At a low price, some seller may even choose to shut down, and their quantity supplied falls to zero
a policy must increase what in order to improve standard of living
production increasing minimum wages does not improve production as much as investing in technology, education, or tools and capital
Governments may intervene in a market economy to
protect property rights, correct a market failure due to externalities and establish a more equal distribution of income
State and local governments
provide goods and services and transfer payments as well Means of finance: sales taxes, property taxes, income taxes Government circular flow
price of the good itself
represents a movement along the demand curve
normative statement
statement which describes how the world should be
positive statement
statement which describes the world as it is
Macroeconomics
study of factors that affect the entire economy. Therefore, macroeconomists tend to create models to analyze how aggregate phenomena such as growth, inflation, and unemployment respond to policy decisions of governments and central banks, changes in aggregate spending or savings, and supply or demand shocks.
invisible hand
term economists use to describe the self-regulating nature of the marketplace
if the world price of textiles is lower than the domestic price
textiles would be imported into the country because the cost of the textile is cheaper abroad
Another possible cause of market failure is market power
the ability of a single person or firm (or a small group) to unduly influence market prices. An monopoly so to speak. Where one person controls the resources that everyone wants and so have the ability to change the price as they please.
Adam Smith's "invisible hand" refers to
the ability of free markets to reach desirable outcomes, despite the self-interest of market participants.
Trade-off
the act of giving up one benefit in order to gain another, greater benefit Example: as a student we're giving up time that we rather spend watching tv or playing video games, to study and go to school. We're giving up one thing for another greater benefit
tax incidence
the actual division of the burden of a tax between buyers and sellers in a market
marginal benefit
the additional benefit to a consumer from consuming one more unit of a good or service
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
producer surplus
the amount a seller is paid for a good minus the seller's cost of providing it
productivity
the amount of goods and services produced by each unit of labor input. In nations where workers can produce a large quantity of goods and services per hour, most people enjoy a high standard of living; in nations where workers are less productive, most people endure a more meager existence. Similarly, the growth rate of a nation's productivity determines the growth rate of its average income
expectations (supply)
the amount of ice cream a firm supplies today may demand on its expectation about the future example: if a firm expects the price of ice cream to rise in the future, it will put some of its current production into storage and supply less to the market today.
quantity demanded
the amount of the goods that buyers are willing and able to purchase
quantity supplied
the amount that sellers are willing and able to sell
The term supply and demand refers to
the behavior of people as they interact with one another in competitive market
law of supply and demand
the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance the price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance
marginal cost
the cost of producing one more unit of a good
supply curve
the curve relating price and quantity supplied. It slopes upward because, other things being equal, a higher price means a greater quantity supplied
Market economy
the decisions of a central planner are replaced by the decisions of millions of firms and households. Firms decide whom to hire and what to make
tax wedge
the difference between the price paid by buyers and the price received by sellers in the presence of a tax
supply and demand
the forces that make market economies work. They determine the quantity of each good produced and the price at which it is sold
Trade raises the economic well-being of a nation in the sense that
the gains of the winners exceed the losses of the loser
We still need government interference in our market because
the government enforces the rules and maintains the institutions that are key to a market economy. Most important, market economies need institutions to enforce property rights so individuals can own and control scarce resource
The quantity supplied in a market is the sum of the quantities supplied by all the sellers at each price. Thus, the market supply curve is found by adding horizontally the individual supply curves. At a price of $2.00, Ben supplies 3 ice-cream cones and Jerry supplies 4 ice-cream cones. The quantity supplied in the market at this price is 7 cones
the graph shows the supply curves that correspond to the supply schedules. As with the demand curves, we sum the individual supply curves horizontally to obtain the market supply curve
business cycle
the irregular and largely unpredictable fluctuations in economic activity, as measured by the production of goods and services or the number of people employed
demand curve
the line relating price and quantity. this slopes downward because, other things being equal, a lower price means a greater quantity demanded
product market
the market in which households purchase the goods and services that firms produce
Opportunity costs
the most desirable alternative given up as the result of a decision
opportunity cost
the most desirable alternative given up as the result of a decision
demand is also a maximum willingness to pay curve. Each point represent
the most that some consumer would give up to get the object Maximum willingness to pay = measure of value
Before you started applying for college, a job recruiter offered you a full-time cashier position at a department store, earning an after-tax salary of $23,000 per year. However, you turn down this offer and attend your first year of college. The additional monetary cost of college to you, including tuition, supplies, and additional housing expenses, is $36,000. You decide to go to college, probably because
the opportunity cost of a choice includes both the monetary amount paid and the value of your time given up by making that choice over another. So you gave up the cashier job and went to college. You lost the 23,000 and the opportunity cost of college is 36,000 so the total opportunity cost is 59,000. Since you decided to go to college, the value of the benefits must exceed the cost
Substituion Principle
the parable of Baker who may have to edit a paper, correct exam, make lecture notes, and comment on theses in a given afternoon
equilibrium price
the price at the intersection of the market supply and demand curves; at this price, the quantity demanded equals the quantity supplied
world price
the price of a good that prevails in the world market for that good
equilbrium quantity
the quantity at the intersection of the market supply and demand curves
At the equilibrium price,
the quantity of the goods that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell
dead weight loss
the reduction in economic surplus resulting from a market not being in competitive equilibrium
property rights
the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it
Microeconomics
the study of how prices and quantities are determined through interactions between buyers and sellers (individuals and firms) in individual markets. Therefore, microeconomists are more likely to create models to analyze the decisions of firms (such as pricing) and those of consumers (such as shopping choices), as well as how government policies affect those decisions.
Economics
the study of how society manages its scarce resources
market demand
the sum of all the individual demands for a particular good or service does not say anything about where the product is coming from keep supply and demand as separate as you possibly can
Whether a tax is on consumers or producers, result is that
the tax burden will be shared between the two
opportunity cost of going to a movie is
the total cash expenditure needed to go to the movie plus the value of your time
If the world price of textiles is higher than the domestic price
then producers will be eager to receive the higher prices available abroad and start selling their textiles to buyers in other countries
Say's Law
theory that supply creates its own demand
law of increasing opportunity cost
to produce more of one good, a successively larger amount of the other good must be sacrificed
There are two broad rationales for a government to intervene in the economy and change the allocation of resource that people would choose on their own
to promote efficiency or to promote equality.
Countries benefit from the ability to trade with one another
trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services
the jobs argument
trade destroys jobs in industries that compete with imports
A PPF (Production Possibilities Frontier) describes
what is possible and what isn't what it means to be producing efficiently However if production is efficient, there are tradeoffs! Efficient production implies a menu of choices, not a particular choice and nothing is said about distribution or preferences
Opportunity cost is
what was lost in exchange for the better alternative
opportunity cost example
what you give up from one alternative to get what you want ex. giving up a BMW for a prius to save gas money