Principles of Economics

market economy

allocates resources through the decentralized decisions of many households and firms as they interact in markets

opportunity cost

anything that you give up to obtain something

normative statement

attempts the prescribe the world how it should be

change in quantity of demanded vs change in demand

change in quantity demanded causes the movement along the curve

factors of production

the resources the economy uses to produce goods, services, including labor, capital and land

elasticity

the responsiveness of Qs or Qd to one of its determinants

economics

the study of how society manages its scarce resources

total consumer surplus

the sum of total consumer surplus

fiscal policy

the use of government revenue collection (taxation) and expenditure (spending) to influence the economy

inverse relationship

there is an inverse relationship between quantity and price

circular flow diagram

visual model of the economy, shows how dollars flow through markets among households and firms

market power

when a single buyer and seller has substantial influence on market price ex) monopoly

equality

when prosperity is distributed uniformly among society's members

efficiency

when society gets the most from its scarce resources

market failure

when the market fails to allocate society's resources efficiently * causes of market failure: externalities, market power

externalities

when the production and consumption affects bystanders ex) pollution

market

a group of buyers and sellers *need not to be in a single location

model

a highly simplified representation of a more complicated reality

positive statement

a statement that describes the world as it is

demand schedule

a table that shows the relationship between quantity demanded and price

cross-price elasticity of demand

% change in Qd for good 1 / % change in price of good 2

income elasticity of demand

% change in quantity demanded / % change in income

competitive market

- all goods are exactly same - buyers and sellers are so numerous that no one can affect the price

determinants of elasticity of demand

- availability of substitutes - time horizon - category of product (specific vs. broad) - necessities vs. luxuries - purchase size

PPF is a bow shaped when

- different workers have different skills, different opportunity costs - when there is a mix of resources with varying opportunity costs

demand shifters

- income - price of substitutes/complements - expectations - tastes - population

principles of decision making

- opportunity costs - rational people - incentives - tradeoffs

rational people

- systematically and purposefully do their best to achieve their objectives - make decisions by evaluating costs and benefits of marginal changes, incremental adjustments to existing plans

determinants of supply curve

- technological innovation - input prices - taxes and subsidies - expectations - entry or exit of producers - changes in opportunity cost

determinants of elasticity of supply

- time horizon - share of market for inputs - geographic scope change in per-unit cost with production

organize economic activity

- what to produce - how to produce - who gets it - how much to produce

equilibrium

Qd = Qs

production possibilities frontier

a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology

elastic (demand)

a demand curve is elastic when increase in price reduces the quantity demanded (vice versa)

inelastic (demand)

a demand curve is inelastic when increase in price decreases the quantity demanded just a little (vice versa)

scientific method

economist employ scientific method, dispassionate development and testing of theories about how the world works

macroeconomics

economy as a whole

public policy promotes

efficiency

government promotes

equality

consumer surplus

highest price consumers are willing to pay - actual price of a good

inflation

increase in general level of prices

producer surplus

market price - minimum price producer would sell the product

income elasticity of normal good & inferior good

normal good: income elasticity > 0 inferior good: income elasticity < 0 luxury good: income elasticity > 1

monetary policy

the process by which the government controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability

which determinant of demand curve move along the curve?

price of a good

supply schedule

relationship between the price of a good and the quantity of supplied

two roles of economists

scientists and policy advisors - scientist: explain the world - policy advisors: try to improve the world

incentive

something that induces person to act * could be either reward or punishment

cross-price elasticity of demand of substitutes and complements

substitutes > 0 complements < 0

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

absolute advantage

the ability to produce a good using a fewer inputs than another producer

productivity

the amount of goods and services produced per unit of labor

microeconomics

the behavior of consumers and firms, and their interactions in markets

inferior goods

the demand of inferior goods decrease when income increases

normal goods

the demand of normal goods increase when income increases

scarcity

the limited nature of society's resources