Principles of Macro Economics

decrease in supply

A shift of the supply curve to the left.

increase in supply

A shift of the supply curve to the right.

Four Core Principles

- The marginal principle: Ask "one more?" instead of "how many?" - The cost-benefit principle: Compare the relevant costs and benefits - The opportunity cost principle: Remember to consider the opportunity costs - The interdependence principle: Take account of the broader effects of your decisions

4 types of interdependencies

1. Dependencies between each of your individual choices 2. Dependencies between people or businesses in the same market 3. Dependencies between markets 4. Dependencies through time

5 factors that shift the supply curve:

1. Input prices 2. Productivity and technology 3. Prices of related output 4. Expectations 5. The type and number of sellers → only shift supply curve

Market Demand Curve

A graph plotting the total quantity of an item demanded by the entire market, at each price.

market supply curve

A graph plotting the total quantity of an item supplied by the entire market, at each price.

An Individual Demand Curve

A graph, plotting the quantity of an item that someone plans to buy, at each price.

Production Possibilities Frontier

A way to visualize opportunity costs

An Individual Supply Curve

An individual supply curve is a graph of the quantity that a business plans to sell at each price; it summarizes a business's selling plans.

Rational Rule for Buyers

Buy more of an item if the marginal benefit of one more is greater than (or equal to) the price.

Diminishing Marginal Benefit

Each additional item yields a smaller marginal benefit than the previous item.

Cost Benefit Principle

Evaluate the full set of costs and benefits associated with that choice. Pursue that choice, only if the benefits are at least as large as the costs

Six Factors Shifting the Demand Curve

Income, preference, prices of related goods, expectations, congestion and network effects, and The type and number of buyers (only affects market demand, not individual demand)

analysis of shift of demand curve

Income: Higher income increases the demand for normal goods, but decreases the demand for inferior goods. Preferences: Demand for particular goods can increase or decrease as your desire for those goods change. Preferences can be changed by trends, advertising, changing lifestyles, and countless other factors. Advertisers will try to increase your demand for their products. Social pressure can also shift demand curves. Prices of related goods: Demand will increase if the price of substitute goods rises, or the price of complementary goods falls. Demand will decrease if the price of substitute goods falls, or the price of complementary goods rises. Expectations: If prices are expected to rise, today's demand will increase; if prices are expected to fall, today's demand will decrease. Congestion and network effects: If a good with network effects becomes more popular, demand will increase. If a good with congestion effects becomes more popular, demand will decrease. Type and number of buyers: Demand will increase due to population growth, immigration, or access to new international markets. Demographic change can also shift demand. This factor only affects market demand curves, not individual demand.

The marginal Principle

Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost. You should break down "how many" decisions into a series of smaller, or marginal, decisions

The Rational Rule for Sellers in Competitive Markets

Sell one more item if the price is greater than (or equal to) the marginal cost.

MCOI

Step one: First, use the marginal principle by breaking "how many" choices down into simpler marginal choices. Ask yourself whether you would be better off doing a bit more of something, or a bit less. Step two: Then apply the cost-benefit principle by assessing the relevant costs and benefits. Since you're analyzing a marginal question, this says you need to assess whether the marginal benefit exceeds the marginal cost. Step three: To evaluate all the relevant costs and benefits, you'll need to apply the opportunity cost principle and ask, "Or what?" This ensures that you take full account of what you give up when you make a choice. You should focus on the relevant opportunity costs, not just financial out-of-pocket costs. Step four: The interdependence principle helps you identify how changes in other factors—in your own choices, other people, other markets, and expectations about the future—might lead you to make a different decision.

Predicting market outcome:

Step one: Is the supply or demand curve shifting (or both)? Remember that any change affecting buyers or their marginal benefits will shift the demand curve, while any change affecting sellers or their marginal costs will shift the supply curve. Step two: Is that shift an increase, shifting the curve to the right? Or is it a decrease, shifting the curve to the left? An increase in marginal benefit is an increase in demand, while an increase in marginal cost creates a decrease in supply. Step three: How will prices and quantities change in the new equilibrium? Compare the old equilibrium with the new equilibrium.

Supply curve is also marginal cost curve

Supply curves are upward-sloping because of rising marginal costs due to: diminishing marginal product rising input costs.

Disequilibrium

Symptom one: Queuing. When you're driving around looking for a spot, you're effectively queuing—waiting in line—for the next available spot. The extra time you spend in the queue raises the effective price you're paying because it'll cost you both time and money to get a spot. Symptom two: Bundling of extras. When you bought dinner just so you could get the valet to park your car, you were effectively buying extras (that dinner) so you could get the thing you wanted (the parking spot), and this effectively raises the price you're paying to park. Symptom three: A secondary market. When you parked in someone else's driveway, you've found a way around the "official" market for parking spots.

Change in the quantity demanded

The change in quantity associated with movement along a fixed demand curve

marginal product

The increase in output that arises from an additional unit of an input, like labor.

diminishing marginal product

The marginal product of an input declines as you use more of that input.

equilibrium price

The price at which the market is in equilibrium.

equilibrium quantity

The quantity demanded and supplied in equilibrium.

Law of Supply

The tendency for the quantity supplied to be higher when the price is higher.

Opportunity Cost Principle

The true cost of something is the next best alternative you must give up to get it. Your decisions should reflect this opportunity cost, rather than just the out-of-pocket financial costs.

fixed costs

Those costs that don't vary when you change the quantity of output you produce.

Shortage

When the quantity demanded exceeds the quantity supplied.

Surplus

When the quantity demanded is less than the quantity supplied

Marginal Benefit Curve

Your demand curve is also your marginal benefit curve

Shift in the demand curve

a movement of the demand curve itself occurs when other factors affect demand

variable costs

costs that vary with the quantity of output produced

Rational Rule

if something is worth doing, keep doing it until your marginal benefit equals your marginal cost

Decrease in demand

leftward shift

Lower marginal costs

make it profitable to sell a larger quantity at any given price, and so will lead to an increase in supply, shifting the supply curve to the right.

higher marginal costs

mean that it's no longer profitable to produce as large a quantity at any given price, and so will lead to a decrease in supply, shifting the supply curve to the left.

change in the quantity supplied

movement along the supply curve: A price change causes movement from one point on a fixed supply curve to another point on the same curve.The change in quantity associated with movement along a fixed supply curve.

shifts in demand

price and quantity to change in the same direction

a shift in supply

price and quantity to move in opposite directions

Market equilibrium

quantity supplied equals quantity demanded. Intersection of demand and supply curve. everything that is supplied is being bought

Increase in demand

rightward shift

economic surplus

the difference between the benefits you enjoy and the costs you incur - it is a measure of how much your decision has improved your well-being

Marginal benefit

the extra benefit from one unit

Marginal cost

the extra cost from one extra unit

Law of Demand

the tendency for the quantity demanded to be higher when the price is lower

Sunk Costs

time, effort, and other costs you put into a project that cannot be reversed. IGNORE THEM

your demand curve is your marginal benefit curve, while the supply curve is your marginal cost curve.

yup