Chapters 1 - Notes ECON

Type and Number of Buyers

If the composition of the market changes because of a change in demographic composition, then the market demand will also change. Type of Buyer: As Baby Boomers continue to age, this will cause the demand for healthcare services to increase. Number of Buyer: An increase in the population over time can increase the demand for goods and services, shifting the demand curve to the right. International trade can also increase the number of buyers. For example, the opening of the Chinese economy means there are now an additional 1 billion consumers (a big shift in demand!)

Willingness to pay

In order to convert nonfinancial costs or benefits into their monetary equivalent, ask yourself: "What is the most I am willing to pay to get this benefit (or avoid that cost) (do not confuse "want to pay" with "willingness to pay")

Shifts in the Demand Curve

Increase in Demand: a shift of the demand curve to the right Decrease in Demand: a shift of the demand curve to the left

Diving into the Definition

Individual demand curves are the building blocks of market demand: At each price, the total quantity of gas demanded is the sum of the quantity that each potential customer will demand at that price The market demand curve visually summarizes these purchasing decisions across the various price points.

You are trying to decide if you should buy a warmer coat but realize that the answer to this question will depend on whether you are taking a trip to Canada next month. Which economic principle is taken into account?

Interdependence Principle

Dependence Through Time

Is it better to act today, tomorrow? * should I buy gas today, or next week? My decision depends on whether I think gas prices will fall or not next week Furthermore, decisions today shape future opportunities and decisions

What should you do as a business owner if you want to predict the decisions that one of your competitors will make?

WRONG The interdependence principle encourages you to think about the decisions that others will make, but does not aim to help you predict what those decisions will be.

market demand curve

A graph plotting the total quantity of an item demanded by the entire market, at each price. The market demand gives business owners a sense of how much business is up for grabs: How many applicants for a university How many followers on Insta

How Realistic Is This Theory of Demand

Advice for you: You can make better decisions if you follow the rational rule for buyers and understand the underlying principle of diminishing marginal benefit Ex. next time don't make the same mistake, know your limits on what you can handle and do not ask for more than what you can do. Understanding and Predicting the choices of others: Put yourself in the shoes of others and try to make the best decisions possible by following the rational rule of buyers, and by understanding diminishing marginal benefits Store owners already understand diminishing marginal benefits which is why we often see "Buy one, get one-half off"

Key Take-aways

Be careful: The effect of changing income depends on whether the good is normal or inferior the effect of changing the price of a related good depends on whether the two goods are complements are substitutes.

Preferences

Changes in your preferences can shift your demand curve. Preferences can change for any number of reasons: Life altering event Marketing, influencers, and fashion cycles Social Pressure Season/Weather

Marginal Principle

Decisions about quantities are best made incrementally. You should break "how many" questions into a series of smaller, or marginal decisions, weighing marginal benefits and marginal costs. Quantity Decisions: Instead of: "how many workers should I hire?" into a series of smaller marginal choices Simplify to: "Should I hire one more worker?" Apply the cost-benefit principle to this marginal decision to answer the question "should I hire one more worker?"

Key Takeaways: Cost-Benefit Principle

Evaluate the full set of benefits and costs for any given choice: * Purse the choice if the benefits are at least as large as the costs * How much am I willing to pay to enjoy this benefit (or avoid the cost)? * Full set ---> consider both financial and nonfinancial aspects * Avoid being led astray by framing effects

Scarcity Makes Trade-offs Inescapable

Every choice involves a trade-off. Every choice has a cost Why? ---> because everyone deals with issues of scarcity! Scarcity: resources are limited, therefore any resources you spend pursuing one activity leaves fewer resources to pursue others. Wants are unlimited Limited money: what could I spend my money on instead?

Expectations

Expectations about future prices of future availability can influence your current demand - your choices are linked through time Example 1: If you see gas prices are high right now, you may decide to wait another few days before filling your car with gas. Your expectations about future prices decreased our current demand for gas

Trade-off

Giving up one thing for another

Applying the Core Principles to Make Good Buying Decisions

Marginal Principle: Break down the question of "how many gallons of gas to buy?" into a series of smaller marginal choices. Cost-Benefit Principle: For each marginal choice, buy the additional gallon of gas if the benefits exceed the costs. Opportunity Cost Principle: "Or what?" To accurately assess the marginal benefits of each gallon of gas, Darren always makes a comparison to his next best alternative: The Rational Rule for the Buyer: Buy more of an item if the marginal benefit of one more is greater than (or equal to) the price. Keep buying until Price = Marginal Benefit Following this rule maximizes your economic surplus as a buyer! Why? Because each purchase you make in accordance with this rule will boost your total benefits more than it boosts your total costs.

Which BEST explains why sunk costs should have no bearing on the application of the opportunity cost principle?

Sunk costs will be incurred in both your choice and the next best alternative.

Opportunity Cost

The opportunity cost of doing something is the next best alternative you have to give up to do it. In other words... give up one thing to get another

The Marginal Principle and the Rational Rule

When you do marginal analysis, you apply the cost-benefit to figure out if "one more unit" is a good choice. Rational Rule: If something is worth doing, keep doing it until your marginal benefits equal your marginal costs. Connecting Concepts: Every additional unit you acquire using the marginal principle will increase your economic surplus (recall: economic surplus = benefits - costs) Economic surplus is maximized when the marginal benefit equals the marginal cost

Willingness to Pay (WTP)

Willingness to pay is the most you are willing to pay to receive a particular benefit or avoid a particular cost.

Azmera currently rents an apartment for $900. He has made a chart of the costs and benefits associated with buying a new house. Should he buy a new house? Why, or why not?

Yes, because the benefits of buying a house are greater than the costs.

Prices of Related Goods

Your choices are also interdependent across different goods Complementary Goods: Goods that go well together. Your demand for a good will decrease if the price of a complementary good rises. Ex. Phone and phone cases, cereal and milk Substitute Goods: Goods that replace each other. Your demand for a good will increase if the price of a substitute good rises, and it will fall if the price of the substitute good falls. Example: Coca-Cola versus Pepsi One pasta brand versus another Pizza Hut versus Dominos

Using the rational rule allows business owners to experiment their way to the point where:

economic profits are maximized

Economics

is the study of choices

Evie, a receptionist at a car dealership, asks herself the question, "Should I go back to school, or should I continue to work at the dealership?" The fact that she is comparing the idea of going to school with her next best option indicates that she is applying the _____ principle.

opportunity cost

Which of these BEST describes what people should base their decisions on?

opportunity costs

Production Possibilities Frontier (PPF)

shows the different sets of output that are attainable with your scarce resources In other words... What you can get with the scarce resources you have (examples shown of which opportunity cost is more worth it study econ or psych).

Kerosene and propane are energy sources that can be used for heating. The price of kerosene increased while the price of propane decreased. This caused individuals to purchase propane instead of kerosene. These two goods are _____.

substitutes

You are weighing the cost of a cup of coffee against the satisfaction you will obtain from the coffee. Which economic principle are you taking into account?

the cost-benefit principle

Marginal Benefit

the extra benefit from one extra unit (of goods purchased, hours studied, etc.). Quantity Decisions: * What are the extra benefits of hiring one more worker? - marginal benefit

Marginal Cost

the extra cost from one extra unit Quantity Decisions: What are the extra costs of hiring one more worker? - marginal cost Hire the additional worker if the marginal benefit exceeds the marginal cost

Economic Surplus

total benefits - total costs flowing from a decision. It measures how much a decision has improved your well-being. Making good decisions is all about maximizing your economic surplus! (You generate economic surplus every time you make a decision in accordance with the cost-benefit principle.

You are willing to pay $5 for a medium sized bubble tea. According to the cost-benefit principle, when should you buy bubble tea?

when the cost is less than or equal to $5

Your willingness to pay for new glasses is $130. According to the cost-benefit principle, when should you avoid buying new glasses and instead opt to keep your money?

when the price of the glasses exceeds $130

Rational Rule

you will maximize your economic surplus

Interdependence Principle: Your best choice depends on 1. your other choices 2. the choices others make 3. developments in other markets 4. and expectations about the future When any of these factors change, your best choice might change. You are not making decisions in isolation. * You are part of a larger network

By deciding to take this class... 1. you can't take other classes that are offered at the same time 2. there is now one less spot available to others 3. makes you a more attractive intern/employee in the labor market 4. you fulfill a prerequisite needed for enrollment in future classes.

Cost-Benefit Principle

Costs and benefits are the incentives that shape decisions Before you make a decision... * Evaluate the full set of costs and benefits associated with that choice * Pursue that choice only if the benefits are at least as great as the costs. Benefits definitely must outweigh the cost or at least equal it

Demand Curve Discussion Thus Far...

Focus on relationship between price and quantity. Movement from one point to another point on the same demand curve Now, something new! Shift in the demand curve: a movement of the demand curve itself

Matthew has been diagnosed with cancer and doctors estimate that he has roughly 5 months to live. From an economic standpoint, which BEST explains why Matthew might be more likely than a healthy person to take a risky experimental drug?

His opportunity cost is lower than that of healthy people.

You have decided that you will buy tacos, but you are still trying to decide how many tacos you should buy. Which economic principle are you taking into account?

Marginal Principle

Dependence Between Economic Factors

The choices made by other economic factors (people, businesses, governments, etc.) shape the choices available to you: * If Microsoft hires the most talented software engineers in Seattle, then there will be fewer talented people available for other Seattle-based tech companies.

Key Take-aways: The Marginal Principle

The marginal principle tells you to break "how many" decisions into a series of smaller, marginal decisions. * If the marginal benefit exceeds the marginal cost, then buy that additional unit. * Continue to buy additional units as long as the marginal benefit is at least as large as the marginal cost (rational rule) * Stop when the marginal benefit equals marginal cost. * Economic surplus is maximized when marginal benefit equals marginal cost

Characteristics of the Market Demand Curve

The market demand curve is downward sloping: Law of Demand: the total quantity demanded is higher when price is lower Prices change the quantity demand for both old and new customers Lower prices mean current customers buy more and brings in new ones.

movements along the demand curve

The market demand summarizes the entire relationship between price and quantity demand To assess how consumers will react to a change in the price of the good simply compare different points on the same demand curve Move from one point on the existing demand curve to another point You do not need to draw a new demand curve to assess the impact of a price change

The Interdependence Principle and Shifting Demand Curves

The six factors that shift the market demand curve: 1. Income 2. Preferences 3. Prices of related goods 4. Expectations 5. Congestion and network effects 6. The type and number of buyers

How do you know when you have broken a decision into its smallest components?

There will only be either/ or choices left

What should you do as a business owner if you want to predict the decisions that one of your competitors will make?

Use the someone else's shoes technique

Evaluating the FULL Set of Costs and Benefits

Using money as a measuring tool allows you to take into account the financial and non-financial costs and benefits of a decision. In cost-benefit analysis, money is the measuring tool, not the objective (cost-benefit analysis still allows for unselfish decisions) (costs do not always need to be monetary but can also be sentimental or be a benefit such as happiness)

Demand and Marginal Benefit

Your demand curve is also your marginal benefit curve * Recall: price = marginal benefit * demand illustrates the price at which you are willing to buy each quantity * the price you are willing to pay for each unit is informed by the marginal benefit you associated with that unit Thus, the marginal benefit and demand curves are one and the same. Diminishing Marginal Benefit: Each additional item yields a smaller marginal benefit than the previous item Example: the number of slices of pizzas you eat, from 1 slice to 12 slices. You will eventually get full and the benefit will decrease because of it Because each unit yields a smaller marginal benefit, your willingness to pay for each additional unit declines. Hence, your demand (and marginal benefit) curve is downward sloping

Key Definitions

a change in price causes a movement along the demand curve, yielding a change in the quantity demanded. Movement along the demand curve: A price change causes a movement from one point on a fixed demand curve to another point on the same demand curve. Change in the quantity demanded: The change in quantity associated with movement along a fixed demand curve quantity demanded is changing, demand is not

Dependence Between Markets

changes in prices and opportunities in one market affect the choices you might make in other markets * declining interest rates in the credit market make it less expensive to get a mortgage, which might lead you buy a home in the housing market

Sunk Cost

cost that is spent or incurred and cannot be reversed, you incur that cost forever. A sunk cost exists in whatever choice you make, and it is not an opportunity cost. * Good decision makers ignore sunk costs. Sunk costs are irrelevant to the current decision at hand because these costs are associated with every alternative moving forward. (do not incorporate past, irreversible costs into your current cost-benefit analysis.

Hiring another worker is beneficial when the marginal benefit of hiring one more worker _____ the marginal cost, meaning that hiring another worker _____ economic surplus.

exceeds; increases

Framing

framing can make identical choices seem different, this can trick our brain so avoid it. (in other words, the sentences can be worded differently, however it will mean the same thing)

Substitute goods can be used in place of one another. Your demand for a good will _____ if the price of a substitute good _____.

increase; rises

Davida is trying to decide between buying a used stereo from Collect Co. or buying a new stereo from Best Buy. The used stereo is an example of purchasing a(n) _____ goods.

inferior not a substitute since substitutes compete with each other?

The Law of Demand

the lower the price, the higher the demand is. as price decreases, demand increases Economist know that many factors other than price can influence your demand This law implies that demand curves slope down

Marginal Cost (MC)

the extra cost incurred by producing one more unit of a product

congestion and network effects

the usefulness of some products- and hence your demand for them- is also shaped by the choices of others Network Effect: When a good becomes more useful because other people use it. If more people buy such a good, your demand for it will also increase. Example: Insta, Snap, and Facebook. These social media platforms are used because other people use them. China uses WeChat. Congestion Effect: When a good becomes less valuable because other people use it. If more people buy such a product, your demand for it will decrease. Example: Your demand for driving on a particular road declines if you know many other people are also taking that route creating a traffic jam. Hence you try and switch to a less congested route.

How Entrepreneurs Think About Opportunity Costs

this principle allows them to evaluate whether or not to start a business. * you give up your guaranteed paycheck each week if you quit. Forgone wages are an opportunity cost.

Individual demand curve

a graph that plots the quantity of an item that an individual plans to purchase at each price In other words, your demand curve visually summarizes your buying plans, and how your plans vary with price Ex. If I see a lower price on an item I want, I will buy more of this product at a lower price Individual: one person Demand: Examining buying decisions (opposed to selling decisions) Curve: Graphing things (sometimes these curves are straight lines)

Demand Shifter One: Income

All your individual choices are interdependent because you only have a limited amount of income to spend Normal Good: A good for which higher income causes an increase in demand Smartphone Restaurant meals Organic Foods * how your buying plans will change if you earn more money. If you spend more when you receive more money, then it is a normal good Inferior Good: a good for which higher income causes a decrease in demand non-smartphone fast food meals non-organic foods Note: Inferior goods are not bad, they are simply goods you buy less of when your income is higher

Opportunity Cost

The next best thing/alternative you have to give up to get it. Costs are not always obvious you often have to give up more than just money to get something "Or what?" to accurately assess the marginal benefits of a product Focus on the trade-offs associated with a particular option. What did you give up to pursue this option? Whatever you choose to do, you are choosing not to do something else. That is you opportunity cost.

Key Take-aways: Opportunity Cost

The opportunity cost is the most valuable alternative you had to give up to pursue your choice * Even if the choice has no direct financial cost, there is always a cost because every choice has an opportunity cost associated with it. * Scarcity makes opportunity costs (trade-offs) inescapable * Good decision makers ignore sunk costs The production possibilities frontier (PPF) can be used to visualize the opportunity costs we face

Dependence Among Each of your Individual Choices

your own choices are all connected because you have limited resources: * Your decision on how much you spend on movies will impact how often you eat out because you have limited income * your decision on how much time to dedicate to studying economics affects the time available for studying psychology because you have limited time etc.