Econ 101 Ch. 1-4

What forces allow those outputs to be distributed among the population in reasonable ways? What forces establish a smoothly functioning system of exchange so that people can first exploit their comparative advantages and then acquire what they want to consume?

Smith noted that people are adept at pursuing their own self-interests and that a market system harnesses this self-interest remarkably well. As he put it—with clear religious overtones—in doing what is best for themselves, people are "led by an invisible hand" to promote the economic well-being of society as a whole.

Idea 1

opportunity cost - people are forced to make choices

satisficing

choosing a "good enough" alternative - when required information is scarce and the necessary research and calculations are costly and difficult

inferior goods

commodities whose quantity demanded falls when the purchaser's real income rises, all other things remaining equal.

normal goods

commodities whose quantity demanded rises when the purchaser's real income rises, all other things remaining equal.

employment of gender

53% male 47%female (3%teenage)

Competition leads to

efficiency

Limitation of Volume of Transactions

Because sales volume cannot exceed either the quantity supplied or the quantity demanded, a reduction in the volume of transactions is the resul

Misallocation of Resources

Departures from free-market prices are likely to result in misuse of the economy's resources because the connection between production costs and prices is broken.

Idea 8

Government policies can limit economic fluctuations - but dont always succeed cycles of boom (inflation) and bust (raise unemployment) governments institute fiscal policy and monetary policy to control fluctuations both used to fight the great recession of 2007-2009 - sometimes these policies fail because policy makers don't make the right decisions "right" decision is not always clear

marginal analysis

analysis that involves comparing marginal benefits and marginal costs MB>MC engage in behavior MC>MB dont engage MC=MB break even point

Unenforceability

neither party may recover (unenforceable) under an illegal agreement where both parties are in pari delicto (in equal fault)

equilibrium

no inherent forces that produce change. Changes away from an equilibrium position will occur only as a result of "outside events" that disturb the status quo.

quantity supplied

number of units that sellers want to sell over a specified period of time.

progressive taxation

one in which the average tax rate paid by an individual rises as income rises.

open economy

one that trades with other nations in goods and services, and perhaps also trades in financial assets. An economy is called relatively open if its exports and imports constitute a large share of its GDP.

mixed economies

one with some public influence over the workings of free markets. There may also be some public ownership mixed in with private property.

technological progress that reduce costs will shift the supply curve..

outward to the right

favoritism and corruption in price ceilings/floors

someone must decided who gets to buy or sell the limited quantity available

opportunity cost

the opportunity cost of any decision is the value of the next best alternative that the decision forces the decision maker to forgo (not just dollar costs)

equality

the property of distributing economic prosperity uniformly among the members of society

Adam Smith

- father of modern economics - invisible hand - price controls at Valley Forge (

abstract

ignoring many details so as to focus on the most important elements of a problem

Idea 5

the importance of thinking at the margin ex: cost of one passenger from la to ny is $300. the airline can still profit from reduced ticket sales because the only "relevant" extra costs are writing and processing additional tickets, food and beverages, additional fuel. all marginal costs company gains more that seat would otherwise be unused

the US stands out among the world's nations as being among the most ..

"privatized" - few industrial assests are publically owned in the US, many city bus companies and almost all utilities (such as electricity, gas, and telephones) are run by private companies

Gilberto can create 15 slides per hour. For other activities, he can bill clients $750 per hour. Gilberto's opportunity cost of creating slides is - per slide. Juanita's opportunity cost of creating slides is 30% lower than Gilberto's. Therefore, - has a comparative advantage in creating slides.

$50 To create 15 slides, he must forgo the $750 he could have billed for other work during the hour required to create the slides. Juanita Juanita's lower opportunity cost of creating slides means that she has a comparative advantage in the activity.

increases of price inputs that suppliers must buy will shift the supply curve ... decreases in the prices of inputs that suppliers must buy will shift the supply curve

1. inward to the left 2. outward to the right

if consumers want to buy more beef at every given price than they previously wanted, the demand curve shifts.... if they desire less at every given price the demand curve shifts....

1. right (outward) 2. left (inward towards origin)

shifts of a supply curve

1. size of industry 2. technological process 3. price of inputs 4. price of related goods

prices of related outputs

A change in the price of one good produced by a multiproduct industry may be expected to shift the supply curves of other goods produced by that industry.

price ceiling

A legal maximum on the price at which a good can be sold (rents) - protect buyers

price floor

A legal minimum on the price at which a good can be sold (farm products) - protects sellers

division of labor was founded by

Adam Smith, father of economics Wealth of Nations (1776)

auxiliary restrictions

Consumers may be told when and from whom they are permitted to buy. The powers of the police and the courts may be used to prevent the entry of new suppliers. For example, in New York City, there are laws restricting conversion of rent-controlled apartments to condominiums.

inputs are also called

Factors of production - land labor capital natural resources, and entrepreneurship

speculation

Individuals who engage in speculation deliberately store goods, hoping to obtain profits from future changes in the prices of these goods.

Idea 10

Productivity growth is (almost) everything in the long run rising labor activity has increased the standard of living of the typical American by sevenfold in the past century

What does the market do well? What does it do poorly?

Society has many important goals. Some of them, such as producing goods and services with maximum productive efficiency (minimum waste), can be achieved extraordinarily well by letting markets operate more or less freely. Free markets will not achieve all of society's goals.

imperfect information

The absence of full knowledge concerning product characteristics, available prices, and so on.

production possibilities frontier

a curve that shows the maximum quantities of outputs it is possible to produce with the available resource quantities and the current state of technological knowledge. on/in is attainable outside are unattainable bc there are not enough resources

outputs

a firm or an economy are the goods and services it produces.

recessions

a period of time during which the total output of the economy falls. declining economic activity

economic fluctuations

alternating periods of good and bad times

invisible hand

by pursuing their own self-interests, people in a market system are "led by an invisible hand" to promote the well-being of the community.

monetary policy

control over money and interest rates

fiscal policy

control over taxes and government spending

theory

deliberate simplification of reality that attempts to explain how some relationships work. explanation of the mechanism behind ovserved phenomena

Idea 6

externalities, a shortcoming of the market cured by market methods - markets produce goods for consumers at quanitities they desire. works out well as long as exchange only involves buyer and seller. some transactions involve third parties not involved in the decision

shortage

excess of quantity demanded over quantity supplied. When there is a shortage, buyers cannot purchase the quantities they desire at the current price. Price will thus be driven up by unsatisfied demand

surplus

excess of quantity supplied over quantity demanded. When there is a surplus, sellers cannot sell the quantities they desire to supply at the current price. The unsold output can then be expected to push the price down.

quantity demanded normally depends on ..

its price ex: if price of beef it very high, its market potential is small. people will switch to pork or fish - different quantity demanded at each possible price, all other influences being held constant

scarcity

resources are limited, there are never enough to do all the things we might want to do with them scarcity of physical resources is more fundamental than the scarcity of funds human effort is scarce - require fuel, labor, and scare resources as inputs

why does the curvature bow outward?

resources are specialized; increasing costs

when a commodity is ___ it's price tends to ___ and vise versa

short;rise plentiful; drop {law of supply and demand}

population as a determinant

similar to consumer income, as population rises more quantity demanded if price of beef and average income do not change

economic model

simplified, small-scale version of an aspect of the economy. Economic models are often expressed in equations, by graphs, or in words.

demand schedule

table showing how the quantity demanded of some product during a specified period of time changes as the price of that product changes, holding all other determinants of quantity demanded constant. - price rise, reduce quantity consumed - higher prices will induce customers to drop out of the market entirely

supply schedule

tables showing how the quantity supplied of some products change as the price of those products change during a specified period of time, holding all other determinants of quantity supplied constant.

comparative advantage

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

trade off

the act of giving up one benefit in order to gain another, greater benefit

The position and shape of the production possibilities frontier that constrains society's choices are determined by

the economy's physical resources, its skills and technology, its willingness to work, and how much it has devoted in the past to the construction of factories, research, and innovation.

opportunity cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

principle of increasing costs

as the production of one good expands, the opportunity cost of producing another unit of this good generally increases - there are exceptions - based on the fact that resources tend to be somewhat specialized

Idea 2

attempt to repeal the laws of supple and demand - the market strikes back - customers want to impose ceiling prices, producers want to impose floor prices - for example, rent control protects tenants but housing is scare when law makes it unprofitable to built and maintain apartments - or a floor price on agriculture builds surplus because people buy less ( such attempts backfire the law of supply and demand)

efficiency

producing the maximum amount of output possible from its resources given the available technology. economists define efficiency as the absence of waste. an efficient economy wastes none of its available resources and produces the goods and services people want, produces them using the least amount of resources that its technology permits, and gets them to the people who get the most value from them

US is biggest national economy. why?

prosperity+population some nations have higher population, or high prosperity, but we have highest per capita 1. population is under 300 million - working population is 153 million (doesn't account children, retirees, full-time students, instituionalized people, and the unemployed) 2. we are rich our economy produced $59,000 worth of goods and services for every living american think of economic system as a machine that takes inputs and transforms into outputs

rent controls force landlords to price apartments below the equilibrium price level. an immediate effect is that housing becomes ... becuase at the lower rent, it is .... profitable to built and maintain rental housing

scarce less

externalities

social costs external to the economic transactions that cause them

transfer payments

sums of money that the government gives certain individuals as outright grants rather than as payments for services rendered to employers. Some common examples are Social Security and unemployment benefits.

Idea 9

the short run trade-off between inflation and unemployment - low unemployment normally makes inflation rise, and high unemployment makes inflation fall.

gross domestic product (GDP)

the sum of the money values of all final goods and services produced in the domestic economy and sold on organized markets during a specified period of time, usually a year.

Idea 7

the trade-off between efficiency and equality - americans promote efficiency with minimal government interferences - ex: americans have low minimum wage with no fringe benefits or job security, europe has higher minimum wage + benefits. their taxes are higher trade-off between size of nations output and degree of equality which that output is distributed

Idea 4

trade is a win-win situation - both parties must expect to gain something in a voluntary exchange ex: resale of concert tickets, one gains profit, the other goes to concert

economists argue speculators perform two vital economic functions

- Speculators sell protection from risk to other people, much as a fire insurance policy offers protection from risk to a homeowner. - Speculators help to smooth out price fluctuations by purchasing items when they are abundant (and cheap) and holding them and reselling them when they are scarce (and expensive). In that way, speculators play a vital economic role in helping to alleviate and even prevent shortages.

price floors are typically accompanied by a standard series of consequences:

1. A surplus develops because sellers cannot find enough buyers. Example: Surpluses of various agricultural products have been a persistent—and costly—problem for the U.S. government. The problem is even worse in the European Union (EU), where the common agricultural policy holds prices even higher. One source estimates that this policy accounts for nearly half of all EU spending. 2. Where goods, rather than services, are involved, the surplus creates a problem of disposal. Something must be done about the excess of quantity supplied over quantity demanded. Example: The U.S. government has often been forced to purchase, store, and then dispose of large amounts of surplus agricultural commodities, such as wheat, cheese, and powdered milk. 3. To get around the regulations, sellers may offer discounts in disguised—and often unwanted—forms. Example: Back when airline fares were regulated by the government, airlines offered more and better food and more stylishly uniformed flight attendants instead of lowering fares. Today, the food is worse (or nonexistent), but tickets cost much less. 4. Regulations that keep prices artificially high encourage overinvestment in the industry. Even inefficient businesses whose high operating costs would doom them in an unrestricted market can survive beneath the shelter of a generous price floor. Example: This is why the airline and trucking industries both went through painful "shakeouts" of the weaker companies in the 1980s, after they were deregulated and allowed to charge market-determined prices.

central role of business firms

8% fail each year some succeed spectacularly, lure of riches induces hundred of thousands of employees

market system

form of economic organization in which resource allocation decisions are left to individual producers and consumers acting in their own best interests without central direction.

specialization

fundamental source of productive efficiency

supply-demand diagrams

graph the supply and demand curves together. They also determine the equilibrium price and quantity.

demand curve

graphical depiction of a demand schedule. It shows how the quantity demanded of some product will change as the price of that product changes during a specified period of time, holding all other determinants of quantity demanded constant.

law of supply and demand

in a free market the forces of supply and demand generally push the price toward the level at which quantity supplied and quantity demanded are equal. (equilibrium)

consumer incomes as a determinant

increase in income leads to purchase of more goods, even if prices remain the same increase in income normally shift to the right

prices and availability of related goods

increases in price of goods that are subsititutes for the good in question (ex: pork, fish and chicken are for beef) move the demand curve to the right increases in prices that are normally used together with the good in question (as in hamburger buns, ketchup, and pickles are with beef) shift the demand curve to the left

antitrust laws

laws that encourage competition in the marketplace to prevent monopoly

consumer preferences as a determinant

may decide to buy more at any given price; whole curve would shift right

quantity demanded also depends on determinants such as

population size consumer incomes tastes prices of other products

a shift to "service economies" reflects the arrival of

"information age"

which of the following are myths about the US economy?

- business profits account for roughly 1/3 of the price americans pay for typical goods and services (actually closer to 7%) - federal government jobs have grown rapidly over the past few decades (fell roughly 10% lower than it was in the 80s) the US IS a relatively closed economy compared to other industrial nations. average imports and exports are 14.5% GDP compared to 76.9% netherlands less than 1/6 imports come from china

a traditional role of government in a market economy revolves around 5 main jobs

- making and enforcing the laws - regulating business - providing certain good and services such as national defense - levying taxes to pay for these goods and services - redistributing income

which is the following are facts about the US economy?

- the standard of living in the US is higher than 50 years ago - more than 85% of what americans buy is made in the US

how to allocate scarce resources

1. figure out how to utlilize its recourse. which resources will produce which goods; who will work; which industries will use materials; how society's equipment will be used 2. which of the possible combinations of goods to produce 3. how much of the total output of each good to distribute to each person

comparative advantage

A producer (individual, firm or country) has a comparative advantage over another producer in the production of some good if they have a lower opportunity cost of producing that good than the other producer. Serena has a greater advantage as an athlete than seamstress

closed economy

An economy is considered relatively closed if its exports and imports constitute a small fraction of GDP. (america)

correlation

Two variables are said to be correlated if they tend to go up or down together. Correlation need not imply causation

two people (or two businesses or two countries) can generally gain from trade even if one of them is more efficient than the other in producing everything

ex: Tennis star Serena Williams is an accomplished seamstress; not only can she design clothes, but she can make them herself. Should Serena stop wearing Nike tennis dresses and sew her own outfits? Not likely. Even if she can do a better job than Nike, good judgment tells Serena to concentrate on her tennis game and leave the sewing to lower-paid seamstresses. Why? Because the opportunity cost of an hour devoted to sewing is what she could gain from another hour spent on the practice court or in the gym, which has a far higher payoff.

true/false: the consequences of price ceilings are random, as the effects cannot be explained by the dynamics of free market

false - When a price ceiling, such as rent control, is placed on a product, suppliers will find it unprofitable to provide as much of the good as people want, and a shortage will result.

True or False: Economists today believe fluctuations in real GDP are inevitable and that there is nothing the government can do to attenuate these cycles.

false Modern governments have a variety of tools at their disposal to try to mitigate large fluctuations in economic activity. These tools include fiscal policy (changes in taxes and government spending) and monetary policy (changes in interest rates and the money supply). In the United States, fiscal policy is conducted by the executive and legislative branches of government, while monetary policy is conducted by the central bank, known as the Federal Reserve (or Fed).

free markets

individuals and businesses voluntarily buy and sell things

below frontier =

inefficient, not using all resources

optimal decision

is selected after implicit or explicit comparison of the consequences of each of the possible choices and that is shown by analysis to be the one that most effectively promotes the goals of personX

the most important input is

labor

national income mainly accrues to the owners of capital -

machines, buildings that make up the nation's industrial plants

The US also has one of the most ... economies on earth

marketized

division of labor

means breaking up a task into a number of smaller, more specialized tasks so that each worker can become more adept at a particular job. - one of the secrets of Industrial Revolution

Idea 3

principle of comparative advantage ex: Chinese competition on imports is believe the threaten American standards of living but econominists believe both sides gain from international trade ex: sally makes $4000 from a singing performance, should she leave her job at the farm? no, hire alfie who is a less skilled farmer but even worse singer both gain from the trade