Economics

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Incentives

general principle of economics; any factor that enables or motivates a particular course of action

normal good

good for which demand increases when income increases; ex) cars, electronics

"thinking on the margin"

making choices by thinking in terms of marginal costs

total producer surplus

measured by the area above the supply curve and below the price

total consumer surplus

measured by the area beneath demand curve and above price [(base x height) / 2]

comparative advantage

producing goods for which it has the lowest opportunity cost

microeconomics

study of how consumers and producers make decisions and interact in markets

macroeconomics

study of the economy such as economic growth, unemployment, and inflation

Principle ONE

tax revenue

absolute advantage

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

marginal cost

the additional cost of producing a little bit more

marginal revenue/ benefit

the additional revenue from producing a little bit more

quantity supplied

the amount of a good that sellers are willing and able to sell at a particular price

opportunity cost

the cost of an alternative that is not chosen

producer surplus

the producer's gain from exchange

quantity demanded

the quantity that buyers are willing and able to buy at a particular price

Principle FOUR

voluntary consumption is a good thing

Features of PPF

-negative slope due to scarcity -concave due to increasing opportunity cost -slop of PPf is the opportunity cost

First Welfare Theorem

1. free market maximizes the sum of producer surplus and consumer surplus 2. free market maximizes the gains from trade 3.free market maximizes the social surplus 4.free market maximizes the economic "well-being' 5.free market allocations are efficient

Characteristics of Homo economicus

1. rational 2.self-interested 3. responds to incentives 4. consumers make decisions that maximize their individual well being 5. more is better, less work is better

Principle TWO

a cost is a cost, no matter who bears it

complements

a decrease in the price of one good leads to an increase in the demand for the other good; ex) hamburgers and buns: if price of beef goes down, people buy more ground beef as well as hamburger buns

"quantity of demand increases"

a downward/rightward movement on the demand curve

demand curve

a function that shows the quantity demanded at different prices

inferior good

a good for which demand decreases when income increases; ex) Ramen noodles

Principle THREE

a good is a good, no matter who owns it

Production Possibilites Frontier

a graph that shows the combinations of goods that a country can produce given its productivity and supply of inputs

inflation

an increase in the general level of pirces

"demand increases"

an upward/rightward shift of the demand curve

social surplus

consumer surplus + producer surplus

consumer surplus

consumer's gain from exchange

Principle FIVE

don't double count

homo economus

driven by incentives (usually money); easily predictable

What does economics primarily deal with?

SCARCITY

Demand shifters

Tastes, Income, Substitutes, change in Consumer price, Population, Expectations

Supply shifter

Taxes, changes in Opportunity cost, changes in the price of Inputs, Entry and exits of producers, Expectations, Technology


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