ECO 155 Akbar
Taxing and dead weight loss
-Taxing specific goods leads to a dead weight loss, which reflects reduced economic activity. -Taxing goods with an inelastic demand and/or supply leads to a smaller deadweight loss.
Endogenous Factors
-Variables that can be controlled from inside a model
Production Possibilities Frontier
-illustrates the combinations of output that a society can produce if all of its resources are being used efficiently. An outcome is considered efficient when resources are fully utilized to produce the maximum output.
Economic Thinking
Requires a purposeful evaluation of available opportunities to make the best decision possible
Marginal Thinking
Requires decision-makers to evaluate whether the benefit of one more unit of something is greater than the cost
Market
-Place where buyers and sellers meet - Doesn't have to be a physical place
Types of Price Controls
-Price ceiling -Legally established maximum price for a good or service -Price floor -Legally established minimum price for a good or service
Law of Supply
- All else equal, there is a direct relationship between price and quantity supplied - If price goes down, quantity supplied goes down - If price goes up, quantity supplied goes up
Changes in Quantity Demanded versus Changes in Demand
- Change in quantity demanded - Movement along a demand curve - Caused by a change in the price of the good - Change in demand - Shift of the demand curve - Entire demand curve will shift to the left or right - Caused by changes in nonprice factors
Competitive Markets
- Characteristics of a competitive market: - Many buyers and sellers - The goods sold by each vendor are similar - No one individual has any influence over the price
Fundamentals of Markets
- Firms - Supply goods (or services) - Consumers - Purchase goods supplied by firms - Exchange happens - Through prices established in markets - Supply or demand factors can change the market price
Market Economy
- Resources are allocated among households and firms with little or no government interference. - Producers and consumers are motivated by self-interest.
Price Gouging
- Temporary price ceilings imposed during emergencies - Imagine that there's a severe hurricane. How would an uncontrolled market deal with an increase in the demand for generators?
Surplus
-Occurs when QS > QD -Occurs at any price above equilibrium - Price will fall over time toward equilibrium -Why does price fall over time with a surplus? - Firms will lower prices to get rid of mounting inventories
Law of Demand
-All else equal, there is an inverse relationship between price and quantity demanded - If price goes up, quantity demanded goes down - If price goes down, quantity demanded goes up
Normative Statement
-An opinion that cannot be tested or validated -describes "what ought to be" -For example, an unemployed person should get financial assistance from the government to help make ends meet.
Rent Control
-Besides shortages, what are some unintended consequences of rent controls? -Reduction in quality of apartments: -Either less maintenance or decay - What are some other unintended consequences of rent controls? -Landlords "nickel and dime" tenants with fees to increase revenues -Decreases in long-term investment in thebuilding of new units -Policy often ends up hurting the very people it was supposed to help
Positive Statement
-Can be tested and validated -Describes "what is" -For example, the unemployment rate is 7% is a positive statement, as we can gather data to verify this information
Causes of the unemployment created by minimum wage
-Decrease in QD of labor and increase in QS of labor -Firms may replace low-skilled jobs with capital - Decrease in QD and increase in QS of labor - Firms may replace low-skilled jobs with capital - Shortening hours for workers - Firms may relocate where no minimum wage
An imperfect market, especially a monopoly may arise due to several reasons.
-First, strategic access to certain resource or technology. For example, the OPEC has access to oil reserve. Apple has copyright over the 'iPhone' and other Apple products. -Second, barriers to market entry. Sometimes there could be legal barriers giving a firm advantage over the others. The advantage may arise due to one firm has significantly large economies of scale in production than others. Thus, the firm can lower price making it impossible for other firms to enter the market. -Third, the geographical location for a firm can also create an advantage for a firm over other competitors. -Sometimes, a monopoly may arise due to location, economies of scale, or strategic access to natural resources. We call them natural monopoly. In such cases, we often observe the government take over these businesses to make sure that consumers do not have to pay a too high price.
Ceteris Paribus
-Latin, means "other things being equal" -used to build economic models Allows economists to examine a change in one variable while holding everything else constant
Minimum Wage
-Minimum wage -The lowest hourly wage rate that firms may legally pay their workers -Rationale for minimum wage: -Provide a "living wage" -Help the working poor who are often unskilled -Provides skills, experience
Factors that Shift Supply
1) The cost of inputs - Inputs - Resources used in the production process 2) Changes in technology - Technology - Knowledge that producers have about how to produce a product 3) Taxes and subsidies - Tax - Tax paid by producer adds cost of production - Subsidy - "Opposite" of a tax; government pays sellers to produce goods - Reduces the cost of production 4) Number of sellers - More individual sellers means more market supply 5. Price expectations - Higher price expected tomorrow? If so, delay sales until future if possible
Factors That Shift Demand
1. Changes in income - Normal good - Good we buy more of when we get more income - Inferior good - Good we buy less of when we get more income 2. Price of related goods - Complements - Two goods used together - Substitutes - Goods that can be used in place of each other 3. Changes in Tastes and Preferences - A good may become more fashionable or may go out of style - A good may come into or go out of season 4. Price expectations - Our consumption today may depend on what we think the price may be tomorrow 5. Number of buyers - More individual buyers means more market demand
The Five Foundations of Economics
1. Incentives: Factors that motivate a person to act or exert effort. Positive Incentives encourage actions by offering rewards. Negative incentives discourage actions by providing punishments. Incentives can be direct and indirect as well. Indirect incentives may lead to unintended circumstances. 2. Trade-offs: are integral to economics. Scarcity implies we have to make choices. Every decision relating to a choice has a cost. We have to give up one thing to have another. The gangnam style video has been watched for over 140 million hours, using the same time we could have built 4 Great Egyptian Pyramids. 3. Opportunity Cost: The highest valued alternative that must be sacrificed to get something else. Suppose you have two options for the evening- go to a movie (ticket, drink + popcorn= $20) or go to a baseball game (ticket, drink, + hotdog = $25) If you chose to go to the movie what is your opportunity cost? You are saving $5 going to the movie but sometimes opportunity cost involves the value of your time as well. 4. Marginal Thinking: Sometimes referred to as decision making at the margin. Economic thinking requires a purposeful evaluation of available opportunities to make the best decision possible. For example: you want to support yourself while studying in college. You evaluate what are the available opportunities for what is best for you. Now the next challenge you face is how many hours to work? You have to find the right balance between work and study. This is where decision making at the margin or marginal thinking, becomes relevant. 5. The principle that trade creates value: Without trade you would have to produce everything you consume. Trade fosters exchange of goods and promotes specialization
Changes in Quantity Demanded versus Changes in Demand:
A change in quantity demanded is a movement along the demand curve. If the price goes up, quantity demanded decreases. If the price goes down, the quantity demanded increases. As such, the change in the quantity demanded is caused by a change in the price of the good. A change in demand is the result of a shift in the demand curve. The curve may shift to the right indicating an increase in demand i.e. more and more people are buying it. If the curve shifts to the left, this indicates a decrease in demand i.e. fewer people are buying it. The shifts are caused by non-price factors. We will learn about these factors in detail. Usually, after a shift in demand the equilibrium price and quantity demanded both changes. A change in the price of the good or service will cause a movement along the demand curve, but cannot shift the demand curve.
Which of the following will most likely cause a decrease in the supply of most fruits and vegetables?
A) an increase in demand for meat B) the introduction of an environmentally friendly pesticide C) a decrease in the price of corn and rice D) harsh punishments for farmers who hire undocumented workers D
Supply and demand generally become more elastic in the long run. This means that shortages caused by price ceilings _________ in the long run.
A) disappear completely B) become smaller C)become larger D) become infinitely large C
Changes in Quantity Supplied versus Changes in Supply:
A change in quantity supplied is a movement along the supply curve. If the price goes up, quantity supplied increases. If the price goes down, the quantity supplied decreases. As such, the change in the quantity supplied is caused by a change in the price of the good. A change in supply is the result of a shift in the supply curve. The curve may shift to the right indicating an increase in supply i.e. more and more people are selling it. If the curve shifts to the left, this indicates a decrease in supply i.e. fewer people are selling it. The shifts are caused by non-price factors. We will learn about these factors in detail. Usually, after a shift in supply the equilibrium price and quantity demanded both changes. A change in the price of the good or service will cause a movement along the supply curve, but cannot shift the supply curve.
Necessity
A good is a necessity when its demand does not change too much with an increase or decrease in income
Normal Good
A good or service is called a normal good when the demand increases with an increase in income. For example, most of the goods we purchase are normal goods.
Inferior Good
A good or service is called an inferior good when the demand increases with a decrease in income. For example, used or second-hand clothing is an example.
What will be the effect of a nonbinding price ceiling?
A) A surplus will be created. B) A shortage will be created. C) There will be no effect. D) The effect is unknown. C
Which of the following situations illustrates an incentive?
A) Dave snacks all afternoon and isn't hungry for dinner. B) Dirk's children misbehave during dinner. C) Lee gives his children candy if they behave during dinner. D) Jaime goes to a restaurant for dinner. C
What is one unintended consequence of rent control?
A) People in rent-controlled units will relocate more often. B) Landlords may not maintain rental units. C) Too many apartments will be built, creating a surplus of units. D) People will choose not to live in big cities. B
What can be said about scarcity?
A) Scarcity forces us to make choices. B) Scarcity doesn't affect the super-wealthy. C) Scarcity only affects commodities such as oil. D) Scarcity generally doesn't affect our day-to-day living. A
Suppose there is high unemployment. With respect to the PPF, what will happen?
A) The PPF will shift inward. B) The PPF will shift outward. C) We will produce at a point inside the PPF. D) We will produce at a point outside the PPF. C
Assume you like Pepsi and your income increases.
A) The demand for Pepsi increases. B) The demand for Pepsi decreases. C) The quantity demanded of Pepsi increases. D) The quantity demanded of Pepsi decreases. A
Assume the price of Coke decreases.
A) The demand for Pepsi increases. B) The demand for Pepsi decreases. C) The quantity demanded of Pepsi increases. D) The quantity demanded of Pepsi decreases. B
Assume the price of Pepsi decreases.
A) The demand for Pepsi increases. B) The demand for Pepsi decreases. C) The quantity demanded of Pepsi increases. D) The quantity demanded of Pepsi decreases. C
Suppose goods X and Y are substitutes for each other. If the price of good Y increases, what is the result in the market for good X?
A) The demand for X increases. B) The demand for X decreases. C) The quantity demanded of X increases. D) The quantity demanded of X decreases. A
Suppose the price of good X increases. In terms of demand, what is the result?
A) The demand for X increases. B) The demand for X decreases. C) The quantity demanded of X increases. D) The quantity demanded of X decreases. D
Consider the market for bananas. Suppose that both the supply of and demand for bananas increases simultaneously. Which of these effects is certain?
A) The equilibrium price of bananas will increase. B) The equilibrium price of bananas will decrease. C) The equilibrium quantity of bananas will increase. D) The equilibrium quantity of bananas will decrease. C+D
Which of the following will cause the supply curve for oranges to shift to the left?
A) The government begins subsidizing orange growers. B) A study is released showing oranges improve eyesight. C) An ice storm strikes Florida. D) A new orange juice commercial airs on TV. C
What is a possible problem with using faulty assumptions when building an economic model?
A) The model could become too popular. B) It could lead to poor economic decisions. C) It means we never have to rebuild the model. D) It could cause too much wealth. B
Suppose there is a shortage in the market for avocados. Assuming a competitive and unrestrained market, what happens over time?
A) The price of avocados will fall, and the shortage will worsen. B) The price of avocados will rise, and the market will eventually reach equilibrium. C) The price of avocados will rise, and a large surplus will be created. D) Producers will stop growing avocados. B
Assume the price of cheese decreases. What will happen in the pizza market?
A) The supply of pizza increases. B) The supply of pizza decreases. C) The quantity supplied of pizza increases. D) The quantity supplied of pizza decreases. A
What is the opportunity cost of producing capital goods instead of consumer goods?
A) We give up consumption today. B) We give up consumption tomorrow. C) We have less employment today. D) We have a lower standard of living tomorrow. A
If we move down and to the right along a PPF, the opportunity cost of this movement can be measured in terms of
A) how much of the x-axis good we gain. B) how much of the y-axis good we gain. C) how much of the x-axis good we give up. D) how much of the y-axis good we give up. D
With regard to the PPF, an efficient point is a point that is
A) impossible to reach. B) inside the PPF. C) outside the PPF. D) on the PPF. D
In the event of a binding price ceiling, what is one function that a black market serves?
A) reduces the shortage caused by the price ceiling B) decreases the price even further C) creates a monopoly D) causes a surplus of the good A
With regards to marginal thinking, an individual will do an action if
A) the probability of success is greater than 50 percent. B) the action has positive benefits. C) the costs of the action are small. D) marginal benefits ≥ marginal costs. D
The opportunity cost of buying a good is
A) the sum of values of all the other goods you could have purchased. B) the value of the next-best alternative you could have purchased. C) irrelevant since you will purchase your highest-valued good. D) the average of values of all the other goods you could have purchased. B
The governor decides to increase funding for education. However, this will mean decreasing funding for infrastructure. This situation illustrates
A) trade-offs. B) comparative advantage. C) incentives. D) markets. A
Efficient outcomes
An outcome is efficient when an allocation of resources maximizes total surplus.
Mixed Economies
At present, most of the economies are known as mixed economies. In this system, we observe a balance between market and government's work together to decide on resource allocation.
Price Controls
Attempt to set, or manipulate, prices through government involvement in the market
Imperfect Markets
Buyer or seller has an influence on the price
The Scientific Method in Economics
Economists use the scientific method to explain economic phenomena: 1st Observe a phenomena 2nd develop a hypothesis 3rd Construct a model to test the theory 4th Design an experiment to test how well the model works and collect data 5th Revise or refute the theory based on evidence
Market DemandF
Horizontal sum of all individual quantities demanded by each buyer in the market at each price
Price Gouging and Price Collapsing law examples
In order to protect consumers from excessively high prices, a city government will impose a price-gouging law on snow shovels, deicer, and so on during severe winters. In order to protect producers from excessively low prices, a city government will impose a price-collapsing law on snow shovels, deicer, and so on, during unusually mild winters.
What does income equal
Income=Expenditure
Specialization
Specialization is limiting one's work to a specific area, which leads to increased production due to learning by doing. If you do the same thing again and again, your productivity in that task increases leading to increased output. Specialization can lead to gains from trade for society. If each person or society specializes in certain economic activity, we may observe increased production. The person or society may benefit from trading the surplus with each other.
Supply: the behavior of a seller
Supply is the behavior of a seller. A seller can be a household, a firm or farm, and the government. We will use the supply curve to analyze 'demand'. Note: We are looking at a competitive market where all the sellers are price takers. They chose the quantity supplied and cannot influence the market price.
Markets in the Circular Flow
The Circular Flow contains 2 markets: the product market and the resource market -Product Market: In this market, households are the buyers and firms are the sellers. This is the type of market you are probably most familiar with. When you go into a gas station or the mall, you are acting as a buyer, the store is the seller. -Resource Market- A resource market is a reverse of a product market. In this market the household acts as the seller and the firm is the buyer. The market for labor is a resource market. When you go to the job market, you are basically selling yourself. Firms are looking for employees to help them produce goods and services . They are buying labor
The Circular Flow
The circular flow shows how resources and final goods and services flow through the economy. There are two groups in the circular flow, households and firms, which want to trade with each other -Households: The people we usually think of as customers -Firms: businesses -Households want the goods and services produced by the firms, and the firms want the resources owned by the households in order to make goods and provide services
Factors that cause a shift in demand:
The following factors cause the demand curve to shift. 1. Buyers' Income: Purchasing power is the value of your income expressed in terms of how much you can afford. As peoples income increase, this leads to an increase in their purchasing power. As a result, people buy more goods and services for consumption. This increases demand, ceteris paribas. As peoples income decrease, this leads to a decrease in their purchasing power. As a result, people buy fewer goods and services for consumption. This decreases demand, ceteris paribas. 2. Price of Related goods: We are not taking about the price of the good, rather discussing the price of a related good. Two goods are complements that are used or consumed together. When the price of a complement goes up, the demand for the related good decreases. When the price of a complement goes down, the demand for the related good increases. Think about color ink-cartridge and photo paper. If the price of color ink-cartridges go up ceteris paribas, will you buy more photo paper? Two goods are substitutes that are used or consumed as alternatives. When the price of a substitute goes up, the demand for the related good increases. When the price of a substitute goes down, the demand for the related good decreases. Think about Coca Cola and Pepsi Cola. If the price of Pepsi Cola go up but Coca Cola remains the same ceteris paribas, will you buy more Pepsi Cola or switch to Coca Cola? 3. Changes in Taste and Preference: Fashion goes in and out quickly. This change in fashion may lead to changes in peoples preferences for certain type of goods and accessories. Seasonality may also impact the demand. Medical reports often impact the demand for certain products. Recently, medical research is indicating that 'vaping or e-cigarettes' is leading to deaths. Do you think the demand for vaping products are going to increase? The demand for these products are likely to decrease in the future. 4. Price Expectations: Why do we purchase airline tickets in advance? Why do we often purchase winter clothing at the beginning of Spring? We expect the prices to be lower. This will increase demand, ceteris paribas. 5. Number of Buyers: The population can play an important role in changing the demand for certain products over time. If we expect that there are more babies are going to be born in a society, the demand for baby products is going to increase over time. 6. Taxes: Changes in excise taxes and sales taxes affect demand as well.
Factors that cause a shift in supply:
The following factors cause the supply curve to shift. 1. The Cost of Inputs: We need inputs to produce goods and services. Think about a cake shop. You will need flour, sugar, cake mix, eggs, oven, refrigerator, water-gas-electricity, and labor. Every month you have a fixed budget for each of these inputs. Sometimes we call them factors of production. If the utility bill goes up, what happens? Each month you work on a fixed budget for your business. If the utility cost goes up, everything else held constant, you would be forced to buy fewer inputs used for baking. The result is a decrease in supply, shifting the curve to the left. 2. Changes in the technology or production process: Technology often makes inputs more productive, other things held constant. You can use the same amount of inputs and produce more goods. This implies you are becoming more cost-effective. In this case, the supply increases, shifting the supply curve to the right. 3. Taxes and Subsidies: If the government imposes a tax on the producers, increases the cost of production other things held constant. This lowers the supply, shifting the supply curve to the left. A subsidy, on the other hand, lowers the cost for the producer. This increases the supply, shifting the supply curve to the right. 4. The number of firms in the industry: If the number of firms in the industry increase, other things held constant, supply increases. If the number of firms in the industry decrease, other things held constant, supply decreases. 5. Price Expectations: If a seller is expecting higher prices in the future, other things held constant, supply will decrease now. If a seller is expecting lower prices in the future, other things held constant, supply will increase now.
Law of Increasing opportunity cost.
The law of increasing opportunity cost states that the opportunity cost of producing a good rise as society produces more of it. -Why is this? The resources are not homogenous. Think about the skill-set of a plumber versus a dentist. A musician has a specific set of talent and a dentist has a separate set of skills. It is implausible to think that we can ask all the musicians to become dentists and be able to become equally productive. As we move resources from producing one good to another, we will observe the opportunity cost (in terms of lost production) increases fast. This is because the resources are often specialized and/or specific to certain products.
Law of Supply and Demand
The market price of any good will adjust to bring the quantity supplied and quantity demanded into balance
Command Economy
The opposite of the market economy is a command economy. In this system, the government as a planner decide on resource allocation.
Equilibrium quantity
The quantity at which quantity demanded is equal to quantity supplied
Comparative Advantage
The situation in which an individual, business, or country can produce at a lower opportunity cost than a competitor
What is economics?
The study of how individuals and societies allocate their limited resources to satisfy their nearly unlimited wants
Microeconomics
The study of how the individual units that make up the economy, such as households and businesses
Macroeconomics
The study of the overall aspects and workings of an economy, such as inflation (an overall increase in prices), growth, employment, interest rates, and the productivity of the economy as a whole
Scarcity
The term used to describe the limited nature of society's resources
What Effects Do Price Ceilings Have on Economic Activity?
Two real-world examples: Rent control and price gouging
Exogenous Factors
Variables that cannot be accounted for in a model
Market Power
a firm's ability to influence the price of a good or service by exercising control over its demand, supply, or both.
Luxury Good
a good whose demand increases with income.
Supply Curve
a graph of the relationship between the prices in the supply schedule and the quantity supplied at those prices.
The invisible hand
a phrase coined by Adam Smith that refers to the unobservable market forces that guide resources to their highest-valued use.
Monopoly
a single seller, exists when a single company supplies the entire market for a particular good or service.
Shortage
a situation when the price is such that the quantity demanded exceeds quantity supplied. This is also known as excess demand. During a shortage or excess demand situation, the sellers raise the price. The price will continue to increase until we reach the equilibrium, where the market clears.
Nonbinding Price Ceiling
a situation where the law has no impact at all. When the price ceiling is set above the equilibrium price, we observe the market surplus to emerge. This surplus will push the price down. Since the ceiling is a legal maximum, the sellers can lower their price without any legal consequence. The market stays at the equilibrium and nothing changes.
Supply Schedule
a table that shows the relationship between the price of a good and the quantity supplied. The table shows that as price decreases, the quantity supplied for fish decreases. We can construct a supply curve using the supply schedule.
Consumer goods
are produced for present consumption.
Competitive Market
exists when there are so many buyers and sellers that each has only a small (negligible) impact on the market price and output. Often we use a term, the price taker, which implies the buyers and sellers do not control the market price.
Capital goods
help produce other valuable goods and services in the future.
Imperfect Market
in which either the buyer or the seller can influence the market price. Often we use a term, the price maker, which implies the buyers or the sellers (very few, sometimes just one seller) control the market price.
Demand Curve
is a graph of the relationship between the prices in the demand schedule and the quantity demanded at those prices.
Market economy
is a system where resources are allocated among households and firms with little or no government interference. Producers and consumers are motivated by self-interest.
Demand Schedule
is a table that shows the relationship between the price of a good and the quantity demanded.
Investments
is the process of using resources to create or buy new capital.
Market Demand Curve
is the sum all the individual quantities demanded by each buyer in the market at each price.
Equilibrium
occurs at the point where the demand and the supply curve intersect each other.
Comparative advantage
refers to a situation when an individual, business or country can produce at a lower opportunity cost than a competitor can.
Absolute advantage
refers to the ability of one producer to make more than the other producer with the same quantity of resources.
Quantity Demanded
the amount of a good or service that buyers are willing and able to purchase at the current price.
Quantity Supplied
the amount of a good or service that sellers are willing and able to sell at the current price.
Consumer Surplus
the difference between what a consumer is willing to pay and the price paid.
Producer Surplus
the difference between what a consumer is willing to pay and the price paid.
Short-run
the period in which we make decisions that reflect our immediate or short-term wants, needs, or limitations.
Long-run
the period in which we make decisions that reflect our needs, wants, and limitations over a long time horizon
Equilibrium Price
the price at which the quantity supplied equals the quantity demanded. It is also known as the market clearing price. It is known as the market clearing price because the buyers and sellers do not have any incentive left to deviate away from their decision.
Market Supply Curve
the sum all the individual quantities supplied by each seller in the market at each price.