Intro to Microeconomics

complements

(shift of demand curve - changes in prices of related goods or services) pair of goods in which a rise in the price of one good leads to an decrease in the demand for the other good - usually goods that in some sense are consumed together - ex. cars and gasoline

substitutes

(shift of demand curve - changes in prices of related goods or services) pair of goods in which a rise in the price of one of the goods leads to an increase in the demand for the other good - usually goods that in some way serve a similar function - ex. coffee and tea

changes in taste (shift of demand curve)

- due to fads, beliefs, cultural shifts, etc - when tastes change in favor of a good, more people want to buy it --> demand curve shifts to the right and vice versa

Principle #1 (individual choice): Choices are necessary because resources are scarce

- ex of scarce resources: natural resources (minerals, lumber, and petroleum), human resources (labor, skill, intelligence), even clean air and water - scarcity of resources means that society as a whole must make choices - sometimes society lets individuals make their own decisions, but other times should be made at a higher, community-wide level - Ex. local residents feel that the community would be more pleasant to live in if some fo the land was left undeveloped, but no individual has an incentive to keep his or her land as open space if they could sell it for money. So instead, local governments purchase undeveloped land and preserve it as open space

Principle #3 (individual choice): "How much" is a decision at the margin

- ex. if you taking both economics and chemistry, you must decide how much time to spend studying for each - your decision involves a trade off- comparison of costs and benefits - usually when making the decision, you make it a bit at a time (ex. when deciding between studying eco or chem you ask yourself how to spend the next hour) - these decisions of whether to do a bit more or bit less of an activity are marginal decisions

Principle #10 (eco wide interaction): one person's spending is another person's income

- in the market eco, people make a living selling things-- including their labor-- to other people, so a chain reaction of changes in spending behavior tends to have repercussions that spread through the economy - important for understanding recessions and recoveries

Principle #4 (individual choice): people usually respond to incentives, exploiting opportunities to make themselves better off

- incentive is anything that offers rewards to people who change their behavior - in addition to exploiting these opportunities, people will continue to exploit them until they have been fully exhausted - this is the basis of all predictions by economists about individual behavior - economists tend to be skeptical of any attempt to change people's behavior that doesn't change their incentives (ex. a plan that calls on manufacturers

competitive market

- market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold - behavior is well described by supply and demand model - ex. the global marketplace for natural gas is so huge that even the biggest US driller for natural gas--Exxon Mobil-- accounts for such a small share of total global transactions that it is unable to influence the price at which natural gas is bought and sold

Principle #11 (eco wide interaction): overall spending sometimes gets out of line with the economy's productive capacity

- shortfalls in spending leads to recessions (economic slumps) because people not buying enough -> less spending -> shortage of what was needed to keep workers employed, etc - excesses in spending leads to inflation (rises in prices) because the amount that people want to buy outstrips the supply, so producers can raise their prices and still find willing customers

Comparative Advantage

- the ability to produce a good at a lower opportunity cost than another producer - it makes sense to produce the things you're especially good at producing and buy everything else from others - Ex. Brazil has a comparative advantage in the production of small jets (the opportunity cost of a small jet is 1/3 of a large jet while in the US, the opportunity cost of a small jet is 3/4. 1/3<3/4) - everyone has a comparative advantage in something, and everyone has a comparative disadvantage in something, this shows the gains from trade because both parties will be better through specialization and trading rather than being self-sufficient

Principle #8 (interaction): Markets usually lead to efficiency

- the incentives built into a market eco ensure that resources are usually put to good use and that opportunities to make people better off are not wasted - because of the invisible hand, people usually exploit gains from trade, markets usually lead to efficiency - exception: market failure: when the individual pursuit of self-interest found in markets makes society worse off (market outcome is inefficient)

Why are the countries that make our clothes and such (ex. El Salvador, Bangladesh, etc) so much poorer than we are? Why do they continue to make our clothing if they're not as productive?

- these countries are less productive and aren't able to produce as much from a given quantity of resources as comparable firms in the US or other wealthy countries - "comparative advantage": these countries have an absolute disadvantage compared to US in almost everything, but has a comparative advantage in clothing production. This means that US and these countries can specialize in different things and be able to consume more (US supply with more sophisticated goods, and poorer countries supply US with clothing)

forecast

- type of question under positive economics - simple prediction of the future - NOT "what if" questions - ex. how much revenue will the tolls on the state turnpike yield next year NOT how much would that revenue increase if the toll were raised from $1 to $1.50

Principle #12 (eco wide interaction): gov policies can change spending

- used when principle 11 (overall spending) gets out of line - gov already does a lot of spending (military equipment, education) and can choose to do more or less - can also vary how much it colleges from the public in taxes -> affects how much income consumers and business have left to spend - tools of macroeconomic policy

Principle #9 (interaction): When markets don't achieve efficiency, government intervention can improve society's welfare

- when markets go wrong, an appropriately designed gov policy can sometimes move society closer to an efficient outcome by changing how society's resources are bring used

efficient economy

-an eco that takes all opportunities to make some people better off without making other people worse off - it is producing the maximum gains from trade possible given the resources available

economic growth

-increase in factors of production" resrouaces used to produce goods and services - better tech -

Principle #2 (individual choice): The true cost of something is its opportunity cost

-opportunity cost: what you must give up in order to get an item you want - concept of opportunity cost is important to understanding individual choice because in the end all costs are opportunity costs - this happens because every choice you make means forgoing some other alternative

Principle #5 (interaction): there are gains from trade

-people can get more of what they want through trade than they could if they tried to be self-sufficient - this is why we have a economy not many self-sufficient individuals - this increase in output is due to specialization

Comparative vs Absolute Advantage in terms of mutual gain

Comparative, not absolute, advantage is the basis for mutual gain - Ex. the US may be able to produce more large and small jets than Brazil but it has a comparative disadvantage in making small jets because it has a greater opportunity cost than Brazil. That is why it is still mutually beneficial for the US and Brazil and absolute advantage is irrelevant

When does the economy succeed?

Succeeds to the extent it delivers the goods

Economy

System for coordinating a society's productive activities-the activities that create the goods and services people want and get them to the people who want them

Command Economy

There is a centralized authority making decisions about production and consumption - Ex. Soviet Union tried this but failed because producers were unable to produce because they did not have crucial raw materials or people didn't want their products, consumers were often unable to find necessary items (long lines at shops)

Trade off

When you compare the costs with the benefits of doing something - ex. spending more time studying chem involves a benefit (higher grade) and a cost (less time to study for other subjects)

shift of the demand curve

a change in the quantity demanded at any given price, represented by the shift of the original demand curve (D1) to a new position, denoted buy a new demand curve (D2)

demand curve

a graphical representation of the demand schedule. It shows the relationship between quantity demanded and price - in the real world, demand curves almost always slope downward (law of demand)

increasing opportunity cost

a situation in which producing more of one good requires giving up an increasing amount of production of another good - this happens because you have to rely more and more labor and tools for producing one good when those aren't as efficient at making that good

Principle #6 (interaction): markets move toward equilibrium

an economic situation where no individual would be better off doing something different - ex. at a busy supermarket with long lines, if a new cash register opens up then people will move to that one --> in the end, all the lines are the same length - we can depend on markets to work in a predictable way and supply us with the essentials of life because of this concept of equilibrium - ex. supermarkets are always stocked because if some merchant didn't make the food deliveries, a big profit opportunity would be created for any merchant who did-- and then there would be a rush to supply food

changes in input prices (shift in supply curve)

an increase in the price of an inputs makes the production of the final good more costly for those who produce and sell it -> producers are less willing to supply the final good at any given price -> supply curve moves to left

input

any good or service that is used to produce another good or service

Resource

anything that can be used to produce something else - ex. land, labor, capital (machinery, buildings, and other man-made productive assets), human capital (educational achievements and skills of workers)

Incentive

anything that offers rewards to people who change their behavior

Macroeconomics

branch of economics that is concerned with overall ups and downs in the economy - concerned with recessions

movements along the demand curve

change in the quantity demanded of a good arising from a change in the good's price

movements along the supply curve

changes in the quantity supplied arising from a change in price

individual demand curve vs market demand curve

individual demand curve- shows the relationship between quantity demanded and prices for an individual consumer market demand curve- shows how the combined quantity demanded by all consumers depends on the market price of a good - horizontal sum of all the individual demand curves of all consumers in that market

factors of production

land, labor, physical capital (manufactured items used to produce), human capital

Normative economics

makes prescriptions about the way the economy should work - not always a right answer - ex. should the toll be raised, bearing in mind that a toll increase will reduce traffic and air pollution near the road but will impose some financial hardship on frequent commuters?

Supply and demand model + five elements of model

model of how a competitive market behaves elements of this model 1. the demand curve 2. the supply curve 3. the set of factors that cause the demand curve to shift and the set of factors that cause the supply curve to shift 4. the market equilibrium, which includes the equilibrium price and equilibrium quantity 5. the way the market equilibrium changes when the supply curve of demand curve shifts

interaction (of choices)

my choices affect your choices and vice versa; a feature of most economic situations. The results of this interaction are often quite different from what the individuals intend - five principles underlying the economics of interaction

normal goods vs inferior goods

normal goods: known as "most goods", goods for which the demand increases when income increases inferior goods: goods for which demand decreases when income rises - usually is a good that is considered less desirable than more expensive alternative, so when they can afford to, people stop buying an inferior good and switch their consumption to the preferred, more expensive alternative - ex. fast food restaurants are inferior goods, and casual dining are normal goods

trade

people divide tasks among themselves and each person provides a good or service that other people want in return for different goods and services that he or she wants

Invisible Hand

refers to the way in which the individual pursuit of self-interest can lead to good results for society as a whole - "[He] intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention" (Adam Smith) - con: can lead to market failure

Circular flow diagram

represents the transactions in an economy by flows around the circle (simple economy) contains only two kinds of inhabitants: households and firms -household: individual or group of people that share their income -firm: produces goods and services for sale and employs members of households two kinds of markets for simple economy - markets for goods and services: households buy goods/services they want from firms - factor markets: firms buy the resources they need to produce goods and services, ex. labor market where workers sell their services, ex. capital market where capital is bought and sold -- factor markets determine the economy's income distribution

shift of the supply curve

shift in the supply curve: a change in the quantity supplied of a good or service at any given price - increase in supply shifts the supply curve to the right

fix this statement: "if demand increases, the price will go up, but that will lead to a fall in demand, which pushes the price down..."

should be: "if the quantity demanded increases, the price will go up, but that will lead to a fall in quantity demanded, which pushes the price down..." - demand: shift of the demand curve - quantity demanded: movement along the demand curve (influenced by rise/fall of prices)

supply schedule

shows how much of a good or service would be supplied at different prices

supply curve

shows the relationship between quantity supplied and price - normally slope upward (higher the price being offered, the more of any good or service producers will be willing to sell)

Marginal Analysis

study of marginal decisions, plays a key role in economics because it is the key to deciding "how much" of an activity to do

demand schedule

table that shows how much of a good or service consumers will want to buy at different prices

Absolute Advantage

the ability to produce a good or service, producing more output per worker than other countries - individuals have an absolute advantage in producing a good or service if he or she is better at producing it than other people

quantity demanded

the actual amount of a good or service consumers are willing to buy at some specific price

quantity supplied

the actual amount of a good or service people are willing to well at some specific price

Positive Economics

the branch of economic analysis that describes the way the economy actually works - more about facts, there is only one right answer - ex. how much revenue will the tolls on the state turnpike yield next year

Economic Growth

the growing ability of the eco to produce goods and services

law of demand

the higher prices for a good or service, other things equal, leads people to demand a smaller quantity of that good or service - negative slope on demand curve

Production Possibilities frontier

the line on a production possibilities graph that shows the maximum possible output

Opportunity cost

the real cost of an item: what you must give up in order to get it

marginal rate of transformation

the slope of the production possibility frontier

Economics

the social science that studies the production, distribution, and consumption of goods and services

Microeconomics

the study of how individuals make decisions and how these decisions interact

Income distribution

the way in which total income is divided among the owners of the various factors of production, determined by factor markets

what do economists mean when they say "the demand for X increased"?

they mean that the demand curve for X shifted (shift of demand curve) -- not that the quantity demanded rose or fell because of a change in price (movement along demand curve)

Principle #7 (interaction): resources should be used efficiently to achieve society's goals

this doesn't always mean that economic policy makers should always strive to achieve economic efficiency - usually a trade off between efficiency and equity: policies that promote equity often come at a cost of decreased efficiency in the economy, and vice versa

changes in expectations (shift of demand curve)

when consumers have some choice about when to make a purchase, current demand for a good is often affected by expectations about its future price - when price is expected to rise in the future, demand for the good increases today - when price is expected to fall in the future, the demand for the good decreases today

changes in income (shift of demand curve)

when income rises, the demand for normal goods increase and inferior goods fall when income falls, the demand for normal goods fall and inferior goods rise

Market Failure

when the individual pursuit of self-interest leads to bad results for society as a whole

Scarce

when there are not enough of the resource available to satisfy all the ways a society wants to use it

changes in the prices of related goods or services (shift in supply curve)

A single producer often produces a mix of goods rather than a single product

Market Economy

Production and consumption are the result of decentralized decisions by many firms and individuals - Ex. US economy - Better than a command economy

In Italy, an automobile can be produced by 8 workers in one day and a washing machine by 3 workers in one day. In the United States, an automobile can be produced by 6 workers in one day and a washing machine by 2 workers in one day. 1. which country has an absolute advantage in the production of automobiles? In washing machines? 2. which country has a comparative advantage in the production of washing machines? In automobiles? 3. What pattern of specialization results in the greatest gains from trade between the two countries?

1. US has absolute advantage in both because it takes fewer workers in both producing automobiles and washing machines than Italy 2. opportunity cost for washing machine in terms of automobile is 3/8 (italy) and 1/3 (us) -- means 3/8 of a car is given up for making 1 washing machine 1/3<3/8, so US has comparative advantage in making washing machines. therefore, italy has comparative advantage in making car 3. US should specialize in washing machine, and Italy should specialize in automobiles

what are the five principal factors that shift the demand curve for a good or service

1. changes in the prices of related goods or services 2. changes in income 3. changes in tastes 4. changes in expectations 5. changes in the num of consumers - when saying "the quantity of a good or service demanded falls as its price rises, OTHER THINGS EQUAL, we are stating that the factors that shift demand are remaining unchanged

In what ways (3) does the circular flow diagram ignore a number of real-world complications in the interests of simplicity?

1. distinction between firms and households isn't always clear-cut. - for ex. a small family run business a firm or household? --> should be a separate box for family business 2. many of the sales firms make are not to households but to other firms --> flows of goods, services and money within the business sector 3. doesn't show the gov which diverts quite a lot of money out of the circular flow in form of taxes but also injects a lot of money back into the flow in the form of spending

Three principals of why markets fail

1. individual actions have side effects that are not properly taken into account by the market. - ex. action that causes pollution 2. one party prevents mutually beneficial trades from occurring in an attempt to capture a greater share of resources for itself. - ex. a drug company that prices a drug higher than the cost of producing it, making it unaffordable for some people who would benefit from it 3. Some goods, by their very nature, are unsuited for efficient management by markets - air traffic control

Individual Choice

decision by an individual of what to do, which necessarily involves a decision of what not to do - there are 4 principles that underlie individual choice

Marginal decisions

decisions about whether to do a bit more or a bit less of an activity

Recessions

downturn of the eco

specialization

each person specializes in the task that he or she is good at performing - this is why people choose one career - as long as individuals know that they can find the goods and services they want in the market, they are willing to forgo self-sufficiency and to specialize

equity

everyone gets his or her fair share. Since people can disagree about what's "fair," equity isn't as well defined a concept as efficiency

barter

form of trade when people directly exchange goods or services that they have for goods or services that they want - rare in modern economy because people trade goods or services for money then use money to trade for goods or services

changes in the number of consumers (shift of demand curve)

increase in number of consumers leads to an increase in demand