Economics

Price floor

a minimum price allowed by law

Producer Surplus

the producer's gain from exchange, or the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity

Important Demand Shifters

-Income-Population-Price of Substitutes-Price of Complements-Expectations-Tastes-

Specialization, Productivity, and the Division of Knowledge

-Modern economies require more knowledge than can exist in a single brain-without trade specialization is not possible-trade connects all markets

Rent control effects

-reductions in product quality-wasteful lines-search costs-and lost gains from trade

Price Ceilings Create Five Important Effects

-shortages-reduction in product quality-wasteful lines and other costs of search-loss of gains from trade-miss allocation of resources

Important supply shifters

-technological innovations and changes in the price of inputs-taxes and subsidies-expectations-entry or exit of producers-changes in opportunity costs

Arguments for price controls

-w/out rent controls some people may not be able to afford appropriate housing-discipline monopolies-shortages may benefit the ruling elite

Effects of Price Floors

1) surpluses 2) lost gains from trade 3) wasteful increases in quality 4) a missallocation of resources

The Benefits of Trade

1) trade makes people better off when preferences differ 2) trade increases productivity through specialization and the division of knowledge 3) Trade increases productivity through specialization according to comparative advantage

Comparative Advantage

A country has a comparative advantage in producing goods for which it has the lowest opportunity cost. Allows both trading partners to benefit from trade. (should not be confused with absolute advantage.)

Demand Curve

A function that shows the quantity demanded at different prices. The lower the price, the greater the quantity demanded.

The Supply Curve

A function that shows the quantity supplied at different prices

Inferior Good

A good for which demand decreases when income increases

Normal Good

A good for which demand increases when income increases

Price Ceiling

A maximum price allowed by law. Price ceilings limit the price that sellers can charge for their goods. Prices cannot legally go higher than the ceiling.

Rent Control

A regulation that prevents rents from rising to equilibrium. Rent control is a price ceiling with effects that worsen over time.

Shortage

A situation in which the quantity demanded is greater than the quantity supplied

Surplus

A situation in which the quantity supplied is greater than the quantity demanded

Trade

Allows us to consume more than we otherwise could.

Big Idea Seven: Institutions Matter

Among the most powerful institutions for supporting good incentives are property rights, political stability, honest government, a dependable legal system, and competitive and open markets.

Big Idea Eight: Economic Booms and Busts Cannot Be Avoided but Can Be Moderated

Booms and busts are part of the normal response of an economy to changing economic conditions. Although some booms and busts are part of the normal response of an economy to changing economic conditions, not all booms and busts are normal. When used appropriately, the tools of monetary and fiscal policy can reduce swings in unemployment and GDP. Unemployment insurance can also reduce some of the misery that accompanies a recession. The tools of monetary and fiscal policy, however, are not all powerful. At one time, it was thought that these tools could end all recessions, but this is not the case. When used poorly, they can actually make recessions worse and the economy more volatile.

The Biggest Idea: Economics is Fun

Economics teaches us how to to make the world a better place. It's about the difference between wealth and poverty, work and unemployment, happiness and squalor. Economics increases your understanding of the distant past, present events, and future possibilities.

Substitutes

For two goods a decrease in the price of one good leads leads to a decrease in the demand for the other good

Complements

For two goods a decrease in the price of one good leads to an increase in the demand for the other good

Big Idea One: Incentives Matter

Incentives are rewards and penalties that motivate behavior. People respond to incentives in predictable ways. Self interest is an important incentive in economics.

Big Idea Nine: Prices Rise When the Government Prints Too Much Money

Inflation comes when there is a sustained increase in the supply of money. When people have more money, they spend it, and without an increase in the supply of goods, prices must rise. Inflation refers to an increase in the general level of prices. Inflation makes people feel poorer, and it makes it harder for them to figure out the real value of goods, services, and investments.

Quantity Supplied

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

Why Absolute Advantage Does Not Matter

Just because a producer or country can produce more of a good than others doesn't necessarily mean that it can produce the good cheaper. Even very productive countries can gain when they import cheaper goods.

Big Idea Two: Good institutions align self-interest with social interest

Markets magically align your self-interest with social interest usually. When self-interest aligns with broader public interest, we get good outcomes, but when self-interest and the social interest are at odds we get bad outcomes.

Total Consumer Surplus

Measured by the area beneath the demand curve and above the price

Big Idea Ten: Central Banking Is a Hard Job

No one can foresee the future perfectly and so, the Fed's decisions are not always the right ones. The Fed is always trying to get it "just right," but some of the time it fails. Sometimes the failure is a mistake the Fed could have avoided, but other times it simply isn't possible to always make the right guess about where the world is headed. Thus, in some situations the Fed must accept a certain amount of either inflation or unemployment. Central banking relies on economic tools, but in the final analysis it is as much an art as a science.

Production Possibilities Frontier

Shows all the combinations of goods that a country can produce given its productivity and supply of inputs.

Absolute Advantage

The ability to produce the same good with fewer inputs than another producer.

Consumer Surplus

The consumer's gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price.

Equilibrium price

The price at which the quantity demanded is equal to the quantity supplied. Gains from trade are maximized at the equilibrium price and quantity.

Quantity Demanded

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

Big Idea Five: The Power of Trade

The real power of trade is the power to increase production through specialization. Through the division of knowledge, the sum total of knowledge increases and in this way so does productivity. Trade also takes advantage of economies of scale, the reduction in costs created when goods are mass produced. Everyone can benefit from trade, even those who are not especially productive.

Big Idea Four: Thinking on the Margin

This is making choices by thinking in terms of marginal benefits and marginal costs, the benefits and the costs of a little bit more (or a little bit less.)

Big Idea Three: Trade offs are everywhere

Trade offs are everywhere, and they closely relate to another important economic idea=opportunity cost. This is the value of opportunities lost in a choice. If you don't understand the opportunities you are losing when you make a choice, you won't recognize the real trade offs that you face. Recognizing the trade offs is the first step to making wise choices.

Big Idea Six: The Importance of Wealth and Economic Growth

Wealthier economies lead to richer and more fulfilled human lives. In short, wealth matters, and understanding economic growth is one of the most important tasks of economics.

Gross Domestic Product

the market value of all final goods and services produced within a country in a year.

Recession

a significant widespread decline in economic activity spread across the economy lasting more than a few months

bribery and wasteful lines

created due to price ceiling shortages. Normally a shortage would be an opportunity for a seller to increase the price to reduce demand, but with a price ceiling the seller cannot. This is why people resort to these actions to get what they desire.

GDP per capita

gross domestic product divided by the country's population

Growth Rate

growth rate of a GDP tells us how rapidly the country's production is rising or falling over time

What direction does the supply curve shift with a decrease in cost?

it will shift down and to the right

What direction does the supply curve shift with an increase in cost

it will shift up and to the left

Total Producer Surplus

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

Missallocation of resources

producers have no incentive to supply the good to the "right" people first, therefore the goods are missallocated. This means that there is no guarantee that the resources will be used for their highest valued uses.

An Decrease in demand shifts the demand curve in what directions?

the demand curve shifts inward, down, and to the left

An Increase in demand shifts the demand curve in what directions?

the demand curve shifts outward, up, and to the right.

Deadweight loss

the total of lost consumer and producer surplus when all mutually profitable gains from trade are not exploited

Gross National Product

the value of goods and services produced by U.S. citizens no matter where they live

Real Variables

variables that have been adjusted for changes in prices

Nominal Variables

variables that have not been adjusted for changes in prices

Price controls reduce the gains from trade

when quantity is below the market equilibrium quantity, consumers value the good more than the cost of its production. This represents a gain from trade that would be exploited if the market were free.