Economics
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
