Module 1

why is your demand curve downward sloping?

diminishing marginal benefit

diminsihing marginal benefit

each additional item yeilds a smaller marginal benefit that the previous item

what holds the potential top make everyone better off

efficient outcomes

what is important but ignored by efficiency

equity

cost benefit principle

evaluate full set of ccosts and benefits of any choice pursue only those3 choices whose benefits are at least as large as costs

marginal benefit

extra benefit from one unit (of goods purchased, hours studied etc. )

positive analysis

fact based Ex: the minimum wage is $7.25

market demand curve

graph plottig the total quantity of an item demanded, bu the entire market, at each price (sum of quantity demanded by each person)

market supply curve

graph plotting the total quantity of an item supplied by entire market

deadweight loss

how far economic surpluys falls below the efficient outcome economic surplus at efficient quantity - actual economic surplus

consumer surplus

the economic surplus you get from buying something consumer surplus = marginal benefit (willingness to pay) - Price

producer surplus

the economic surplus you get from selling something price - marginal cost

efficient outcome

the efficient outcome yields the largest possible economic surplus

marginal cost

the extra cost form one extra unit

supply curve also represents what

the marginal cost curve

economic efficiency

the more economic surplus that's generated, the more efficient the outcome

if there are various costs of taking a walk in the park, each at different values (e.g. $5, $8, $13, $15) what would be the opportunity cost of taking a walk in the park

the next best alternative , $15

equilibrium price

the price at which the market is in equilibrium

Law of Demand

the quantity demaded is higher when the price is lower -- holding other things constant

equilibrium wuantity

the quantity demanded and supplied at equilibrium

efficient quantity

the quantity that produces the largest possible economic surplus

if supply equation is

Qs = 40 + 5P

You are considering whether you should go out to dinner at a restaurant with your friend. The meal is expected to cost you $40, you typically leave a 20% tip, and an Uber will cost you $5 to get there. You value the restaurant meal at $20. You enjoy your friend's company and are willing to pay $30 just to spend an evening with her. If you did not go out to the restaurant, you would eat at home using groceries that cost you $8. How much are the benefits and costs associated with going out to dinner with your friend? Should you go out to dinner with your frien

The benefits are $58. You receive $20 worth of benefit from the restaurant meal itself. You also receive $30 worth of benefit from having dinner with your friend. Additionally, by not eating at home, you will save $8 on the groceries you would have purchased. The total benefit, therefore, would be $58. The costs are $53. The price of the meal will be $40. You will also leave a 20% tip, which adds another $8. Your car fare is $5. So, the total cost would be $53. The total benefits are equal to $58 and the total costs are equal to $53. So, going to dinner with your friend will yield $5 worth of economic surplus and you should go out to dinner with your friend

efficient production

producing a given quantity of output at the lowest possible cost

how can we visualize opportunity costs

production possibilities frontier (PPF)

the rational rule for markets

propdcue until marginal benmefit equal marginal cost

equilibrium

quantitiy supplied equals quantitiy demanded

Rational Rule for Sellers in Competitive Markets

sell one more item if the price is greater than (or equal to) the marginal cost

factors that shift both individual and market demand curves

1. income (normal versus inferior) 2. preferences 3. prices of related goods 4. expectations 5. congestion and network effects

five sources of market failrue

1. market power (micro) 2. externalities (micro) 3. information problems (micro) 4. irrationality (micro) 5. government regulations (trarde)

solving market equilibrium with equations

1. set the quantity demanded and quantity supplied equal to eachother 2. Solve for P 3. Substitute the value of P into either equation 4. Solve for Qd or Qs

critiques of economic efficiency

Crigtique 1: distribution matters, so its also importatn to account for equity Critique 2: willingness to pay reflects ability to pay, not just marginal benefit Critique 3 the means matter, not just the ends

demand equation

Qd = 100 - 10d as prices changes by $1, Qd changes by 10 units

economic surplus of Ivan and Samanthas trade what is the total

Ivan's: 55,000-45,000 Samanthas': 72,000-55,000 total: 27,000

Ivan has inherited his mother's 1963 Chevrolet Corvette, which he values at $45,000. He decides that he might be willing to sell it so he posts it on Craigslist for $55,000. Samantha is interested and willing to pay up to $72,000

Ivans benefit: $55,000 Ivans cost: benefits of car $45,000 Samantha benefit: $72,000 willing to pay Samantha cost: $55,000 Both would agree to the exchange

Demand function

Qd = f(P)

sunk cost

a cost that has been incurred and cannot be reversed, not an opportunity cost

individual demand curve

a graph plotting the quantity of an item that someone plans to buy at each price "what quantity should I buy at this price?"

four core principles for analyzing decisiosn

cost benefit principle opportunity cost principle the marginal principle the interdependence principle

what choices require a trade off

all choices

what is a perfectly competitive market

all firms in the industry sell an identical good there are many buyers and sellers, each of whom is small relative to the size of the market

efficient allocation

allocating goods to create the largest economic surplus efficient allocation requries that each good goes to the person who will receive the highest marginal benefit from it

equity

an outcome yields greater equity if it results in a fairer distribution of economic benefits

voluntary exchange

buyers and sellers exchange money for goods only if they both want to ensures both buyer and seller enjoy gains from trade

normative analysis

bvalue based ex: the minimum wage should be $15

movement along the demand curve

caused by price change

economic surplus

consumer surplus + producer surplus = marginal benefit - marginal cost

which principle is useful for "either/or" choices

cost-benefit

what is the marginal principles rational rule

if something is worth doing, keep doing it until your marginal benefits equals your marginal costs

when does economic surplus rise

if the gains to those who are helped by policies are greater than the declines in surplus among those who are harmed

what shift individual and market supply curves

input prices productivity and technology prices of related outputs expectations

which principle is useful for "how many" decisions

marginal principle

scarcity

occurs because resources are limited

market failure

occurs when the forces of supply and demand lead to an inefficient outcome

law of supply

the tendancy fro the quantity supplied to be higher when the price is higher supply curves are upward sloping because the higher the price, the higher the quantity supplied

what factor only shifts the market supply curve

the type and number of seller

economic surplus

total benefits minus the total costs

economic surplus

total benefits minus total costs flowing from a decision

opportunity cost:

true cost of something is the next best alternative you must give up to get it

factors that only shift market demand curves

type and number of buyers

produce inside vs outside of PPF

you can produce in something => ineffieicent use of your resources can only produce outside of PPF if you change something

interdepedence principle

your best choice depends on the other choices you make, the choices others make, developments in other markets, and expectations about the furture