Principles of Economics
market economy
allocates resources through the decentralized decisions of many households and firms as they interact in markets
opportunity cost
anything that you give up to obtain something
normative statement
attempts the prescribe the world how it should be
change in quantity of demanded vs change in demand
change in quantity demanded causes the movement along the curve
factors of production
the resources the economy uses to produce goods, services, including labor, capital and land
elasticity
the responsiveness of Qs or Qd to one of its determinants
economics
the study of how society manages its scarce resources
total consumer surplus
the sum of total consumer surplus
fiscal policy
the use of government revenue collection (taxation) and expenditure (spending) to influence the economy
inverse relationship
there is an inverse relationship between quantity and price
circular flow diagram
visual model of the economy, shows how dollars flow through markets among households and firms
market power
when a single buyer and seller has substantial influence on market price ex) monopoly
equality
when prosperity is distributed uniformly among society's members
efficiency
when society gets the most from its scarce resources
market failure
when the market fails to allocate society's resources efficiently * causes of market failure: externalities, market power
externalities
when the production and consumption affects bystanders ex) pollution
market
a group of buyers and sellers *need not to be in a single location
model
a highly simplified representation of a more complicated reality
positive statement
a statement that describes the world as it is
demand schedule
a table that shows the relationship between quantity demanded and price
cross-price elasticity of demand
% change in Qd for good 1 / % change in price of good 2
income elasticity of demand
% change in quantity demanded / % change in income
competitive market
- all goods are exactly same - buyers and sellers are so numerous that no one can affect the price
determinants of elasticity of demand
- availability of substitutes - time horizon - category of product (specific vs. broad) - necessities vs. luxuries - purchase size
PPF is a bow shaped when
- different workers have different skills, different opportunity costs - when there is a mix of resources with varying opportunity costs
demand shifters
- income - price of substitutes/complements - expectations - tastes - population
principles of decision making
- opportunity costs - rational people - incentives - tradeoffs
rational people
- systematically and purposefully do their best to achieve their objectives - make decisions by evaluating costs and benefits of marginal changes, incremental adjustments to existing plans
determinants of supply curve
- technological innovation - input prices - taxes and subsidies - expectations - entry or exit of producers - changes in opportunity cost
determinants of elasticity of supply
- time horizon - share of market for inputs - geographic scope change in per-unit cost with production
organize economic activity
- what to produce - how to produce - who gets it - how much to produce
equilibrium
Qd = Qs
production possibilities frontier
a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology
elastic (demand)
a demand curve is elastic when increase in price reduces the quantity demanded (vice versa)
inelastic (demand)
a demand curve is inelastic when increase in price decreases the quantity demanded just a little (vice versa)
scientific method
economist employ scientific method, dispassionate development and testing of theories about how the world works
macroeconomics
economy as a whole
public policy promotes
efficiency
government promotes
equality
consumer surplus
highest price consumers are willing to pay - actual price of a good
inflation
increase in general level of prices
producer surplus
market price - minimum price producer would sell the product
income elasticity of normal good & inferior good
normal good: income elasticity > 0 inferior good: income elasticity < 0 luxury good: income elasticity > 1
monetary policy
the process by which the government controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability
which determinant of demand curve move along the curve?
price of a good
supply schedule
relationship between the price of a good and the quantity of supplied
two roles of economists
scientists and policy advisors - scientist: explain the world - policy advisors: try to improve the world
incentive
something that induces person to act * could be either reward or punishment
cross-price elasticity of demand of substitutes and complements
substitutes > 0 complements < 0
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
absolute advantage
the ability to produce a good using a fewer inputs than another producer
productivity
the amount of goods and services produced per unit of labor
microeconomics
the behavior of consumers and firms, and their interactions in markets
inferior goods
the demand of inferior goods decrease when income increases
normal goods
the demand of normal goods increase when income increases
scarcity
the limited nature of society's resources