ECO 103PDF 2 - Lecture notes 1-4 PDF

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This is the notes from the first day of class to the first exam. These are highlighted and also contain visual elements that go with the vocab and concepts being disscussed.

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ECONOMICS 103! Andrew Frey!

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Chapter 1 - Fundamental Concept in Economics!

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Economics — The study of how society chooses to manage its scare resources to satisfy ! ! its wants.!

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1. Business related questions (interests / unemployment rate)! 2. Personal Choice questions (social networks) !

! ! Key Features of an Economy! !

Economy — A type of organization that produces goods and services and then allocates good and services to its members. ! ! ! ! !

Derived from the the Greek “Oikonomia’”—Meaning household management!

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Small as households and large organizations! ! ex: home or US!

Legal and cultural conventions determine how the production and distribution decisions ! ! are made.!

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We have mostly “mixed systems” in todays modern society!

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! ! The two key questions every economy must answer!

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#1. What are we going to make with our resources?! #2. Once we’ve made something how of we decide who gets to enjoy it?!

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Key principles of Economics: Scarcity, Trade-offs, and Opportunity Costs!

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Scarcity— Means that we don’t have the resources ! !

necessary to fulfill all of our wants.! A fundamental assumptions is that our wants are not virally unlimited but the means to satisfy them are not. ! Trade-offs and Opportunity Costs— Because of scarcity we have to make choices about which desires to satisfy and which to leave unfulfilled! ! ! ! ! Tradeoffs = Opportunity Cost!

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Opportunity Costs— What must be sacrificed to obtain something else. ! ! ! ! ! ! ! Applies to individuals as well as society, address needs at the expense of others!

! ! Opportunity costs is not about money! ! Economists avoid measuring opportunity costs scarcity in terms of money! !

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Money is a contrivance invented to help facilitate exchange! Not all opportunities are easy measure in dollars !

! Explicit Costs versus Implicit Costs! ! Explicit— Costs measured in dollars and typically involves exchange in money! !

! EXPLICIT COSE EXAMPLE— Free sandwich…..the university/ someone pays for the ! ! ! ! ! ! sandwich that is free to you in some way.!

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Implicit— Costs do NOT involve money! ! difficult to measure but still important !

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IMPLICIT COST EXAMPLE— !

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Fewer courses offered to save money! Less teachers hired/ less hours!

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Government faces opportunity costs as well…..! ! ! New roads……wont be able to put as much money towards food stamps ! ! ! More construction……Increase in taxes!

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Public Policy— The collection of laws regularity measures and actions centering around a ! ! ! particular topic that originates with some body of government!

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Most deal with life and death! ! EXAMPLE: Repairing highways vs Medicine Research!

Governments aren't always the best way to solve our problems! ! ! ! Can actually make things worse! ! If people can do it themselves but the government does it instead, they may be wasting ! ! resources!

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1.3 Key Principles of Economics: People Respond to Incentives ! Describe how incentive can affect behavior!

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Incentives— Inducements to act in certain ways! ! ! ! Can encourage or discourage particular behaviors! ! Can appear in the forms of costs.!

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All incentives work by changing the trade-offs individual face! ! ! ! Makes some options appear more attractive and other less so…! ! People may be convinced to act in ways that they ordinarily wouldn’t!

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EXAMPLES: Government uses both benefits and costs to promote driving more fuel efficient automobiles. Thus you will qualify for a tax credit if you purchase a hybrid car.!

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It encourages communities to build tornado shelters by helping to pay for !! construction. !

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Government NUDGES you to lead a healthier lifestyle by taxing cigarette purchases.!

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1.4 A Brief Introduction to Collective Action Problems ! Define and explain the nature of collective actions problems!

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Collective Action Problem— When naturally occurring incentives encourage sufficient numbers ! ! ! ! ! of people to act in a way that makes everybody worse off.! ! ! ! Individual trade offs are different than social trade offs! ! ! ! The problem is that no individual has any incentive to act in the best interests of the ! ! group.! ! ! Private incentive are not properly aligned with collective or social goals!

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Individuals may be powerless to solve a problem through individual action.!

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Government action may be needed to alter incentives so that individuals make choices in the best interest of society!

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Government often has the ability to guide behaviors in ways that make the world better off!

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However not all problems are collective action problems. !

EXAMPLES: A huge crowd packs a stadium to see Adele preform! ! ! When the performance begins, everyone is sitting! ! ! A single fan in the front row stands! ! ! Soon/ progressively the whole audience stands!

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1.5 How Economics Analyze Economic Issues! Understanding the difference between positive and normative economics!

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Positive Economics— A description of a current state, it can be proved or disproved….”the way things are” !

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Always testable!

Everybody may have an opinion but that doesn't make them right.! ! !

! The positive approach helps avoid making ! ! ! judgments about what is “fair”! ! Because fairness if so subjective economics generally use the posit approach!

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Normative Economics— An option of what a state should be; It can neither be proved nor disproved!

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Opinions!

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EXAMPLES: The minimum wage has risen 2.1% per year…this is POSITIVE ECONOMICS!

! ! The minimum wage is not rising fast enough…this is NORMATIVE ECONOMICS ! ! ! ! The Benevolent Social Planner and the best use of scare resources! ! ! ! ! !

A hypothetical economic figure! ! She takes a birds eye view of our affairs! ! Considers everybody equally!

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Philosophically rejects any policy that makes someone richer at the greater expense of ! someone else!

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Is a positive economist, one that we will look to often when we evaluate the origins of ! and solutions to social problems. ! !

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! ! ! ! ! The Supply and Demand Model! ! Assumptions of the model ! !

! There are many buyers and sellers participating in the market such that competition among them limits the power of both buyers and sellers!

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The goods offered for sale are identical, thus sellers compete only on the basis of price! All buyer and al sellers have perfect information about the market!

The Law of Demand— The inverse relationship between the price of a good or derive and the quantity of that good or derive that consumer want to buy.!

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The Demand Curve— A curve that shows how many units of a good or service consumers are willing to buy at various prices!

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As price decreases any given buyer might purchase more.!

! The demand curve plots the quantity consumers want to buy at various prices. As the price of a good or service increases, the quantity demand decreases.!

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1A.2 Supply !

The Law of Supply— The positive relationship between the price of a good or service and the quantity of that food or service that sellers are willing to offer for sale.!

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When the price of a good rises, there is an increase in quantity supplied, and when the ! price of a good falls, there is a decrease in quantity supplied !

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Price goes up supply goes up. ! Price goes down, supply goes down!

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Supply Curve— A curve that incited how many units of a good or service sellers are willing to ! ! ! offer for sale at various prices.!

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Stems from the facts that some units of a food are less costly to produce than others.!

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Occurs because some producers are more efficient than others.! ! Can also occur because as production expands the cost of production increase ! sure to limited space or physical constraints.!

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! ! 1A.3 Equilibrium! Finding an equilibrium price and quantity !

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Market Equilibrium— A condition in a market where there is no upward or downward pressure on price, and where quantity demand earls quantity supplied.!

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Shortage— A condition in which the quantity of a good or serve demand at the existing price is greater than the quantity supplies!

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Surplus— A condition in which the quantity of a good or service supplies at the existing price is greater than the quantity demand.!

! ! ! 1A.4 Changes in Supply and Demand ! ! If anything extraneous to the graph changes demand and or supply the curve will shift. This is a change in demand.!

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Increase in Demand— A condition in which buyers increase the number of units of a good or service they are willing to purchase at each price.!

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EX: Peanut butter become more desired…..price stays constant…..consumer now want more PB than before. This is an incase in demand and effects the whole line.! ! One point to another….Quantity Demand! Shifting the Line……Demand Changes!

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An increase in demand cause both the equilibrium price and the equilibrium quantity to increase.!

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Increase in Supply— A condition in which sellers increase the number of units of a good or service they are willing to produce at each price.!

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Sellers are only concerned with two things:! ! !

The price their product will fetch! How much it costs to produce their product!

! 1A.5 Factors that Shift Supply and Demand ! ! ! Factors that Shift Demand! ! Prices of other goods….! ! ! !

! ! ! EX: Toothbrush an Toothpaste! ! Substitutes— Goods that can serve in place of one another! ! ! Income…..! ! ! Normal Goods— A good than consumers buy more of as their incomes rise! ! Inferior Goods— A good that consumers buy less of as their incomes rise! ! ! ! ! Factors that Shift Supply! ! Price of Inputs— Resources that are used in the production of a good or service!

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Technology— The efficiency with which firms convert inputs into outputs!

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EX: New farming technology that work without human control….they drive themselves.!

Price of Substitutes in Production— Different goods that can be produced with the same inputs.!

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EX: Hire lots of worker and not much machinery….higher wages asked by workers, so ! you switch to machines because it is cheaper than workers now.!

! ! 1A.6 The Price of Elasticity of Supply and Demand! ! ! Price elasticity of demand— The sensitivity of consumers buying behaviors to changes in prices, !

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Measured as the percentage changes in the quantity of a !

! good demand by consumer for each 1% change in price.! Price elasticity of supply— The sensitivity of the quantity supplies to changes in price. !

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Measured as the percentage change in the quantity of a good supplied by producers for ! each 1% change in price. !

! ! ! The relationship between slope and Elasticity! ! Elasticity is not the slower of the curve but it is related ! ! ! Specifically at the liven price level elasticity is greater the flatter the curve! ! !

Elastic— The percentage change in quantity is larger than the percentage change in price!

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Inelastic— The percentage change in quantity is smaller than the percentage change in price!

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Unitary Elastic— The percentage change in quantity is equal to the percentage change in price!

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Extreme Elasticity!

! Perfectly Inelastic— When price changes have no effect on the quantity demand ! ! Perfectly Elastic— When any price increase eliminates quantity demand ! ! ! ! ! Relationship between Slope and Elasticity! ! Elasticity is not the slope of the curve, but it is related!

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Specifically, at a given price level Elasticity is greater the flatter the curve!

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! On a linear ( a straight line) curve Elasticity is greater at a higher price!

! ! As the price of coffee goes up, the Quantity of cups will go down ! ! !

Higher prices means greater Elasticity!

The Elasticity of Slope!

! Supply too can be price elastic or price inelastic\! !

Supply Elasticity is calculated just like demand elasticity! ! ! ! It is the percentage change in quantity supplied divided by the percentage change in ! ! price!

! For a demand curve, the line is elastic all the way until the line is completely vertical.! ! One that changes is the price…..the one that responds is the quantity! ! Positive slope = supply! Negative slope = demand!

! ! ! ! Implications of Elasticity ! !

Elasticities of demand and supply have important implications for the way different markets functions!

! Supply and demand can be used to analyze the impact of market forces! ! ! If demand is inelastic, reducing supply will only drive up prices ! ! ! However if demand is elastic, reducing supply will decrease demand ! ! ! EX: If the demand for drugs is highly elastic, drug interdiction ! efforts will be highly successful!

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But if the demand for drugs is highly inelastic, reducing the supply of drugs will not cause much of a reduction in drug use, rather it will drive up prices.! ! P2 = Before drug crackdown! P1 = After drug crackdown!

! ! Determinants of Elasticity! !

Number of and Closeness of Substitutes— The more substitutes there are a for a good, the less likely you are to pay higher prices for it and the more likely you will choose a substitute.!

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Time— The longer you have to purchase a good the more likely you will wait longer to purchase that good.!

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Percent of Budget— The more of your budget a good consumes, the more likely you will settle for something else instead !

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Chapter 2: Cost Benefits Analysis and the value of life!

2.1 Cost Benefit Analysis!

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Cost Benefit Analysis — A method decision makers use to evaluate choices amountg competing alternatives! own gain against ! ! Governments often apply costs benefit analysis to evaluate the cost effectiveness of projects or regulations they are considering!

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Identify the relevant stakeholders! Measure the benefits and costs faced by each of those stakeholders! Net costs and benefits to determine an overall impact!

! ! Problems in Implementing Cost Benefit Analysis! ! ! Cost of regulation might be difficult to measure! ! ! ! Difficulty in measuring the benefits! !

EX: $8 million benefits……5 million cost to make….3 millions net benefit!

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! 12 million benefits……10 million cost to make….2 millions in profits/ !

! *****OPTION ONE IS LESS, BUT HAS A HIGHER NET PROFIT*****! ! ! Marginal Costs— The additional costs you expect to incur if you undertake an activity ! ! Marginal Benefit— The additional benefit you expect to receive if you undertake an activity! ! Marginal Analysis— Arriving at a decision by comparing marginal costs and marginal benefits! ! ! ! ! !

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It is important to consider only magical costs and benefits when conducting a cost ! benefit analysis! ! Ensure ALL of the costs and benefits, both explicit and implicit are considered!

How do you measure the value of your time………Opportunity costs!

2.2 Applying Cost Benefit Analysis to Life!

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Economists consider benefits as benefits, whether they're measure in dollars or something else like human lives!

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Despite claims that life is priceless, people regularly make potential life changing cost benefit decisions!

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Every time we do something “risky’ were implicitly making a cost benefit benefit ! ! calculation! ! ! The fact is that we expose ourselves and other to risk and we do it for our own benefit !

2.3 Using Cost Benefit Analysis to Determine an Appropriate Level of Saftey!

! Cost Justified Precaution— A safety measurer whose benefits outweighs its costs!

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In a world of scarcity, we can’t save everybody from everything, so we have to make ! hard choices!

! ! Mistake in Estimating Risk! ! Failure apply probably to an uncertain event when applying cost benefit analysis! ! ! Error in eliminating probabilities! ! ! ! Estimating the Value of Life!

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Cost benefit calculations can go awry if the company uses an inappropriate value for the value of a life!

! If the value of life is undervalued, then a company might put less money into making it safe! ! ! ! ! ! ! ! ! !

2.5 Approaches to Valuing Life!

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The lost income approach— Estimating the value of an injured or deceased person’s life by adding up that persons lost future earnings.!

! ! Estimating what they would have earned over the remained of his or her life! ! ! The Compensation Differential Approach! !

Compensating Differential— The extra pay people earn in exchange for undertaking risky or otherwise undesirable work!

! Apply The Compensation Differential Approach! ! Begin with a current probability of death for a given behavior esppecially employment! ! If additional risk is incurred at some point it will be monetarily compensated! ! ! Calculating the Value of Life! ! Value of Life = Compensating Differential / Increased Chance of Death! ! EX: 500 / .0003 - .0002! ! ! Using Compensation Differentials ! ! Makes sense when designing laws and regulations! ! ! Decided how much care should be taken for specific behaviors! ! ! 3.1 What is Game Theory ! !

Game Theory— A method of analyzing the strategic interactions that occurs between number of people, firms organizations and even counties!

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Strategic Interactions— Anticipating the decisions others will make in response to your decisions!

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Mutual interdependence— The characteristics of games whereby the outcome of the game depends not only of what you do but on what the other player do in response !

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Assumptions of Game Theory !

! Economic Reality…..Players will be! ! ! ! !
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