Econ Textbook Outline - Study guide containing materials in detail from the course throughout the semester. PDF

Preview

Summary

Study guide containing materials in detail from the course throughout the semester....

Description

Microeconomics Textbook Outline Economic Agent: an individual or a group that makes choices. Scarce Resources: Things that people want, where the quantity of what people want exceeds the quantity of what is available. Scarcity occurs in a world where people have unlimited wants in a world of limited resources. Economics: is the study of how agents choose to allocate scarce resources and how these choices affect society. Positive Economics: -

Describing what has happened or predicting what will happen.

Normative Economics: -

Expresses values of what people ought to do.

Microeconomics: the study of how individuals, households, firms, and governments make choices, and how those choices effer prices, the allocation of resources, and the well-being of other agents. Macroeconomics: the study of the economy as a whole, the economy wide phenomena, like growth rate of a country's economic output. Three key Principles of Economics: 1. Optimization: Economists believe that a person's goal of optimization is picking the best feasible option. 2. Equilibrium: A situation in which no agent would benefit personally by changing his or her own behavior given the choices of others. 3. Empiricism: evidence based analysis, aka analysis that uses data. Trade offs: arise when some benefits must be given up in order to gain others. Budget constraint: the set of things that a person can do or but without breaking her budget. Opportunity Cost: the best alternative use of a resource. Evaluation of trade offs leads to focusing on the best alternative. Cost Benefit Analysis: is the calculation that identifies the best option by summing benefits and subtracting costs, with both benefits and cost denominated in a common unit of measurement like dollars. Net Benefit: sum of the benefits of choosing an alternative minus the sum of the costs of choosing that alternative.

CHAPTER 2: Economic Methods and Economic Questions Empiricism: Using data to analyze the world - Scientific Method is the ongoing process that economics, other social scientists use to develop models of the world and evaluate those models by testing them with data. Model: simplified description of reality. Sometimes economics refer to a model as a theory which are used interchangeably. Hypothesis: a prediction typically generated with a model that can be tested with data. Causation vs. Correlation: - Causation occurs when one thing directly affects another. - Ex. turning on the stove causes water to boil in the pot. - A variable is something that is changing one factor or characteristic in this example would be the temperature of the water in the tea kettle. - Correlation means that two varialestend to change at the same time. As one variable changes, the other changes as well. - Three variables which are derived from Correlation - Positive correlation units that the two variables tend to move in the same direction - Ex. people who have relatively high income are more likely to be married than people with low income. Therefore, income and marital status is positively correlated. - Negative Correlation: implies that two variables tend to move in opposite directions - Ex. people with high level of education are less likely to not be employed. When correlation DOES NOT imply causality: - Omitted Variables: when something has been left out of the study, if included, would explain why two variables are correlated. - Reverse Causality: plagues our efforts to distinguish correlation It offices when we mix up the direction of cause and effect. Ex. wealthy people are usually healthier, believing they can afford better health care. Independent Variable: The variable the experimenter has control of changing Dependent Variable: Variable potentially affected by the experimental treatment. Slope:Change in y / Change in x Chapter 3:Optimization-Doing the best you can Optimum: the best feasible choice which is the optimal choice. 1. Translate all your costs and benefits into a common unit like dollars per month. 2. Calculate total net benefit of each of the alternatives. 3. Pick the alternative with the highest net benefit. Marginal Analysis: is the cost-benefit calculation that stufi the difference between one feasible alternate and the next feasible alternative. - Compares the consequences, costs and benefits of doing something.

-

Marginal commuting cost column reports the difference between the two commuting costs in adjacent positions on the list**** - Marginal Cost: the extra cost generated by moving from one alternative to the next. - The Principle of Optimization at the Margin:states that the optimal feasible alternative has the property that moving to it makes you better off and moving away makes you worse off. - When the total cost is falling and the marginal cost is negative marginal analysis recommends to keep going towards an alternative. When total cost bottoms out, marginal cost will soon become positive therefore telling the investor they should no longer keep searching for an alternative. - This is used to solve optimization problems. Chapter 4: Demand, Supply, and Equilibrium Markets: a group of economics agents who are trading a good or service plus the rules and arrangements for trading. - Price acts as a selection device that encourages trade between sellers who can purchase goods at low costs and buyers who can buy goods at a high price. - The market price is when all sellers and buyers face the same price which is referred to as the market price. - A Perfectly Competitive Market is when all sellers sell an identical good or service, and any individual buyer or any individual seller and any individual seller isn't powerful enough to affect the market price. - This implies that buyers and sellers are all Price Takers: where they accept the market price and do not bargain for a better price. At ANY given price, the amount of the good or service that buyers are willing to purchase is called the quantity demanded. Ex. when gas prices are higher, people may become less likely to drive their cars. When this occurs, a demand schedule happens, showing quantity demanded at different prices. The term “holding all else equal” implies that everything other than the gas price is fixed or held constant. Demand Curves: plots the relationship between prices and quantity demanded plotting the points of the demand schedule. - Two variables are negatively related if the variables move in opposite directions. - When one goes up, the other goes down. Ex. Price of gas and consumer purchasing. - The Law of Demand states that the quantity demanded rises when price falls. - Willingness to pay is the highest price a buyer is willing to pay for an extra unit of a good. - As you consume more of a good, your diminishing marginal benefit causes your willingness to pay for an additional unit to decline.

Aggregation: is the process of adding up individual behaviors is referred to as aggregation. This is how economists calculate things for world wide amounts by adding u each individual demand curve. Market Demand Curve:the sum of the individual demand curves of all potential buyers. It puts the relationship between the total quantity demanded and the market price. Shifting the demand curve: for this all else other than price and quantity must be held equal. The factors that shift curves are1. Tastes and Preferences 2. Income and Wealth a. A normal good, an increase in income shifts the demand curve to the right holding price fixed causing buyers to purchase more of the good. 3. Availability and prices of related goods. a. An inferior good, an increase in income shifts the demand curve left holding price equal causing buyers to purchase less of the good. b. Two goods are substitutes when a rise in price of leads to a right shift of the demand curve for the other. i. Ex. Public transportation and gas are substrates because a rise in price of public transportation lead people to use it less and drive their cars more. c. Two goods are complements when a fall in price of one leads to a rightward shift in demand (increase demand) for another. d. An inferior good, an increase in income shifts the demand curve left holding price equal causing buyers to purchase less of the good. 4. Number and scale of buyers 5. Buyers’ beliefs about the future The demand curve shifts when quantity demanded changes at a given price. If a goods own price change and its demand curve has shifted, the own price change produce a movement along the demand curve. If a goods own price changes and its demand curve has shifted, the own price changes produces a movement along the demand curve. Quantity Supplied: amount of a good or service that sellers are willing to sell at a given price. Supply Curves - A supply schedule is a table that reports the quantity supplied at different prices, holding all else equal. - The supply curve plots the quantity supplied at different prices. A supply curve plots the supply schedule. - When things are positively related, when one variable moves up, the other variable moves in the same direction.

The Law of supply states that in most cases, the quantity supplied rises when the price rises. Willingness to accept- the lowest price that a seller is willing to get paid to sell an extra unit of a good. This occurs at a particular quantity supplied, willingness to accept is the height of the supply curve and willingness to accept is he same as the marginal cost of production. Market Supply Curve- is the sum of individual supply curves of all the potential sellers. It plots the relationship between the total quantity supplied and the market price, holding all else equal. Shifting the Supply Curve: 1. Prices of inputs used to produce the good a. An input is a good or service used to produce another good or service. b. **if a goods own price changes, and the supply curve has shifted the own price change produces a movement along the supply curve*** 2. Technology used to produce the good 3. Number and scale of sellers 4. Sellers’ beliefs about the future Supply and Demand in an equilibrium - A competitive equilibrium is the crossing point between the supply curve and demand curve. - The competitive equilibrium price equals the quantity supplied and the quantity demanded. - The competitive equilibrium quantity is the quantity that corresponds to the competitive equilibrium price. -

When the market price is above the competitive equilibrium price, quantity supplied exceeds the quantity demanded creating excess supply. When the market price is below the competitive equilibrium price, the quantity demanded exceeds the quantity supplied creating excess demand....