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Ten primciples of economicsEconomy(oikonomos): - “one who manages a household”.unit - Households and economies have much in common. - In escens economics studies how we manage scarce resources Households face many decisions: - Allocate scarce resources o Ability, efort, and desire Resources are scar...

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Ten primciples of economics Economy(oikonomos): -

“one who manages a household”.unit Households and economies have much in common. In escens economics studies how we manage scarce resources

Households face many decisions: -

Allocate scarce resources o Ability, effort, and desire

Resources are scarce Scarcity: -

The limited

Chapter 3 Definition of Macro and Micro economics. Chapter 4: market forces and supply and Demand. -

The forces that make market economies work Refer to the behavior of people as they interact with one another in competitive markets

Market: a group of buyers and sellers of a particular good or service.  

Buyer as a group: Determine the demand for the product. Seller as a group: Determine the supply of the product.

Competitive market 

Market in which there are many buyers and many sellers



Each has a negligible impact on market price



Price and quantity are determined by all buyers and sellers o

As they interact in the marketplace. Monopoly

It faces Decreaseng ATC Optimal quantity MC= MR (the solve for Q) Short Run: MR=MC

P= AR Maximum Profit: MR=MC (gives you the quantity) Profit= p-ACT (at the quantity) * The quantity



o

The only seller in the market

o

Sets the price

Other markets o

Between perfect competition and monopoly

Demand: •

Quantity demanded Amount of a good that buyers are willing and able to purchase

•

Law of demand Other things equal When the price of a good rises, the quantity demanded of the good falls When the price falls, the quantity demanded rises

•

Demand Relationship between the price of a good and quantity demanded Demand schedule: a table Demand curve: a graph

•

•

Price on the vertical axis

•

Quantity on the horizontal axis

Individual demand An individual’s demand for a product

•

Variables that can shift the demand curve Income •

Normal good •

Other things constant

• •

An increase in income leads to an increase in demand

Inferior good: if you have more money you’ll ignore this. •

Other things constant

•

An increase in income leads to a decrease in demand

Prices of related goods •

•

Substitutes, two goods •

An increase in the price of one

•

Leads to an increase in the demand for the other

Complements, two goods •

An increase in the price of one

•

Leads to a decrease in the demand for the other

Tastes •

Change in tastes: changes the demand

Expectations about future •

Expect an increase in income •

Increase in current demand

Number of buyers: increases •

Market demand increases

Supply •

Quantity supplied Amount of a good Sellers are willing and able to sell

•

Law of supply Other things equal

When the price of a good rises, the quantity supplied of the good also rises When the price falls, the quantity supplied falls as well •

Supply Relationship between the price of a good and the quantity supplied Supply schedule: a table Supply curve: a graph

•

•

Price on the vertical axis

•

Quantity on the horizontal axis

Individual supply(graph done on paperA seller’s individual supply

•

Shifts in supply Increase in supply •

Any change that increases the quantity supplied at every price

•

Supply curve shifts right

Decrease in supply (graph in paper)

•

•

Any change that decreases the quantity supplied at every price

•

Supply curve shifts left

Variables that can shift the supply curve Input prices •

Supply is negatively related to prices of inputs

•

Higher input prices: decrease in supply

Technology •

Advance in technology: increase in supply. Ex. self check out in stores.

Expectations about future •

Affect current supply

•

Expected higher prices •

Decrease in current supply (at the moment)

Number of sellers •

Market supply increases

Supply and Demand Together: –

Various forces are in balance

–

A situation in which market price has reached the level where –

Quantity supplied = quantity demanded

–

Supply and demand curves intersect

–

Equilibrium price

–

–

Balances quantity supplied and quantity demanded

–

Market-clearing price

Equilibrium quantity –

–

–

Quantity supplied and quantity demanded at the equilibrium price

Surplus –

Quantity supplied > quantity demanded

–

Excess supply

–

Downward pressure on price •

Movements along the demand and supply curves

•

Increase in quantity demanded

•

Decrease in quantity supplied

Shortage –

Quantity demanded > quantity supplied

–

Excess demand

–

Upward pressure on price •

Movements along the demand and supply curves

•

Decrease in quantity demanded

•

Increase in quantity supplied

Chapter 5 Elasticity and its aplications 09/11/2020 •

Elasticity Measure of the responsiveness of quantity demanded or quantity supplied To a change in one of its determinants

•

Price elasticity of demand How much the quantity demanded of a good responds to a change in the price of that good

•

Price elasticity of demand Percentage change in quantity demanded divided by the percentage change in price

•

Elastic demand Quantity demanded responds substantially to changes in price (something that is not a necessity- like k=luxury good, jewlry, designing clothes )

•

Inelastic demand Quantity demanded responds only slightly to changes in price (like a necessity)

•

Determinants of price elasticity of demand Availability of close substitutes •

Goods with close substitutes: more elastic demand

Necessities vs. luxuries

•

•

Necessities: inelastic demand

•

Luxuries: elastic demand

Determinants of price elasticity of demand Definition of the market •

Narrowly defined markets: more elastic demand

Time horizon • •

Demand is more elastic over longer time horizons

Computing the price elasticity of demand Percentage change in quantity demanded divided by percentage change in price Use absolute value (drop the minus sign)

•

Midpoint method Two points: (Q1, P1) and (Q2, P2)

•

Variety of demand curves Demand is elastic •

Price elasticity of demand > 1

Demand is inelastic •

Price elasticity of demand < 1

Demand has unit elasticity •

Price elasticity of demand = 1 •

•

If one changes by 10% the other one will change by 10%

Variety of demand curves Demand is perfectly inelastic •

Price elasticity of demand = 0

•

Demand curve is vertical

Demand is perfectly elastic

•

•

Price elasticity of demand = infinity

•

Demand curve is horizontal

The flatter the demand curve The greater the price elasticity of demand

•

Total revenue, TR Amount paid by buyers and received by sellers of a good Price of the good times the quantity sold (P ˣ Q)

•

For a price increase If demand is inelastic, TR increases If demand is elastic, TR decreases

•

When demand is inelastic (elasticity < 1)

P and TR move in the same direction • •

If P ↑, TR also ↑

When demand is elastic (elasticity > 1) P and TR move in opposite directions •

•

If P ↑, TR ↓

If demand is unit elastic (elasticity = 1) Total revenue remains constant when the price changes

•

Linear demand curve Constant slope •

Rise over run

Different price elasticities •

Points with low price and high quantity •

•

Inelastic demand

Points with high price and low quantity •

Elastic demand

Income elasticity of demand How much the quantity demanded of a good responds to a change in consumers’ income Percentage change in quantity demanded •

Divided by the percentage change in income

• •

Positive income elasticity Necessities

Normal goods

•

Smaller income elasticities

Luxuries •

Large income elasticities

•

Negative income elasticities

Inferior goods

• Cross-price elasticity of demand

How much the quantity demanded of one good responds to a change in the price of another good Percentage change in quantity demanded of the first good • •

Divided by the percentage change in price of the second good

Substitutes Goods typically used in place of one another Positive cross-price elasticity

•

Complements Goods that are typically used together Negative cross-price elasticity

ELASTICITY OF SUPPLY IS EXACTLY THE SAME AS ELASTIC of DEMAND( SAME FORMULAS AND EVERYTHING )

Chapter 6

Taxes: •

Government use taxes To raise revenue for public projects •

•

Roads, schools, and national defense

Tax incidence Manner in which the burden of a tax is shared among participants in a market

•

How taxes on sellers affect market outcomes Immediate impact on sellers: shift in supply Supply curve shifts left Higher equilibrium price Lower equilibrium quantity The tax reduces the size of the market

Chapter 7 Consumer surpluss: •

Welfare economics The study of how the allocation of resources affects economic well-being

•

•

Benefits that buyers and sellers receive from engaging in market transactions

•

How society can make these benefits as large as possible

•

In any market, the equilibrium of supply and demand maximizes the total benefits received by all buyers and sellers combined

Willingness to pay Maximum amount that a buyer will pay for a good How much that buyer values the good

•

Consumer surplus Amount a buyer is willing to pay for a good minus amount the buyer actually pays for it Willingness to pay minus price paid Example

•

•

Willing to pay 1300

•

Price is 800

•

Consumer surpluss: 1300-800= 500s

Consumer surplus Measures the benefit buyers receive from participating in a market Closely related to the demand curve

•

Demand schedule Derived from the willingness to pay of the possible buyers

•

At any quantity, the price given by the demand curve Shows the willingness to pay of the marginal buyer •

•

The buyer who would leave the market first if the price were any higher

Consumer surplus in a market Area below the demand curve and above the price A lower price raises consumer surplus

Existing buyers: increase in consumer surplus Buyers who were already buying the good at the higher price are better off because they now pay less New buyers enter the market: increase in consumer surplus Willing to buy the good at the lower price

Producer Surpluss

•

Cost Value of everything a seller must give up to produce a good Measure of willingness to sell

•

Producer surplus Amount a seller is paid for a good minus the seller’s cost of providing it Price received minus willingness to sell

•

Producer surplus Closely related to the supply curve

•

Supply schedule Derived from the costs of the suppliers

•

At any quantity Price given by the supply curve shows the cost of the marginal seller •

•

Seller who would leave the market first if the price were any lower

A higher price raises producer surplus Existing sellers: increase in producer surplus •

Sellers who were already selling the good at the lower price are better off because they now get more for what they sell

New sellers enter the market: increase in producer surplus •

Market’s efficiency

Willing to produce the good at the higher price

•

The benevolent social planner All-knowing, all-powerful, well-intentioned dictator Wants to maximize the economic well-being of everyone in society

•

Economic well-being of a society Total surplus Sum of consumer and producer surplus

•

Total surplus = Consumer surplus + Producer surplus •

Consumer surplus = Value to buyers – Amount paid by buyers

•

Producer surplus = Amount received by sellers – Cost to sellers

•

Amount paid by buyers = Amount received by sellers

•

Total surplus = Value to buyers – Cost to sellers

•

Efficiency

•

•

Property of a resource allocation

•

Maximizing the total surplus received by all members of society

Equality •

Property of distributing economic prosperity uniformly among the members of society

CHAPTER 8 •

• •

Tax burden Distributed between producers and consumers Determined by elasticities of supply and demand Market for the good Smaller Economic welfare Buyers: consumer surplus Sellers: producer surplus Government: total tax revenue • Tax times quantity sold • Public benefit from the tax

CONSUMER SURPLUSS IS the area above the price and below demand curve Producer SURPLUSS is the area below the price and above supply curve •

Welfare without a tax Consumer surplus, areas A, B, and C Producer surplus, areas D, E, and F Total tax revenue = 0

•

Welfare with tax Smallser consumer surplus, area A Smaller producer surplus, area F Total tax revenue, areas B and D Smaller overall welfare

•

Losses of surplus to buyers and sellers, from a tax Exceed the revenue raised by the government

•

Deadweight loss Fall in total surplus that results from a market distortion, such as a tax

•

Taxes distort incentives Markets allocate resources inefficiently

•

Deadweight losses and gains from trade Taxes cause deadweight losses •

Prevent buyers and sellers from realizing some of the gains from trade

The gains from trade •

Difference between buyers’ value and sellers’ cost are less than the tax

•

Once the tax is imposed •

Trades are not made

•

Deadweight loss

CHAPTER 3 A Parable for the Modern Economy •

Only two goods Meat Potatoes

•

Only two people A cattle rancher named Rose A potato farmer named Frank Both would like to eat both meat and potatoes

•

If Rose produces only meat and Frank produces only potatoes Both gain from trade

•

If both Rose and Frank produce both meat and potatoes Both gain from specialization and trade

•

Production possibilities frontier Various mixes of output that an economy can produce

•

Specialization and trade Farmer Frank specializes in growing potatoes •

More time growing potatoes

•

Less time raising cattle

Rancher Rose specializes in raising cattle •

More time raising cattle

•

Less time growing potatoes

Trade: 5 oz of meat for 15 oz of potatoes Comparative Advantage •

Absolute advantage The ability to produce a good using fewer inputs than another producer In producing meat: Rose •

Rose needs 20 min. to produce 1 oz. of meat

•

Frank needs 60 minutes

In producing potatoes: Rose

•

•

Rose needs 10 min. to produce 1 oz. of potatoes

•

Frank needs 15 minutes

Opportunity cost Whatever must be given up to obtain some item Measures the trade-off between the two goods that each producer faces

•

Comparative advantage The ability to produce a good at a lower opportunity cost than another producer Reflects the relative opportunity cost

•

Principle of comparative advantage •

Each good should be produced by the individual that has the smaller opportunity cost of producing that good

Specialize according to comparative advantage •

Trade can benefit everyone in society Allows people to specialize

•

The price of trade Must lie between the two opportunity costs

•

Principle of comparative advantage explains: Interdependence Gains from trade Applications of Comparative Advantage

Should Tom Brady Mow His Own Lawn? •

Brady, in 2 hours Mow his lawn, or Film a TV commercial, earn $20,000

•

Forest Gump, in 4 hours Mow Brady’s lawn Work at McDonald’s, earn $40

Chapter 09

The Determinants of Trade

•

The equilibrium without trade Only domestic buyers and sellers Equilibrium price and quantity •

Determined on the domestic market

Total benefits

•

•

Consumer surplus

•

Producer surplus

Allow for international trade? Price and quantity sold in the domestic market? Who will gain from free trade; who will lose, and will the gains exceed the losses? Should a tariff be part of the new trade policy?

•

World price Price of a good that prevails in the world market for that good

•

Domestic price Opportunity cost of the good on the domestic market

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Compare domestic price with world price Determine who has comparative advantage •

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Exporting country Domestic equilibrium price before trade is below the world price Once trade is allowed

•

•

Domestic price rises to equal the world price