Unit 1 (lecture notes) PDF

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Lecture notes throughout the course of the whole semester. ECON1 Ghuloum...

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Micro Economics

Unit 1 (Chapters 1,2,3,4) Chapter 1 Big Idea #1: Incentives Matter! Example from the book: there was a boat and everyone kept dying. Incentives didn’t matter to them because they were getting paid for every passenger boarder rather than every passenger that came back alive.! "

Rules —> incentives —> choices —> outcomes!

Incentive: reward or penalty that motivates your behavior ! - Benefit or cost that motivates behavior ! Example: Professor kisses his cat on the mouth but she eats bugs which makes him sad.! Goal: I want Lucy to have a bug free diet! - Reward her when she doesn’t eat bugs - incentives align!

- Penalize her when she does - incentives align! - Say “good girl Lucy” every time she eats a bug - incentives don’t align! Example: Camel Trader! How will we determine who has the slowest camel in all of the desert? ! Whoever gets there last has the slowest camel…! Solution: You guys will switch camels and ride the other guys camel! What happened? Now the incentive wasn’t to go as slow as possible, the incentive was to go as fast as possible.! There are certain economic “rules of the game” that affect our incentives to be economically productive citizens Example: go to school and get educated, invest, research and develop new technologies, work, firms to hire, economy to grow! Economic Rules: How much unemployment benefits should people get? Minimum wages, tariffs on foreign goods!

- Cobra effect ! 1

Micro Economics Incentives affect choices.! Big Idea #2: We live in a world of scarcity! Scarcity: unlimited wants and limited resources to satisfy those wants… which means. We have to make choices about how to best use our scarce resources…! Economics: the study of the use of scarce resources which have alternative uses! Cost: the value of what you give up when you take an action! Opportunity cost: we gave up the opportunity to do something else! Benefit: what you gain! Profit maximizing rule: take action in which the marginal benefit is greater than the marginal cost. Actions that follow this rile are profitable… gain more than what you give up! Marginal: weighing additional benefits against additional costs vs total thinking “all or nothing”! An economic efficient action is unique to the individual because benefits and costs are subjective. Big Idea #3: The Invisible Hand - Adam Smith! Invisible hand: a metaphor to describe how the individual pursuit of self interest can lead to socially desirable outcomes! “It is not from the benevolence of the butcher, the baker, or the brewer that we expect our dinner but through their own self interest”! If people generally are self interested and trying to maximize their personal profit how can we ensure that their actions are going to be beneficial for society

- for the invisible hand to work, there needs to be competition! - Roles of prices in an economy induce us to take socially useful actions ! - Prices provide signals and incentives! - Prices go up! - Consumer side - prices go up, people cut back! - Producer side - start expanding at the higher price! 2

Micro Economics Production Possibilities Frontier: Shows the maximum combinations of 2 goods that a country can produce given its fixed resources and the productivity those resource!

What changes PPFs?!

- human capital! - Technology! - Physical capital! - BETTER RULES! Chapter 2

- Benefits of trade! - Moves goods to those who value them more! - Trade promotes specialization which increases productivity! - Trades takes advantage of cost different between trading partners! People trade because of unequal value! Absolute advantage: the ability to produce more output with the same input compared to someone else! Output: beautiful music! Input: time and energy !

- Beethoven could compose the more beautiful music in a short period of time with not a lot of energy! Comparative advantage: ability to produce a good or service at a lower opportunity cost than your trading partner!

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Micro Economics Chapter 3 Part 1! Law of Demand: As the price of the good rises, the quantity demanded of that good will fall !

- centers paribus (holding all else constant)! - Inverse relationship: when price goes up, quantity demanded go down ! Graph is called demand curve! Each point on the curve is quantity demanded!

- a change in price causes a movement along a demand curve! Chapter 3 Part 2!

- increase in demand happens when the demand curve shifts to the right! - Decrease in demand happens when the demand curve shifts to the left! - Anything that makes people demand more or less BESIDES the price is a shift! Shift vs movement ! Movement: when dots move on the line! Shift: when lines move! What shifts the demands?!

- Tastes - Preferences! - Price related goods such as substitutes and complements

- Complements: (milk and cereal, hot dogs and hot dug buns, toothpaste and toothbrush, printers and ink)!

- Substitutes: (coke and pepsi, taxi and uber, iPhone and samsung, Mac and PC)!

- The income you attain 4

Micro Economics

- Normal goods (income up, demand up) - Rise in income will give you more fruits and vegetables ! - Rise in income will give you a nice house, take more vacations! - Organic, lactose free, vitamin, enhanced, gluten free, ultra pasteurized, grass fed, milk! - Inferior goods (income increases, demand goes down)

- Crappy toilet paper (when income increases you don’t have to buy that anymore)!

- Powdered milk! - Expectations - expect future price rise, demand now rises. Buy low sell high.!

- # of buyers/population - Population increases, demand increases! - Less buyers, less demand! "

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Complements! Price Good 1 rises, demand for good 2 falls! "

Substitutes!

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Price good 1 up! Demand good 2 up!

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Micro Economics

Quantity demand falls when movement occurs! Demand falls/rises when shifts occur!

- Substitutes move up in the same directions! - Complements move in different directions! "

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Consumer Surplus

- gains from trade to buyers! - Ex: went to Starbucks and I bought a latte for $5! - You were willing to pay more than 5 if you bought it! - Willing to pay up to 7! Consumer surplus is $2! Consumer surplus: What you are willing to pay - price ! Area of the triangle, below the demand curve and above the price ! =$7-$5! =$2!

Law of Supply: as the price of a good rises, the quantity supplied of that good will also rise, ceterus paribus!

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Micro Economics

Producer surplus 700,000,000x 70/2= 24.5 billion!

- producer surplus is always the area of the triangle below the price and above the supply curve! Shift in supply curve is always caused by something BESIDES the price! What causes supply shift? ! 1. Taxes and subsides (subside Is when the government gives you money for every product you sell)! 2. Costs of inputs (what goes inside cigs; tobacco, filters, paper, labor)! 3. Technology and natural disasters! 4. Expectations! 5. Number of sellers! 6. Price of alternative product! Chapter 4! Equilibrium: stable position, the price at which quantity demanded = quantity supplied (stable price)!

- prices form in markets! - Markets: buyers and seller interact to exchange goods and services! Assumptions that go into supply and demand model:!

- infinite number of buyers and sellers! - Everyone is selling the same thing… identical product! - Perfect information! Market for shares of Apple Stock! Qd=1000-5P! Qs= 5P! P. 7

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Outcome!

Micro Economics 80

600

400

No Shortage= 200!

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500

500

Yes equilibrium !

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400

600

No Surplus= 200!

Shortage: occurs when quantity demanded exceeds quantity supplied! Surplus: occurs when quantity supplied exceeds quantity demanded!

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