To get something one usually has to give something up
Whatever must be given up to obtain some item.
Additional monetary expenditures next best forgone opportunity
Thinking on the margin
People are rational/logical
*More is preferred to less
* Firms want to maximize profits
* Individuals want to maximize utility or happiness
* Marginal changes are small incremental changes on the edge (margin) of what you are doing.
Marginal Cost (MC) vs. Marginal Benefit (MB)
* If MB>MC do it
People Respond to Incentives
Incentive=something that induces a person to act (what drives people)
* If one wants to change an outcome, alter the current incentive
Trade Can Make Everyone Better Off
*Allows specialization in what countries do best
*Greater variety of goods/services at lower cost.
allocates resources through the decentralized decisions of many households and firms as they interact in markets.
*The interaction of many buyers and sellers determines prices. (set by the market)
*Each price reflects the good's value to buyers and the cost of producing the good.
*Prices guide self-interested households and firms to make decisions that, in many cases, maximize society's economic well-being. (people that value the good the most consume it and it is produced by the lowest cost firms)
market left on its own fails to allocate resources efficiency
the impact of one person's actions on the well being of a bystander
a single economic actor (or small group) has a substantial influence on market prices, i.e. a monopoly
resources are spread evenly through society
society is getting maximum benefit from scarce resources
2 roles of an economist
2) Policy maker
Circular Flow Diagram
- Basic economy
- Dollars circulate back and forth between firms and households.
- Both "actors" interact in the market for goods and services, where the firms sell products to households and in the market for factors of production where households sell land, labor, and capital to the firms
the study of how households and firms make decisions and how they interact in markets
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
claims that attempt to describe the world as it is. A statement of what is, objective analysis.
claims that attempt to prescribe how the world should be. A statement of what ought to be, subjective analysis.
one with many buyers and sellers, each has a negligible effect on price
Perfectly Competitive Market
- All goods exactly the same
- Buyers & sellers so numerous that no one can affect market price - each is a "price taker"
Law of Demand
the claim that the quantity demanded of a good falls when the price of the good rises, other things equal
Law of Supply
the claim that the quantity supplied of a good rises when the price of the good rises, other things equal
# of Buyers
Increase in # of buyers increases quantity demanded at each price, shifts D curve to the right.
- Demand for a normal good is positively related to income.
-Increase in income causes increase in quantity demanded at each price, shifts D curve to the right.
- (Demand for an inferior good is negatively related to income. An increase in income shifts D curves for inferior goods to the left.)
Price of Related Goods
Two goods are complements if an increase in the price of one causes a fall in demand for the other
Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right.
Expectations affect consumers' buying decisions
A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right.
- Technology determines how much inputs are required to produce a unit of output.
- A cost-saving technological improvement has the same effect as a fall in input prices, shifts S curve to the right.
# of Sellers
An increase in the number of sellers increases the quantity supplied at each price,shifts S curve to the right
measure of the responsiveness of Qd or Qs to one of its determinants
Mid point Method
- Price elasticity is higher when close substitutes are available
- Price elasticity is higher for narrowly defined goods than broadly defined ones
- Price elasticity is higher for luxuries than for necessities
- Price elasticity is higher in the long run than the short run
- The more easily sellers can change the quantity they produce, the greater the price elasticity of supply
Revenue = P x Q
Total Revenue's Relationship to Elasticity
If demand is inelastic, then
price elast. of demand < 1
% change in Q < % change in P
The fall in revenue from lower Q is smaller than the increase in revenue from higher P, so revenue rises.
If demand is elastic, then
price elast. of demand > 1
% change in Q > % change in P
If price is increased: The fall in revenue from lower Q is greater than the increase in revenue from higher P, so revenue falls.