1/2 Flashcards
1st Principle of Economics
People face trade-offs (such as the choice between a clean environment or a higher income).
-No such thing as a free lunch
Efficiency and Equity
Efficiency Definition
The property of society gets the maximum benefits from its scarce resources.
Equity Definition
The property of distributing economic prosperity fairly among the members of society.
Second Principle of Economics
The cost of something is what you give up to get it.
Opportunity Cost: what you are giving up in exchange for what you want. (Going to college to get a better career in the future. But you are giving up time to have fun and earn money by having a job now.)
Third Principle of Economics
Rational people think at the margin.
Rational People: systemically and purposefully do their best to achieve their objectives.
Marginal Changes: small adjustments to a plan of action.
Fourth Principle of Economics
People respond to incentives.
-Prices induce people to buy or not buy certain goods.
-Wages encourage people to work.
-Fines encourage people to obey the law.
-Social norms make people behave in certain ways.
-Morals make people act in particular ways.
Fifth Principle of Economics
Trade can make everyone better off.
-Specialization of labor.
Property Rights: the ability of someone to own and control scarce resources.
Sixth Principle of Economics
Markets can be a good way to organize economic activity.
-Market economy: allocates resources through decentralized decisions of firms and households interacting in markets for goods and services.
Seventh Principle of Economics
Governments can sometimes improve market outcomes.
-Enforcing property rights. (Legal)
Market Failure Definition
A situation in which a market left on its own fault to allocate resources efficiently.
-Healthcare, climate change
Externality Definition
The impact of one person’s actions on the well-being of a bystander (education, smoking).
Eight Principles of Economics
A country’s standard of living depends on its ability to produce goods and services.
Productivity: the quantity of goods and services produced from each hour of a worker’s time.
-Depends on technologies
-Depends on productivity of individuals (health, education)
Ninth Principle of Economics
Prices rise when the government prints (too much) money.
Inflation: increases overall price level within an economy.
Deflation: decreases overall price level within an economy.
-Not all prices rise equally (like how groceries rise quicker than wages).
Tenth Principle of Economics
Society faces a short-run trade-off between inflation and unemployment.
-Inflation causes the reduction of employment in the short run.
Business Cycle Definition
Irregular and (largely) unpredictable fluctuations in economic activity measured by the production of goods and services or the number of people employed.
(Addition) Eleventh Principle of Economics
People can be less selfish, less patient, and dumber than economics suggest.
-Ultimatum game
-Time inconsistency/regret
-Risk aversion/loss aversion
(Boettke, 2024) Four More points
-The hard truth of economics: decisions require trade-offs.
-An appreciation for spontaneous order: how to design institutions.
-There is hope: economics can show us the way out of problems. Definition and measurement.
-Economics is an ally to compassion: recognizing the mutual benefits of cooperation and competition.
Microeconomics Definition
Focuses on individual decision markers (methodological individualism).
The Circular Flow Diagram
A visual model of the economy shows how dollars flow through markets among households and firms.
Inputs and outputs.
Production Possibility Frontier
Illustrations of combinations of output that the economy can produce given available technology and resources.
Positive Statements Meaning
Statements that describes the world as it is.
Normative Statements
Statements prescribing how the world should be.
Economic Debates Are Often From?
- Disagreement about the validity of alternative positive theories about how the world works.
- Differences in values/preferences and different normative views about what a policy should try to accomplish.
- Disagreement about the direction and magnitude of policy effects.
Supply and Demand
They are two concepts that economists use to characterize how markets operate.
Interaction between them determines the quantity of goods produced and the price at which they are sold.
Refers to the behavior of individuals (consumers and firms) in the markets.
Markets Definition
It is broadly defined as a group of buyers and sellers of a particular good or service.
-Buyers determine the demand for the product.
-Sellers determine the supply of the product.
Competitive Market Definition
A market with many buyers and many sellers such that each has a negligible effect on the market price. (Since there’s lots of people, one person does not have any influence on the price.)
Perfectly Competitive Market Definition
It is a hypothetical market structure that doesn’t exist in real life.
Goods are all the same (homogenous) and buyers and sellers are so numerous that no single buyer or seller has any influence over the market price.
Other Market Types
Monopoly: Only the seller determines the price.
Oligopoly: Few large sellers compete in the market.
Monospony: Only one buyer determines the price. (Farmers selling to a single buying market.)
Monopolistic Competition: Many sellers, differentiated goods. (Similar products but not completely the same.)
Demand Curve Definition
Relation between price of good and how much consumers will purchase.
Quantity Demanded Definition
The amount of a good consumers are willing and able to purchase at a given price. (It is a point in a relationship.)
-Willing to buy more when the price is low, willing to buy less when price is high.
Market Demand Definition
Sum of all individual demands for a particular good or service.
Law of Demand
Other things held constant, the quantity demanded of a good falls when the price of the good rises.
Diminishing Marginal Returns (D)
Additional (marginal) units of a good provide smaller increases in satisfaction.
-The more you do something the less you like it. (Value lessens.)
Income Changes in Demand
Normal Good: other things equal, an increase in income results in an increase in demand.
Inferior: other things equal, an increase in income results in a decrease in demand.
Substitute Goods Definition
Two goods which can be used in place of one another.
-An increase in the price of a substitute good results in an increase in the demand for the other.
-Consumers are substituting towards the less expensive good that fulfills the same desire.
Complement Goods Definition
Two goods which are used in combination one another.
-An increase in the price of complement good results in a decrease in the demand for the other.
-Consumer substitute away from the combined/composite desire that requires both goods.
Changes in Demand Variables
Price of the good itself: represents a movement along the demand curve.
Income, prices of related goods, tastes, expectation, number of buyers: shifts the demand curve.
Supply Curve Definition
Relationship between the price of a good and the quantity supplied.
Quantity Supplied Definition
The amount of a good that sellers are willing and able to sell.
Market Supply Definition
The sum of supplies of all sellers.
Law of Supply
The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises.
Diminishing Marginal Returns (S)
If productivity falls with each additional input (worker), then each marginal unit is more costly to produce and requires a higher price to incentivize producers.
Change in Supply Variables
Price of the good itself: represents a movement along the supply curve.
Input prices, technology, expectations, number of sellers: shifts the supply curve.
Equilibrium Definition
A situation in which the price has reached the level where quantity supplied is equal to the quantity demanded. (Everything is sold.)
Equilibrium Price Definition
Price balancing quantities supplied and demanded.
Equilibrium Quantity Definition
Quantities supplied and demanded at the equilibrium price.
Surplus Definition
Quantity supplied is greater than quantity demanded.
-Competition between producers cause prices to fall to avoid a surplus. (Agricultural goods.)
Shortage Definition
Quantity demanded is greater than quantity supplied.
-Competition between consumers causes prices to rise to avoid a shortage. (Rental housing.)
Law of Supply and Demand
The price of a good adjusts to bring the quantity supplied and the quantity demanded into balance.
Elasticity Definition
Measures how buyers and sellers respond to changes in market conditions.
Market Responses to Consider
-Taxes
-Addiction
-Income
-Price of related goods
-Availability of substitutes.
-Necessity vs. Luxury
-Time Horizon (short vs. long run)
Price Elasticity of Demands Definition
A measure of how much the quantity demanded of a good responds to a change in the price of that good.
The percentage change in quantity demanded is divided by the percentage in price.
Price Elasticity of Demand Equation
Percentage change in quantity demanded / percentage change in price.
OR
[(Q2-Q1)/(Q2+Q10/2] / [(P1-P2)/(P2+P1)/2]
-Suppose a 10% increase results in a decrease in the quantity demanded of 20%
E= 20%/10% = 2.
Demand Curves and Elasticity
-Demand is elastic is the absolute value of elasticity is greater than 1.
-It is Inelastic when it is less than 1.
-If it is equal to 1, the demand is unit elastic.
Price Elasticity of Supply Equation
Percentage change in quantity supplied / Percentage change in price.
Elasticity of Supply of a Good
-Elastic if percentage change in quantity supplied is more than percentage change in the price.
-Inelastic if percentage change in quantity supplied is less than percentage change in the price.
-Time horizon is the determinant of the elasticity of supply.
Supply Definition
How much producers are willing to supply at a given price.
Demand Definition
How much consumers are willing to buy at a given price.
Markets Definition
Interaction of supply and demand result in equilibrium prices and quantities.
Price Ceiling Definition
Legal maximum on the price at which a good can be sold. (Rent control.)
Price Floor Definition
Legal minimum on the price at which a good can be sold. (Agricultural subsidies, minimum wage.)
Efficiency (Strict) Definition
An allocation (distribution of) is efficient if we cannot reallocate resources to make someone better off without harming another individual.
AKA Pereto Efficient.
Welfare Economics Definition
Analysis of how the allocation of resources affects economic well-being.
Consumer Surplus Equation
Value to buyers - Amount paid by buyers.
Producer Surplus Equation
Amount received by sellers - Cost to sellers
Total Surplus Equations
CS + PS
(Value to buyers-Amount paid by buyers) + (Amount received by sellers-cost to sellers)
Value to buyers-Cost to sellers.
Deadweight Loss (DWL) Definition
Reduction in total surplus due to the tax.
-Measure to market inefficiency.
-Measure of the cost of misallocated goods in a market.
Debates Over (International) Trade Policy
- Supporting domestic industry (independence).
- Protecting domestic labor force.
- Protecting incentives for innovation.
-Sometimes gains from trade aren’t apparent because losers use political action to influence trade policy (tariffs, quotas).
Tariff Definition
A tax on goods produced abroad and sold domestically.
-It only matters only if economy is an importer.
-Causes DWL.
Quotas Definition
Limits on how much of a good can be imported.
-Reduce quantity of imports
-Raise domestic price of good.
-Cause DWL.
Why do firms exist?
It reduces transaction costs, specialization of labour, higher productivity under teamwork.
-Goal is to maximize profit.
Industrial Organization
The study of how firms’ decisions regarding prices and quantities depend on the market conditions they face.
Industry Definition
A group of firms producing the same product or similar product. (Sugar or automobiles)
Explicit Costs Definitions
The output costs that require an outlay of money by the firm.
Implicit Costs Definition
The input costs do not require an outlay of money by the firm.
-Consider opportunity costs as well within the given time horizon.
Average Total Cost (ATC)
Total cost / Quantity of Output
Average Fixed Cost (AFC)
Fixed cost / Quantity of Output
Average Variable Cost (AVC)
Variable Cost / Quantity of Output
Marginal Cost (MC)
Increase in total cost that arises from extra unit of production.
Change in Total Cost / Change in Quantity
Breakeven Analysis Definition
Used in business situations to understand effect of change in quantity on firm profits.
-Relationship between quantity produced, cost to produce and profit.
Break-Even Point Definition
Output level at which total revenue equals total cost (zero profits).
Economies of Scale Definition
Property whereby long-run average total cost FALLS as the quantity of output increases.
Diseconomies of Scale Definition
The property whereby long-run average total cost RISES as the quantity of output increases.
Constant Returns to Scale Definition
The property whereby long-run average total cost STAYS THE SAME as the quantity of output changes.
