Extra Notes Flashcards
Water Diamond Paradox
The paradox lies in the fact that something with great utility (water) can have a low price, while something with little intrinsic utility (diamonds) can have a high price.
The resolution to this paradox lies in the economic concept of marginal utility and the law of diminishing returns:
Marginal Utility
Marginal utility is the change in total utility that comes from consuming one additional unit of a product or service.
Diminishing Marginal Utility: A key principle associated with marginal utility is the law of diminishing marginal utility. This law states that, as a person consumes more units of a good, the additional satisfaction gained from each successive unit tends to decrease.
Do viruses discriminate?
yes
Positive statements
can be classified as either true or false
In our analysis should we avoid positive or normative statements
normative
Normative statements
express value judgments about what ought to be
Effective arguments should have or can have
normative positions supported by positive analysis
Theory of economics
is a method rather than doctrine
it is a technique of thinking
Can theory be a substitute for data?
yes it is able to provide structure
Theory and introspection
theory is an antidote to introspection
Price is a
ration of 2 goods/services exchanged
What is the origin of the economic problem?
Resources are scarce
Scarcity is
Inevitable so therefore competition is inevitable
What helps mitigate the costs of scarcity?
competitive actions
Consumer vs. Producer Theory
consumer - demand/quantities demanded
producer - supply/quantities supplied
Quantity Supplied
The supply curve is upward sloping, indicating that as the price increases, the quantity supplied also increases. This reflects the principle that higher prices incentivize producers to supply more of a good, while lower prices lead to a decrease in the quantity supplied.
Consumer Theory
assumptions have to be made since you cannot measure tastes or preferences
4 behavioral postulates
- People have preferences
- People prefer more to less
- People are willing to substitute
- Marginal values are decreasing
Intrinsic Value
So, intrinsic value is about what something is really worth based on its actual qualities, not just what the market says it’s worth at any given moment.
ex) value of books and their themes TKAMB
Models are built to
predict behavior
Total value
the maximum amount of money one would be willing to spend
Ex) the highest price you would pay for a full tank of gas
Marginal Value
max amount of money one is willing to spend in order to acquire one more unit of that good
Ex) the highest price you would pay for one gallon of gas
MV of a good or service
decreases as more of that good or service is consumed
Q goes up … MV decreases
General Rule for MV
rational consumers will keep purchasing additional units until the marginal value has fallen to the price
MV > P
purchased too few
MV < P
purchased too many
Theory has the ability to be
prescriptive or descriptive
Marginal Value is the
Demand Curve
inelastic
less sensitive to changes in prive
-1 < e <= 0
elastic
more sensitive to changes in price
e < -1
When there is more alternatives or more time to adjust there will be
higher price sensitivity
Examples of inelastic
business travel
medical care
coffee
Examples of elastic
Honda cars
leisure travel
Linear Demand curve
as quantity demanded increases, elasticity increases towards zero
A linear demand curve is
more elastic at higher prices and less elastic at lower prices
normal good
demand increases income increases
ex) political donations, fine dining, aie travel
inferior good
demand decreases as income increases
ex) ramen, fast food
Substitutes
two goods for which the demand of one good increases as the price of the other good increases
ex) ipad and surface, uber and taxis
Complements
two goods for which the demand of one good decreases as the price of the other good increases
ex) peanut butter and jam, wine and cheese
Shipping the good apples out
The offense should run even more when it rains.
* Although running still has the same 1-yard advantage (3 vs. 2 yards per play), the relative advantage increases in the rain.
* Running is 25 percent more productive in dry conditions, but 50 percent more productive in wet conditions.
Diamond Water Paradox
market demand prices reflect the marginal values of these goods
Opportunity cost
Suppose you have $1,000 and decide to buy a laptop instead of investing that money in a stock. If the stock would have returned $100 over the next year, then the opportunity cost of buying the laptop is not just the $1,000 spent, but also the foregone $100 you could have earned from the investment.
Change in demand vs. change in price
change in demand shifts demand curve
change in price changes the movement along the demand curve
