Mid1 Flashcards
Economics
The study of the choices people make and actions they take for best use of scarce resources to meet wants and needs.
Thinking on the margins
If marginal benefits of X are greater than marginal costs of X then do X. Think benefits/costs of additional.
Microeconomics
Study of choices/actions of individual units like households, firms, consumers, etc.
Macroeconomics
Study of behaviour of entire economy. Includes issues like unemployment, inflation, national income fluctuations.
Positive Economics
Involves statements about what is and can be tested by checking statements against the observed facts. (Ex. If coffee prices increase, people buy less coffee)
Normative economics
Involves statements about what should be. Depends on values/beliefs and cannot be tested. (Ex. Taxes should be used to redistribute income from high to low-income groups)
Correlation fallacy
Incorrect belief that correlation implies causation. Ex. Ice cream causes people to drown. No, more people drown during the summer when there are a lot of swimmers and coincidentally at that time ice cream is very popular.
Post hoc fallacy
Sub case of correlation fallacy. Believing that since first event came before the second event the first event caused the second event.
fallacy composition
Incorrect belief that what is true for individual is true for group.
Economic choices
Activity X, simple rule if benefits are greater than cost then you do activity X. Otherwise you don’t do activity X if costs are greater than benefit.
How are scarce resources allocated?
- Efficiency: Allocative efficiency is present when society’s resources are so organized that the present value of net benefits are maximized.
- Equity: Distributing goods/services in a way that is considered fair by society. Economists do NOT consider equity. Net benefits are what they value most.
- Moral and political consequences
Why is economics considered a social science?
Economics seeks to explain how people act. Like other sciences it uses models, theories, and assumptions, to explain how people behave.
A model is a simplified description of the way things work. A model is not a complete description of every detail rather a simple description that covers a wide range of possibilities.
Models/theories are meant to provide an understanding and explanation. They also should be useful in predicting behaviour.
Neoclassical Paradigm is the dominant model.
Economics is an empirical science. Theories/models are tested against observed information.
Absolute Advantage
A country/person has an absolute advantage over another entity in the production of a good/service if it can produce it at a lower absolute cost.
Comparative Advantage
A country/person has a comparative advantage over another entity in the production of a good/service if it can produce it with a lower opportunity cost.
Law of Increasing cost
In order to produce extra amounts of one good, society must give up ever increasing amounts of the other good. This law is what gives us the curve of a Production Possibility Frontier (PPF) graph.
The Rationality Assumption in a market economy
Individuals do not intentionally make decisions that will leave them worse off
Factors of production
capital, labor, and materials
Players in market economy
- Households: these are the consumers of goods and services and the sellers of factors of production.
Objective: Maximize their satisfaction. - Firms: These are producers of goods/services. These are also the demanders of factors of production.
Objective: Maximize their profits. - Government: This includes all public officials. The referee of the economy.
Objective: Unknown.
Draw a circular flow diagram for a market economy
check doc for image
Demand function
Demand: The demand function shows the quantity demanded of a good for different levels of goods price given the value of other relevant variables. Using functional notation; Q =D*(P…).
It is a function that gives you the quantity of the good that consumers are willing to buy during a specific time. Emphasis on relationship between Quantity Demand and Price.
Quantity Demanded: Amount consumers are willing to buy during a given time period.
Ceteris Paribus
Everything is held constant - To determine the effect of one variable.
LAW OF DEMAND
As a products price increases, the quantity demanded decreases; as a products price decreases, the quantity demanded increases. THINK MOVEMENT ALONG THE DEMAND CURVE
What can shift a demand curve?
- Price of substitutes:
Two goods are substitutes if for the consumers these goods satisfy same needs/desires. Ex. Butter and margarine or tea and coffee. If the price of substitute increases (decreases) the demand for the original commodity shifts out(in) which corresponds to an increase (decrease) in demand. - Price of compliments:
Compliments are products that tend to be used jointly. (Ex. Coffee and cream or butter and bread) If the price of a compliment increases (decreases), the demand curve for the original commodity shifts in(out) which corresponds to a decrease (increase) in demand. - Number of buyers:
This includes population and demographics. When the number of buyers increases (decreases), demand increases (decreases). - Preferences (tastes):
As preferences change, demand changes. (Ex. Gradual – Cigarettes and smoking) - Expectations:
The consumers expectations of what will happen to the price of a good in the future may cause the demand curve to shift.
Ex. If price of a product is expected to increase in future people may try to stockpile on commodity today. - Income:
Normal good: As income increases (decreases), demand for a normal good increases (decreases).
Inferior Good: As income increases (decreases), demand for an inferior good decreases (increases).
Changes in a commodities price correspond to..
to movements along the demand curve which are referred to as changes in quantity demanded. CHANGE IN PRICE DOES NOT SHIFT DEMAND. YOU SIMPLY MOVE ALONG THE DEMAND CURVE.
Supply function
The supply function shows the quantity of a good supplied at different prices given the technology, price of inputs and other relevant variables. Using functional notation; Qs = S*(P…)
Emphasis on the relationship between the quantity supplied and the price.
There can be exceptions to how the corresponding graph will look like.
Quantity supplied: Amount producers are willing to sell during a given time period, not how much they sell.
LAW OF SUPPLY
As the price of a commodity increases (decreases), the quantity supplied increases (decreases) [“Ceteris Paribus”]
(For supply curve) Changes in the commodity’s price correspond to…
movements along the supply curve which are referred to as changes in QUANTITY SUPPLIED.
What variables shift supply curve?
- Cost of inputs: (wages, interest rates, opportunity costs, etc.)
As costs increase (decrease) the supply curve for the commodity shifts in (out) which corresponds to a decrease (increase) in supply.
Firm produces less at every price point! - Technology and productivity:
A better, cheaper production technology allows the producer to supply more of the product at every price level, thus increasing supply. - Number of firms:
If the number of firms increases (decreases) supply increases (decreases) - Taxes:
Taxes are an addition to production costs and result in decreased supply. - Expectations:
The producers view of the future may change the current supply. - Prices of substitutes in production:
Substitutes in production are goods that can be produced using the same inputs (or input).
If the price of a substitute in production for good X increases (decreases) the supply of good X decreases (increases).
Ex. Suppose corn/wheat can be grown on same land. Then if the price of corn rises farmers switch to corn, away from wheat and thus, supply of wheat falls. - Prices of compliments in Production:
Complements in production are also called joint products. They are products, which by nature of production, are produced together.
When price of complement in production for good X increases (decreases) [this increases quantity supplied] the supply of good X increases (decreases). - Changes in Nature:
Natural events (ex. Flood, tornado) can have significant impacts upon the supply of a product. Good weather can also change the supply of a product.
EQUILIBRIUM
Equilibrium is achieved in the market when supply curve intersects the demand curve.
Quantity Supplied = Quantity Demanded
Note that at equilibrium the market clears. That is there is no surplus and no shortage.
