Econ 101

economics intro Economic forelands arise bc we birth to a greater extent than we can get. Inability to satisfy want scarceness Incentives rewards that encourage action or penalties that discourage action. Economics studies the allocation of scarce recourses among people Alfred marshell (1842-1924) shaped macro economics Joan robinson the main(prenominal) reason to study econ is to avoid being fooled by it Two main parts A) Microeconomics studying the choice of individual decision makers. And how they interact in markets B) macroeconomics how the overall economy performs. 2 unfit questions 1.What, how and for whom do untroubleds and services get produced? 2. When do choices made in self bear on correct with the neighborly interest? Answer 1) what corkings and services ar objects that people value and are produced to satisfy gay wants how factors of production. A) Land natural recourses. B) labour work time & effort. quality of labour (human capital). C) capital tool s, equipment, machines, computers, buildings.. D) entrepreneurship human imagination hat organizes the above. For whom who gets good services depends on the incomes people earn. oLand=rent oLabour=wages oCapital=interest oEntrepreneurship=profitAnswer 2) We make choices in self interest oChoices you think are best for you Choices that are best for society are state to be in the social interest oUses resources efficiently oDistributes goods fairly When does self-interest align with social interest? (important) Environmental issues Bad corporate responsibility The Economic way of thinking Choice under scarcity = tack offs chance represent the highest valued alternative that you give up to get something. Choices at the margin We look at the tradeoffs at the margin Marginal benefit (MB) benefit from an incremental increase in an activity.Marginal exist (MC) hazard cost from an incremental increase in an activity. People respond to incentives MBMC= do more of an activity MB does le ss of an activity Lesson 2 Recap Economics oMicro oMacro 2 big question owhat, how, for whom oself interest vs social interest opportunity cost otrade-offs thinking at the margin Lesson 2 wet affix vs. diamonds water essential but almost costless Diamonds not essential but very pricy What is value? What gives things value? Labour theory of value the value of a commodity is proportional to the total of labour that goes into it. Abandoned ex. Cement lifejacketEconomists think about value differently 1. the value of something is what youre volition to give up to get it. 2. Economists think about peripheral value instead of total value. Water is plentiful= marginal value low Diamonds are scarce= marginal value high imperious and normative statements Positive statements of facts about observable data Normative statements about what ought to be. Value judgments Ex. 20% of teens mint Positive Are you more likely to smoke if your parents do? Does living location affect likelihood o f skunk? Are smoking rates different across education takes? Self reported reasons for smoking Do costs affect smoking rates? Normative Kids shouldnt smoke Cause and motion exactly because two things happen together doesnt mean that one causes the separate. Ex ice cream sales & deaths by drowning Both related to temperature Economists try to unscramble cause and effect by building models. case a purposeful simplification of the real world. Ex paper airplane Simplification. Learn about aerodynamics, twisting structure Cant learn about thrust, fuel capacity, engines Maps are models Subway map Lines Stops Doesnt show cuts or turns Road map Street names Turns/ make outs Satellite photo Adds detailGraphs Reveal relationships amid variables 3 main types 1. Time series 2. mark sectional 3. Scatter plots Lesson 3 Recap water/diamonds Value what youre get outing to give up to get something Positive vs normative Cause & effect oModels Graphs in economics The Economic problem pr oduction possibilities frontier (ppf) Model focus on tradeoffs among 2 goods. ( attribute other goods constant) PPF shows boundary between what we can produce and what is unattainable Building a PPF scratch good depends Ex. X + 3=7 Second good words Our PPF for Xs & words EX. In textbook PFFs show marginal cost. opportunity cost of producing one more unit Preferences& marginal benefit your likes and dislikes marginal benefit what your impulsive to give up to get an prodigality unit of something what does MB look like? Principle the more you meet of a good, the less youre willing to pay for an additional unit. Allocative efficiency $ up the left side of graph, pizza across the bottom. MC is a positive incline, MB is a ban decline at pt Awe cede allocative efficiency. We cant produce more of any one godd without giving up some other good that we value more highly lesson 4 recap allocative efficiency (MB=MC)Economic growth isnt free 2 key factors Technological change oresearch and enlargement Capital accumulation oDevote resources to production of capital Both pick up resources that could be used for current consumption Economic growth doesnt eliminate scarcity Opportunity cost of growth is reduced current consumption Consuming outside your PPF. Gains from trade Imagine if you produced everything you knock off(Autarky) Producing one (or a hardly a(prenominal)) goods and trading with others is called specialization Gains from specialization come from exploiting comparative utility secure Advantage More productive at somethingComparative Advantage Producing at a lower opportunity cost Ex textbook smoothie bar testple On lined paper Liz absolute profit in smoothies. And comparative return in smoothies Joe no absolute advantage but comparative advantage in salads Where does Comparative advantage come from? Over time people or countries can develop comparative advantage through repeated production. learning by doing (dynamic Comparative advantage) Ec onomic Coordination? Who organizes all this? centrally planned economy USSR, china Decentralized market system most countries Decentralized markets rely on 4 institutionsON MIDTERM . Firms hire and organize factors of production 2. market places any arrangement that connects buyers and sellers 3. Property Rights social arrangements that govern ownership and use 4. Money any commodity or token that is generally accredited as a means of payment markets coordinate economic activity through impairment adjustments. Lesson 5 Demand and supply In a market system, economic coordination happens through price adjustment competitory markets many buyers and many sellers outlays determine the rate at which goods can be transformd Money scathe number of dollars Relative price $price of one good relative to anotherEx coffee$2, gum$1 (Money), one coffee costs 2 gums Demand different than want To subscribe something you must a. require it b. Be able to afford it c. Plan to buy it police f orce of hold holding everything else equal, the higher(prenominal) the price of the good the lower the quantity beseeched 2 effects cause this a. Income effect when price increases, your money doesnt buy as much b. Substitution effect when a price increases people substitute to buy other goods Ways of representing aim a. Demand schedule b. Demand curve When the price of this good changes we crusade along the demand curveChanges in Demand when things other than the price of the good change, the demand curve agitates. Things that shift demand Nature Quality Tastes/preferences Income damage of other goods oComplements call for these goods together (Ex. Shoes, always need both) oSubstitutes give birth one or the other Expected future prices Population Supply a theatre supplies a good if it a. Has the resources and technology to produce it b. Can profit from producing it c. Plans to produce and sell it Law of supply holding everything else equal, the higher the price of a good, the more is supplied The supply curveIN binder Example Changes in Supply Input prices Prices of related goods produced Expected future prices Number of suppliers Technology nature Lesson 6 Market sense of balance Equilibrium a state where opposing forces balance each other consists of a market price and quantity Changes in equipoise (pg 74) 1. French fry demand 2. Market for cocaine 3. Market for kitchen sinks 4. Market for barrels of crude oil 5. Market for fresh orange juice Midterm exam review 20 multiple choice 2 short answers Multiple choice worth 2points short-change answers worth 10 Exam worth 60 Chapters 1-3 Ch 1 What is microeconomics Scarcity and tradeoffs What is value 2 big questions owhat how and for whom oself interest vs. social interest positive vs normative statements graphs in econ Ch 2 ppf and opportunity cost marginal benefit and marginal cost allocative efficiency growth specialization and trade absolute and comparative advantage economic coordination Ch3 de mand curve (law of demand) movement along vs shifts of the demand curve factors that shift the demand curve supply curve (law of supply) movement along vs shifts of the supply curve factors that shift the supply curve equilibrium pg 74, 75 changes in equilibrium Lesson 7 October 11, 2011 Modeling demand 1. Demand schedule (table) 2. Demand curve (picture) 3. Demand equation Ex in notebook In general P=a-bQ. (a and b are some numbers) A vertical intercept B absolute value of slope Modeling supply* 1. G 2. G 3. Modeling equilibrium At equilibrium price (P) quantity demanded equals quantity supplied Equilibrium quantity Q Ex finding equilibrium Demand p=800-2Q Supply P=200+Q fasten the right hand side of each equation equal 800-2Q=200+Q 600=3Q 200=Q snap (Ch 4) Law of demand when price increases quantity demanded falls This gives us direction Elasticity measures how much demand changes Ex Good X Price increases by 1$ Demand drops by 100 unts Good Y Price increases 200$ Demand drops by 1000 units Cant compare the 2 In inn to compare goods we need a measure of responsiveness Price of cracking demand= % change in quantity demanded over % change in price Ex ticket price 21$- 9tickets/hr 19$-11 tickets/hr Find elasticity of demand 1. % change in quantity =change in Q =2/(over) 10 (from 9 to 11) over Average Q Fuck it. In notebook What does elasticity number mean? In notebook Lesson 8Elasticity of demand = % change in quantity demanded/ over % change in price If elasticity is 1 elastic Tuesday October 18, 2011 What affects elasticity? 1. Closeness of substitutes 2. Proportion of income spent on a good 3. Time since price change Other Elasticities 1. Cross elasticity = %change in demand for x % change of price of good Y if X & Y are Substitutes positive Complements negative 2. Income elasticity = %change in demand %change in income bigger than 1 income elastic. As income increases demand increases a lot Between 0 &1 income inelastic. Income increases, demand increa ses by a littleNegative inferior good. Income increases, demand decreases Elasticity of Supply = % Change in quantity supplied % Change in price What affects supply elasticity? 1. Resources substitutions possibilities 2. Time frame for supply decisions Efficiency and Equity (Ch5) Markets are one way of allocating goods Do they do a good job? A. Efficiency (do the goods go to those that value them the most? ) B. Fairness Ex. X pins how should we apportion them? 1. Contest 5 highest grades Ex sports, performance bonuses Pros May encourage effort Cons Goods may not go to those people that value them the most 2.First come, first serve first 5 people to show up get them Ex walk in clinics Pro People who value the good highly will line up early Con May get allocated to those with a low opportunity cost of their time 3. Command System I decide who gets them Ex how tasks get allocated inside a quick Pro May work well when tasks/people are familiar and authority well define Con I cant te ll who values the good the most 4. Lottery set about names from a hat. Ex. Dorm rooms Pros Faireveryone gets an equal shot Cons No reason to expect that high value people will get the good 5. Majority rule voteEx, voting politicians Pro everyone gets an equal say Con special interest group 6. Personal characteristics If you substantiate a chocolate-brown belt Ex. Relationships Pros may work if characteristic highly related to value people have for the good Cons discrimination 7. soak up everybody fights Ex organized crime/war Cons strongest might not value the highest Pros Force can work well in the background oCourts can forcibly reallocate goods 8. Market machine oWhoever is willing to pay the price gets the good Pros people who have high values are willing to pay more and are more likely to get itCons people might not have enough money Tuesday October 18, 2011 Midterm 2 November 3 (Ch 4,5,6) Demand and supply Elasticity (ch 4) Efficiency and candor (ch 5) Obstacles to effic iency Price and quantity regulations (govt actions) Taxes and subsidies (govt actions) Externalities your actions impose costs or benefits on others Ex. Smoking. A person might take into account only their own personal benefits and costs but ignore social costs. (second and smoke) OR. Pollution. Firm doesnt account for external social cost that its production creates. Public Goods A.Consumption by one person doesnt use up the good. B. Anyone can consume the good without paying Ex lighthouse people want to use these goods without paying. freeriding. These are usually under provided Monopoly a single firm sets the market price Price is higher, quantity is lower Fairness 1. Utilitarianism, (Jeremy bentham, John Stuart mill) The Greatest Happiness for the greatest number people are roughly the same the marginal value of money is lower when you have more of it Redistribute wealth to achieve equality (tax rich, subsidize poor) Problems A) onerous income less income generation (work)B) tax ing capital less capital produced (slower growth) C) costs in administering taxes (more fair but size of the pie shrinks) 2. Rawls theory of rightness Fairness of society judged by the well being of the person who is poorest (Equal shares of a small pie) may be worse than (unequal shares of a larger pie) 3. Fairness in Rules, not outcomes Emphasis on equality of opportunity Robert Nozick A. Strong private property rights B. Private property should only be transferred through voluntary exchange Problems A. No room for redistribution after the fact B. No taxes or government since these arent voluntaryGovernment Actions in Markets (Ch 6) Price ceiling govt regulations that makes it illegal to charge a price higher than some specified level Set above equilibrium price= no effect Set below equilibrium price= Example in notebook Black market Illegal market in which price is higher than price ceiling Graph in notebook Thursday October 27, 2011 20 m/c few short answer midterm review Note on demand on supply equations (end of ch 3) Elasticity (Ch 4) know how to calculate and know what it is Efficiency and equity (Ch 5) *consmer and producer surplus Government actions in markets (Ch 6) Price ceilings oPrice flooring oTaxes Price Floors Mandatory minimum price Ex. Minimum wage Graph in notebook Unemployment increases search costs More power to firms in hiring decisions Black markets oEx. Illegal labour markets where people are pay below the min wage oIn notebook Taxes When the government taxes a good the price paid by consumers and the price received by producers are now different Ex. Govt puts a $5 (per unit) tax on producers In notebook Tuesday November 1, 2011 Midterm Thursday Material 1. Note on demand and supply equations. (end of Ch 3) 2. Elasticity (Ch4) Price elasticity Elasticity and total revenue (figure 4. 5 in text) Cross elasticity and income elasticity Supply elasticity 3. Efficiency and equity (Ch 5) Alternative allocation methods Consumer and producer surplus Efficiency of equilibrium fairness 4. Government Actions (Ch 6) Price ceilings Price floors Taxes Tuesday November 14, 2011 Global Markets Many of the goods and services you consume arent produced in Canada Ex. Iphones (all over), clothes (china), tech support (india) Part of the globalization process oImports goods we buy from other countries oExports goods we sell to other countriesGlobal Imports Exports in 2008 =$35 trillion Canada exports $535 billion. Agriculture, forestry, energy, mining, machinery, automotive, aircraft Imports $503 billion In binder example Tariffs a tax imposed by the importing country on goods that come from another country Arguments for rampart 1. Infant industry Argument We need to protect domestic industries when they start so that they can produce enough to compete on world markets. Develop comparative advantage Everyone can argue this 2. Barriers to trade to protect jobs. Trade costs jobs There isnt a fixed number of jobs Trade overly create s jobs