ECON2013, Chapters 1,2,3
ECON2013, Chapters 1,2,3 ECO2013
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This 15 page Bundle was uploaded by Valerie Aranya on Tuesday February 2, 2016. The Bundle belongs to ECO2013 at Florida State University taught by Joab Corey in Winter 2016. Since its upload, it has received 40 views. For similar materials see macroeconomics in Economcs at Florida State University.
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Date Created: 02/02/16
CHAPTER 1 – Economic Approach Is life getting better or worse? How do we answer this subjective question? Life expectancy, health, income, education, entertainment Compared to 40-50 years ago life got much easier and all these factors increased. Changes in transportation (cars), technology (computers); getting cheaper as it gets better, medicine (medical kit vs. high-tech machines), entertainment What is economics? Study of how we make choices under scarcity 1. Choice the act of selecting among alternatives 2. Scarcity the concept that there is less of a good freely available from nature than people would like (time, money, textbooks etc.) Because we have scarcity, we have to make choices- how to get the most out of our lives. Scarcity is NOT poverty. Poverty is subjective. Scarcity necessitates rationing (allocating scarce goods to those who want them) who gets what Price is used to ration goods (encourages people to work) Scarcity leads to competitive behavior (people compete over scarce resources) Resources = an input used to produce an economic good 1. Human Resources (human capital): writer’s creativity, athlete’s speed, Einstein’s intelligence, etc. 2. Physical Resources (physical capital): any hand made tool or machine to produce something. 3. Natural Resources: gold, natural gas, etc. Capital = Human-made resources used to produce other goods and services The Economic Way of Thinking (8 Guideposts) 1. No solutions only trade-offs. No such thing as free lunch. (it doesn’t mean that its free to the world) Opportunity cost: highest valued alternative that must be sacrificed when choosing an option (ex: guns n butter) Positive vs. Normative Economics Positive = testable, wrong or right Normative = not testable 2 4 Pitfalls to avoid in Economical Thinking 1. Ceteris paribus other things constant If you violate this principle and don’t control other factors, it wont be a good study. “if the price of eggs increases, people will buy fewer eggs ceteris paribus.” people still buy more eggs on easter 2. Good intentions don’t guarantee desirable outcomes Ex: suicide warnings on antidepressant medications. If you’re depressed and see this warning, you won’t buy it. It should say “caution, see your doctor before taking it” instead. Ex: C&H Taxi- the regulation decreased taxi leases from 24 hours to 11 hours. After regulation, leases per year decreased while at fault accidents increased. 3. Association is not causation 2 things happening together doesn’t mean one causes another. Ex: ice cream sales and homicides (hot weather) 4. Fallacy of composition belief that what is true for one is true for all. Ex: when you get a raise you’re able to buy more stuff but when everyone gets a raise, not everyone can buy more stuff. Micro vs. Macro 3 Micro: focuses on how human behavior affects affairs within individually defined units. (study of an individual tree in a forest) Macro: focuses on how human behavior affects outcomes in highly aggregated markets (study of a forest) CHAPTER 2 – T ools of the Economist Trade creates value When individuals engage in voluntary exchange, both parties get better off. Channeling goods and resources to those who value them most is the primary way the society increases wealth. Creation of wealth The process by which some people become rich will make everybody richer. Ex: Henry Ford (you have automobiles, he has money) wealthy people create their wealth by voluntary exchange that’s how you have a better world. Ex: class candy exchange Before trade: 381 (total) Group trade: 479 Class trade: 589 Economics of Private Property Rights 4 It involves 1. The right to exclusive use of property 2. Legal protection against invasion from other individuals 3. The right to sell, transfer, exchange, or mortgage the property 4 Incentives of Property Rights 1. Incentive to use resources in ways that are considered beneficial to others. (you have an empty land in middle of the campus and everyone needs parking spots so you turn it to a parking garage) Ex: south park: Cartmen’s amusement park (has to let people in to make money and to run the park) Ex: reselling textbook (instead of burning them) 2. Private owners have an alternative to care for and manage what they own Communal refrigerator vs. your own 3. Private owners have an incentive to conserve for the future. Ex: Tragedy of the commons (if you let a fish go to grow, someone else is going to catch it) Ex: endangered species 1979-1989 1989-1995 Zimbabwe 50,00094,000 15% increase Kenya 65,00019,000 20% decrease 5 ** caused by private property rights** 4. Private owners have an incentive to make sure their property does not damage your property. Ex: being careful cutting down the trees, cautious mean old lady who didn’t let the kids get their ball back because she didn’t want to take the risk if they got hurt. ** lack of property rights= lack of economic progress** Production Possibilities Curve (PPC) Outlines all possible combinations of total output that could be produced, assuming a; 1. Fixed amount of productive resources 2. Given amount of technical knowledge 3. Full and efficient use of resources Efficient points: points that are on the line Inefficient points: points that are inside the graph Unattainable points: points that are outside the graph 4 Factors that shift the PCC 1. A change in the economy’s resource base 6 Investment: purchase, construction, or development of resources. However, it requires us to give up consumption goods 2. Changes in technology Technology: the knowledge available in an economy at any given time. It determines the amount of output we can generate with our limited resources. Ex: tanks and buses 3. A change in the rules under which the economy functions Ex: imposing trade barriers and eliminate the business franchise tax in West Virginia. 4. Changes in work habits Ex: working harder, putting in more effort can shift curve outward, less work can shift curve inward. Law of Comparative Advantage Output of each good is produced by whoever has the lowest opportunity cost. Ex: Bill Gates has more important things to do than washing the dishes as he earns thousands of $$ an hour) Absolute advantage = who can produce more Corn OC (opportunity cost) Cars OC U.S 50 1/5 car 10 5 corn Japan 20 1/4 car 5 4 corn 7 ** U.S. produces corn, Japan produces cars = 4.5 corn for 1 car ** Economic Organization Every economy faces 3 questions: 1. What will we make 2. How will we make it? 3. Who will buy it? Capitalism: A system of economic organization where: Productive resources are owned privately Goods and resources are allocated true market prices Market organization: a method of organization where: Ownership and control of the means of production rest with the state Resource allocation is determined by centralized planning 1 North Korea U.S Hong kong 10 socialism capitalism Collective decision making: the method of organization that relies on public sector decision making to resolve basic economic questions. 8 Means of production Resource allocation Capitalism Private individuals market prices Socialism state (government) central planning Why Capitalism tends to work and Socialism does not : 1.Capitalism is similar to natural selection. It uses the idea of market efficiency (getting the most out of our scarce resources) more income and equality. 2.Socialism suffers from an information problem (it’s harder to make decisions for others) Chapter 3 – supply & demand The demand curve Law of demand: there is an inverse (negative) relationship between the price of a good and the quantity that buyers are willing to purchase. Ex: deriving the demand curve ** As price increases, quantity demanded decreases** Consumer surplus The difference between the max amount consumers would be willing to pay and the amount that they actually pay. 9 It is the area below the demand curve but above the price. There is no such thing as negative surplus We as consumers don’t like paying more when the prices go higher consumer surplus decreases (area of the triangle on the graph gets smaller) Ex: (iclicker question): the most Stewie Griffen is willing to pay for a sonic death ray is $500, while his evil half brother Bertram is willing to pay as much as $400 for one. They both find sonic death rays on sale for $350. What is their combined consumer surplus? Stewie: CS $150 Bertram: CS $50 TOTAL: CS $200 !!!!DEMAND VS. QUANTITY DEMANDED!!! Change in quantity demanded: A movement along the curve. We’re changing the amount of goods we’re gonna buy because the price changes. Increase in quantity demanded: movement down the curve (to the right) Decrease in quantity demanded: movement up the curve (to the left) Change in demand: a shift of the curve. Caused by a change in anything that affects demand and your desire other than the price of the good itself. Increase in demand: curve shifts right Decrease in demand: curve shifts left Ex: (iclicker question): which of the following would result from a decrease in the price of a good? INCREASE IN QUANTITY DEMANDED Shifters of Demand 10 1. Change in consumer income Even if the price a good doesn’t changes, your desire will change as your income changes. Ex: normal goods (foods you like to eat that are expensive to you) when your income goes up, your demand of normal goods also goes up. Ex: inferior goods (we don’t like so much but we buy it because they’re cheap and we’re poor) when your income goes up, your demand of inferior goods will go down. ** know the difference between normal (ex: shrimp, steak, sushi) stand inferior (ex: ramen noodles, bologna, cheap shit) goods** 2. Change in number of consumers More consumers = more demand Less consumers = less demand 3. Change in the price of a related good Ex: substitutes if the price of a substitute goes up, the demand for the other good goes up. (beef prices go up, you buy less beef and demand more chicken) Ex: compliments if the price of a compliment goes up, the demand to the good goes down. (peanut butter and jelly considered compliments. If the price of peanut butter goes up, you won’t buy it. And because you only eat jelly with pb, your demand for jelly goes down.) – beer and fishing in WV lol 4. Change in expectations Expected change in price: if we expect the future price to increase, we’re going to buy more now, current demand goes up. 11 If you’re expecting a future sale, you’re not going to buy right now, you will wait = current demand goes down Expected change in income: if you expect your future income to increase, your current demand will also increase. (millions of $$ on its way but you’re not going to wait for two weeks, you will start spending now.) 5. Change in consumer tastes/preferences Something becomes more popular, your demand tends to go up. The supply curve Law of supply: there is a direct relationship between the price of a good or service and the amount that suppliers are willing to produce. **as price increases, quantity supplied increases** Producer surplus The difference between the minimum price suppliers are willing to accept and the price they actually receive. It is the area above the supply curve, below the price Know what happens if the price falls or rises. (change in the area of the graph) SUPPLY VS. QUANTITY DEMANDED Change in quantity supplies: movement along the curve Caused by a change in the price of that good Different point with same relationship (same line) Increase in quantity supplied movement up the curve (to the right) 12 Decrease in quantity supplied movement down the curve (to the left) Change in supply: a shift of the curve Caused by a change in anything that affects supply other than the price of the good Different point with different relationship (line changes) Increase in supply: curve shifts right Decrease in supply: curve shifts left Shifters of Supply 1. Change in resource price If the price of an ingredient changes that’s when it shifts the curve (tires to make cars) If the ingredients cost a lot to make, we produce less (Price of the ingredient increases, Supply decreases) 2. Change in technology Technology helps us produce more (more technology higher supply) 3. Change in nature/politics Depends on what these changes are (Bad weather vs. good weather for natural products) 4. Change in taxes Taxes go up (takes your money) supply goes down (you would probably want to do less of that thing) Taxes down supply up (want to do more of that) 13 Elasticity Inelastic: changes in quantity are not very sensitive to changes in price (inelastic curves are steeper) You’re going to buy the same amount no matter how much it costs. Elastic: changes in quantity are sensitive to changes in price (elastic curves tend to be flatter) You buy a lot more or a lot less (big change) even though the price changed very slightly. Market Equilibrium A state in which the conflicting forces (supply and demand) are in balance (reach the perfect harmony) Occurs where the demand curve intersects the supply curve The amount of people who are willing to produce is the same as the amount of people who want to buy. It is all about economic efficiency we need to get most out of what we have No transactions if the cost to sellers (supply) is larger than the benefits to buyers (demand) Excess supply: quantity supplied is greater than quantity demanded they will decrease the prices Excess demand: quantity demanded is greater than quantity supplied they will increase the prices 14 Changes in Demand Price & quantity moves in same direction (demand increases price and quantity increases 15
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