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This 9 page Bundle was uploaded by Mollie Masucci on Friday January 30, 2015. The Bundle belongs to a course at Pennsylvania State University taught by a professor in Fall. Since its upload, it has received 29 views.
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Date Created: 01/30/15
Econ 102 82813 mime rt Economic theories are based on behavior 0 Incentives matter ex Picking up a penny vs a quarter on sidewalk 0 In uence behavior in predictable ways 0 Direct incentives usually easy to recognize 0 Indirect incentives Secondary change in behavior unintended consequences Kindergarten pencils Fuel economy standards Ceteris Paribus quotall else equalquot 0 Change only one thing at a time Ex Women earn less than men for doing the same job Rationality Assumption 0 You don t make yourself worse off on purpose 0 So many ways to be irrational only one to be rational o Studying rationality gives baseline 0 Economics focused on outcomes rather than thought process 0 3 rationality assumptions interested only in own satisfaction choices always align with longterm interests can consider every choice Bounded Rationality 0 People are nearly rational 0 Sometimes they break from 3 assumptions 0 Positive vs Normative Econ 0 Positive Statements about quotwhat isquot Can be tested and provendisproven Ex quotIf gas prices fall people will buy more gasquot 0 Normative Statements about what quotshould bequot Are matters of opinion Ex quotGas prices are too lowquot mime o What scarcity is not 0 Not a shortage post disaster supplies running out 0 Not poverty Scarcity and resources 0 Fact of life physicists didn t invent gravity economists didn t invent scarcity 5 types of resources 0 Land Not just land but also location original fertility and mineral deposits topography climate water vegetation natural stuff 0 Labor Productive contributions of humans who work 0 Physical Capital Manufactured resources like 0 Buildings equipment machines improvements to the land used for production 0 Human capital Accumulated training and education of workers 0 Learning by doing apprenticeship or practice 0 Formal education college etc 0 Entrepreneurship Performed by humans Subdivision of labor Raises capital organizes manages assembles factors of production makes business decisions take risks and experiments Wants vs Needs 0 Need used very casually in conversation o Economists concerned with wants 0 Every individual has competing wants but cannot satisfy all of them given limited resources 83013 0 Law of increasing additional cost 0 Specialization o More specialization more bowed curve Efficiency 0 quotproductive efficiency max outputs given inputs or minimize costs given output 0 not wasting o specialization Comparative Advantage o Whoever has the lowest opportunity cost 0 Children setting the table 0 Mitch Hedburg s comedy he could work on a lm but that would take away time from him writing comedy I Boyle O Brien Fish 25 50 Apples 25 100 Trade 25 sh for 37 apples Boyle can now consume more than he could produce O Brien can also now consume more than he could produce 0 Cost is what is given up and trade allows people to produce more while giving up less 0 Ex Make or buy 0 Ford and Audi and BMW and Toyota make cars cars wont run without tires 0 Do they also make tires or do they buy them from others who produce at a lower cost 0 Every enterprise faces the question of whether to quotmake or buy 9413 0 Trade 0 Trade between Individuals Firms States Countries 0 Who values items more 0 Barriers to trade Effects on efficiency Wealth creation Spontaneous Order 0 The result of human action but not human design Markets Language Money Grocery stores 0 Markets are a decentralized system they evolve rather than get created Spontaneous Order 0 The result of human action but not human design 0 Economic way of thinking can be broken down into quotguidepostsquot which guide economic analysis 0 These principles will help you reason through economic problems 0 Foundation 1 opportunity cost 0 Foundation 2 Individuals choose purposefully 0 Try to get the most from limited resources Foundation 3 Incentives matter 0 Positive and negative Foundation 4 Individuals make decisions at the margin 0 Margin means additional 0 Compare marginal costs to marginal bene ts 0 Ex Combo meal vs burger and drink Foundation 5 Information is Costly but helps make better decisions 0 People will not become fully informed when making decisions 0 Ex What did you know before signing up for this class Foundation 6 Secondary effects 0 Indirect impact of an event or policy may not be immediately observable Foundation 7 Value is subjective o Depends on the situation Ex Fav color drinking an IPA riding roller coasters right after lunch Foundation 8 The test of a theory is its ability to predict 0 Want to determine what behavior will look like 0 Bad predictions come from bad theories 0 Simpli cation not necessarily a bad thing Foundation 9 Hold all else equal 0 Bad comparison Crime rate in low income urban area in PA vs crime rate in an old folk s home in OH 0 Want to compare Crime rate in low income urban area in PA vs low income urban area in OH Foundation 10 good intentions do not guarantee good outcomes 0 We care about results not thought process 0 Bootleggers and the Baptists Foundation 11 Association correlation is not causation 0 Ex Facebook driving the greek debt crisis global warming a hoax propagated by scientists Foundation 12 What is good for the individual is not always good for the group 0 quotfallacy of compositionquot 0 ex standing at a football game 0 ex skipping class CHAPTER 3 Buying the bundle example Market Demand Schedule 0 Demand schedules show how much consumers are willing to spend Law of Demand 0 There is an inverse relationship between the price of a good and how much consumers are willing to purchase 0 Partially due to presence of substitutes o Substitutes products that serve similar purposes Relative vs Money Prices 0 Two ways to think about price 0 Dollar bills 0 Opportunity cost in other goods Demand Curve 0 Shows how much people are willing to pay for a good at a given quantity 0 WTP is equal to their marginal bene t Changes in Demand 0 Entire curve shifts o Caused by Changes in consumer income Changes in number of consumers Changes in price of a related good Complement price up demand for original good down 0 Substitute price up demand for original good Up Changes in expectations Demographic changes Changes in consumer tastes and preferences Not caused by an own price change Changes in Quantity demanded o Happen only as the result of a change in the price of that good An increase in quantity demanded is a movement along that curve from point A to point B A decrease in quantity demanded is a movement along the curve from point B to point A Producer Choice 0 Producers convert resources into goods and services Organizing productive inputs and resources like land labor capital natural resources and intermediate goods Transforming and combining these inputs Selling nal product to consumers O Opportunity cost of production value of inputs in their alternative uses Inputs including factories and investment money Pro t and Loss 0 O O O O O 0 Pro t total revenue total cost Negative pro t is called quotlossquot Firm earns pro t when their product is worth more than the opp Cost of the resources used to make it Totally revenue is the minimum value to society of the nished good Total cost is the value of alternative uses for the inputs to the nished good Pro t value of nished good vaue of inputs in alternative uses Pro t minimum level of value created for society Law of Supply 0 0 there is a direct relationship between the price of a good and the quantity of it that suppliers are willing to produce in order to count toward supply producers must be willing AND able to produce some quantity at a given price Supply Curve 0 O Show how much producers are willing and apply to supply at a given price Must be paid at least the opportunity cost Changes in supply 0 Caused by Changes in resources prices Changes in number of producers Changes in technology Natural disasters Political disruptions changes in taxes Price expectations 0 Expect future price to rise l wait to sell l reduction in current supply NOT CAUSED by ownprice change Changes in quantity supply 0 Increase is a movement along supply curve from A to B o Decrease in quantity supplied is a movement from B to A 91313 The price System and markets 0 0 Relative prices always changing Prices are signals OO Voluntary exchange trading game Transaction costs Middlemen help bring buyers amp sellers together to reduce transaction costs Used car dealer Ebay The role of prices 0 Communicate info to decision makers o Coordinatesynchronize actions of market participants 0 O I pencil Motivate economic players Ration economic goods 0 Other means of rationing 000000 0 O Donut ex In class First come rst served Political power Physical force Waiting Random assignment Coupons WWII pay price and relinquish coupon Market response to changes in SampD In market economy when the demand for a good increase its price will rise which will Motivate consumers to search for substitutes and cut back on additional purchases of the good Motivate producers to supply more of the good 0 These two forces will bring the quantity supply and quantity demanded into balance 0 What if both S ampD Change Price Quantity S up D up Ambiguous change Up S up D down Down Ambiguous change S down D up Up Ambiguous change S down D down Ambiguous change Down Price Flexibility and Adjustment Speed 0 We assumer prices adjust instantly O We do not model how long prices actually take to adjust in the real world in this class Its possible for a price change to occur and even overshoot the new equilibrium prediction Implicit price changes Changes in quality cheaper pizza sauce even though published price is the same 0 Government imposed price controls 0 Price controlsgovernment mandated min or max prices for goods and services 0 Price ceiling ega max price 0 Price oor legal min price 0 l nonprice rationing devices waiting in line waiting lists discrimination 0 lead to quotblack marketsquot goods traded above legal max or illegal goods traded not protected by the legal system 0 Black Markets 0 Generators drugs prostitution human organs Organ donor rate 12 in Germany 9998 in Austria very similar countries 115 152 people on US kidney waiting list but 13 are inactive and could not receive a donated organ Violence settles disputes Quality not uniform Breaking Bad s blue stuff 0 Highlight success of legal system w secure property rights contract enforcement and unbiased court system 00 91613 0 Ex Ticket Scalping 0 Why is it illegal paying someone to stand in line for you 0 Its illegality can be viewed as a price ceiling Price Controls 0 Price ceiling legally established maximum price binding if set below market price cause shortages 0 Price oor legally established minimum price binding if set above market price causes surpluses Rent Control 0 Famous price ceiling 0 200 US cities have some form 0 Date back to at least WWII Results of Rent Control 1 Shortages and black markets will develop 2 Future supply of rental housing will decline Chapter 4 hUU Quality of rental housing will deteriorate Nonprice methods of rationing will become more important Inef cient use of housing space a Hurts property owners and low income renters the most Agricultural price supports 0 O O O Intended to help lowincome farmers Bigger farming operations get more Ultimately bene ts accrues to landowners who own elds where price supported crops grow Will create a surplus which is then purchased by the government Minimum Wage O O 0 Lowest hourly rate that rms can legally pay workers 725 federally Higher in some areas Workers are the suppliers of labor and businesses are the consumers Tradeoffs with Minimum Wage O O 0 Workers who keep job earn more money Some workers lose their jobs or never get hired Businesses must adapt to new relative prices Consumer Surplus difference between consumer s WTP and amount actually paid Producer Surplus difference between amount sellers receive for item and amount they would have been willing to sell for Gains from trade 0 CS PS gains from trade 0 Equilibrium is ef cient 0 Over and under production Deadweight Loss potential gains from trade that do not happen 0 Or when there s too much transacted
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