Econ 1 notes
Econ 1 notes Econ 1
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This 6 page Study Guide was uploaded by Teni Adedeji on Thursday February 18, 2016. The Study Guide belongs to Econ 1 at University of California Santa Barbara taught by Ryan Oprea in Winter 2016. Since its upload, it has received 18 views. For similar materials see Microeconomics in Economcs at University of California Santa Barbara.
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Date Created: 02/18/16
Econ 1 Comparative Advantage (9.28) David Ricardo (main economist) Ricardo’s Argument Every country should specialize in their comparative adv. then trade and we’ll be better off. Comp. adv. is relative to other things you could be making. Comp. adv. is useful even if one party is good at everything because everyone has restraints on production. (time) Example Problem 20 hours of productivity Only eats fish sandwich (Need 1 unit of bread and 1 of fish) Ms. Rich Fish 1 per hr Bread 2/3 per hr Mr. Poor Fish 1/3 per hr Bread 1/2 per hr Finding how many they can make independently: Ms. Rich: F + 1.5B = 20 You also know that F=B=S Therefore, S + 1.5S = 20 2.5S = 20 S=8 Mr. Poor: 3F + 2B = 20 5S = 20 4 = S Finding their opportunity cost: Formula: The thing they choose/ what they don’t Ms. Rich: Bread/Fish 2/3B/1F OC: 2/3 of bread per fish Mr. Poor: 1/2/1/3 OC: 3/2 of bread per fish Better comp. adv. for Mr. Poor Opportunity Cost (9.30) GP: Econ exchange is form of cooperation. GQ: What causes people to specialize in comparative advantage? PRICES PRICES PRICES THE PRICE IS RIGHT If the price is right then everything happens automatically Assumption: People want to pay as little as they can, they want to choose the option with the highest income if they do not care about what activity they will do. PROFIT = BENEFIT COST (PROFIT DOESNT ALWAYS HAVE TO BE MONETARY) Key point: If prices are right then the comparative advantage will happen as a decentralized thing. KP: Prices are signals for comparative advantage. KP: Prices define selfinterest. Everyone follows selfinterest. Ends up in comparative advantage. KP: If the prices are all screwed up then some people will do something bad for the economy because they want more money. (EX: If someone does not have a comp adv in making bread but they can sell bread for more than they can sell whatever they have the comp adv in then they will want to sell bread even though it would be bad for the economy.) Decision Making in Economics KP: People take action if profit is positive. KP: Profit doesn’t always have to be monetary. Economists think of money equivalent to implicit things. KP: Cost is a value of forgone opportunities. (Best alt. option) OPPORTUNITY COST Explicit Costs: Monetary Implicit Costs: Non monetary (time) Average Cost (10.5) Total cost = fixed + variable AVERAGE COST Average Cost = Total Cost/ Quantity AC = FC/Q + VC/Q AC = AFC + AVC AVC + Outpu t Initially AVC costs lowers because one gets better and more efficient at their task. (Specialization) Eventually, the rises in AVC comes with rises in output. Fixed costs will also eventually rises because one is restrained with the stuff they have. Marginal Costs Extra costs from producing one more output. General Rules. If MC > AC, AC is rising If MC < AC, AC is falling If MC = AC, Nothing happens AC + AVC is interchangeable. Shortrun Supply If P > minimum AVC, produce If P < AVC, do nothing The Law of Supply If price goes up then people want to supply more. Short run supply curves are upward sloping. Budget Constraints (10.9) Budget line ex. $4 x burgers + $2 x tacos = $40 Represent Preferences bundle (#tacos, #burgers) utility function assigns number to a bundle. utility represents a function of satisfaction. Assume: people want the most for their budget. GP: Utility is a description. Marginal Utility increase in utility for one or more good. Marginal Note of Substitution = Marginal Utility of Tacos/ Mu of Burgers Tradeoff it;s how much you’re willing to be compensated in one good to lose the other good. Mu decreases when people get more of the good. (Diminishing mu) Diamond and water paradox. Indifference curves Point of Tangency Utility and Demand (10.12) Maximizing Utility price tacos/price burgers =Mu tacos/ Mu burgers Mu burgers/price burgers =Mu tacos/ price tacos GP: Relation between price and Mu of good. Slope = x/y Slope of budget line is ration of prices. Slope of indifference curve is ratio of Mu. Normal vs. Inferior Good Inferior Good is when the demand decreases after an increase in income. Normal Good is when the demand increases after an increase in income. When you raise the price of something: 1. You make it less desirable. 2. You become poorer. Income Effect + Substitution Effect causes price increase to lead to a reduction in demand. LAW OF DEMAND Normal good, income effect of an increase in price is negative. For all goods, substitution effect of an increase in price is negative. Normal good, an increase in price decreases demand. Costs (10.16) Fixed costs do not affect short run supply. Sunk cost and opportunity cost after doing sunk costs you don’t have any opportunities you forgo. As supply increases, revenue decreases. Price Elasticity (10.19) Total Revenue = price x quantity Elasticity of demand helps figure out which one was (loss or gain of total revenue with the shift in supply) Approximation of Total Revenue: Percentage of revenue = percentage of quantity plus percentage of price Revenue changes moves along the DEMAND CURVE . Supply curve shifts demand curve stays same. Price elastic of demand = (%change Q/%change P) E > 1 is inelastic E < 1 is elastic absolute value Elastic (<1) quantity dominates Inelastic (>1) price dominates ELASCITY IS NOT SLOPE! It is slope/price q ratio
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