August 24 and August 28th notes
August 24 and August 28th notes ECON 1123
Popular in Principles of Economics: Microeconomics
Popular in Economcs
This 5 page Class Notes was uploaded by Jessica Notetaker on Friday August 28, 2015. The Class Notes belongs to ECON 1123 at University of Oklahoma taught by William Clark in Fall 2015. Since its upload, it has received 124 views. For similar materials see Principles of Economics: Microeconomics in Economcs at University of Oklahoma.
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Date Created: 08/28/15
August 24 1 What is the difference between Micro and Macro Microstudy of individual households and rms Macrostudy of economic totals such as total unemployment overall in ation total production 2 The Basic Economic problem 1 Economic resources are limited or scares 2 Desires for goods and services are unlimited 1 Labor human efforts to produce goods and services 2 Capitol goods used to produce other goods person made aids to production plant equipment machinery tools of all sorts etc 3 Land all natural resources 4 Entrepreneurship the resource that combines the other resources 1 Have an Idea Good ideaBad idea Bad ideas led to losses 2 Motivated by self interest as manifested by the pursuit of pro t 3 Risk bearers People must make choices 3 Three basic questions 1 What to produce 2 How to produce it 3 Who gets the production Answering the questions 1 Command and control economic systems centrally planned questions are answered by some central authority ex Emperor dictator political bureau king 2 Price system questions are answered by prices Decentralization decision making resources are privately owned and decisions about what to buy made by individuals Market economics Mixed economy china Micro economics price theory 4 The way we approach things in economics systematic decisions 5 Economics as a science 6 Positive vs Normative economics August 26 4 The way we approach things in economics systematic decisions 1 Key assumption rationality people do not intentionally make decisions that would make them worse off 2 People respond to incentives a positive incentives rewards Bene ts b negative incentives Costs f Bene ts are greater than costs it implies that the action should be taken It would be rational a Decision making is made at the Margin Person evaluates a little bit more versus a little bit less b Compare Marginal Extra Bene ts versus Marginal Extra costs Should I study one more hour for my econ exam Extra marginal bene t higher test score of 3 points Extra marginal Cost one hour of your time that could ve been spent doing something else Costs are conceived as opportunities fore gone when the decision is made Two types of costs 1 Explicit costs or out of pocket money costs 2 mpicit costs generally refer to alternatives given up when a decision is made Marginal bene t change in total bene tchange in one more unit of the activity MB delta TB total bene tDeta Q Marginal Costs Change on total costchange in one unit of the activity good delta TC total Costdeta Q Principle of Diminishing Marginal Utility Additional units of an activity beyond some point yied smaller and smaller additional units of satisfaction De ning self interest 1 assume peope pursue their self interest Self interest broadly de ned a increased wealth b prestige c power d ove e altruism f creating works of art 2 can be analyzed as arguments in a utility function a variable on which something depends like utility b u fXa Xb XcXh l u utility ll fsome fuctional relationship lll X argument Assme that people try to maximize their Utility 4 Economics as a science 1 Models simplify Abstractions used to make predictions The value of a model depends on how accurately it predicts events in most cases 6 Positive vs Normative economics 1 Two concepts of Efficiency 2 The circular ow of income diagram In the book notes Supply and demand represent the relationship between the price of a good and the quantity of it that is bought or sold These relationships can be expressed in words in a schedule as a curve or as an equation Demand Demand is the relationship between the price of a good and the quantity of that good which consumers are willing and able to buy The higher the price of a good the less people will be willing ad able to buy Conversely the lower the price the more people will be willing and able to buy other things being equal The Quantity demanded also depends upon quotother thingsquot sometimes referred to as nonprice determinants of demand Such as a The price of a substitute b The person s income c Expected future income d Expected future prices e The person s like and dislikespreferences In a Demand Curve when you connect points with a smooth line it is called the demand curve As prices go up the quantity demanded goes down which yields a curve that is a downward sloping This property of demand curves is called the Law of Demand Lowering prices brings in new customers Normal and Inferior Goods When an increase of income of buyers causes the demand curve to increase that good is called a normal good There are some goods for which demand will decrease as incomes increase These are called Inferior goods Substitutes and Complements The demand curve will shift in response to changes in the price of related goods If an increase in the price of one good results in a decrease in the demand for another those goods are said to be complements If an increase in the price of one good results in an increase in the demand for another those are said to be substitutes Elasticity measuring the responsiveness of demand to price changes The Law of Demand states that the demand curve will be downward slopping but does not explain the steepness or slope of the demand curve Total Revenue TRp X q or total expenditures by the consumer is signi cantly effected by the shape of the demand curve Economists use a concept called Elasticity to measure this degree of responsiveness to price changes Elasticity values range from zero totally unresponsive to in nity perfect substitution It is in the consumer s view the adequacy and number of available substitutes for some good that determines the elasticity of that consumer s demand curve for the good In uences of Elasticity a a time element there is greater opportunity of substitution in the long run as opposed to the short run b whether the good in question is a luxury or necessity If a good is viewed as a necessity the consumer will be insensitive to price changes It is up to the consumer to determine whether or not a good is a luxury or necess y c How high the price in relation to the consumer s annual income The formula for elasticity is n quotQquotP quotthe percentage change in quantity demanded for or in response to a given percentage change in pricequot Demand curves are generally classi ed as being ELASTIC or INELASTIC If the computed elasticity is a number less than one the curve is said to be inelastic which means that the quantity demanded is insensitive to changes on price If the computed elasticity is a number greater than one demand is said to be elastic Equilibrium The combination of the supply and demand curves determines the market price The equilibrium price occurs at the intersection of the supply S and demand D curves An equilibrium is a state of balance or equality between two forces where there is no pressure for change Market equilibrium is a state of balance or equality between the two forces of supply and demand Shifting Supply and Demand Curves The equilibrium price is not the same forever and ever It will change with time as do the underlying forces of supply and demand The kinds of things which are assumed held constant in constructing the demand curve include customer s taste the price of related goods income and expectations If any of these things change over time the demand curve with shift Price Ceilings and Floors If the government sets a minimum below which price may not legally fa we have what is called a price oor Price ceiling is the maximum price above which may not be legal to sell Any time prices are administered by government rather than being determines by the fee interplay of Supply and Demand troublesome gaps and problems of rationing will develop
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