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Principles Of Economics

by: Brett Stanton

Principles Of Economics ECON 21000

Marketplace > Purdue University > Economcs > ECON 21000 > Principles Of Economics
Brett Stanton
GPA 3.6

Kelly Blanchard

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Kelly Blanchard
Class Notes
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This 12 page Class Notes was uploaded by Brett Stanton on Saturday September 19, 2015. The Class Notes belongs to ECON 21000 at Purdue University taught by Kelly Blanchard in Fall. Since its upload, it has received 14 views. For similar materials see /class/207952/econ-21000-purdue-university in Economcs at Purdue University.

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Date Created: 09/19/15
Econ Notes 0822 0 Economics study of individual behavior How we decide what to do Basic choices from our individual behavior Based on how we want to L v and its effect 0 Resources factors of production these are the things that you can use to produce We categorized resources in 3 different ways 0 Natural land dirt crops oil coal 0 Labor people We use people We allocate people and where they should work 0 Capital NOT money Physical capital rather than financial capital Man made resources like building equipment machinery Anything to be produce by man instead of nature t i We want more than q u v there is available Ifyou didn t have to pay money for something and it was free then people would want more than what is available What s not scarce 0 Trash waste The quantity of trash is greater than the quantity demanded 0 Greenhouse gases pollution an air is scarce water is scarce Market Economy about being efficient 0 Private property rights that are very well defined MY bag I PAID for this bag of those products are going to determine who gets what I 0 Exchange is voluntary Don t force people to buy things they don t want Normative vs Positive 0 Judgment is normative thinking what s fair and not fair Facts are positive Scarcity implies that we have to make choices How we make rational choices Comparing benefits with any actions with costs Benefits gt costs 9 take that action Benefits lt costs 9 don t take that action Economic costs mm is the value of the best alternative Best alternative to going to a 730am class is sleeping Mari a cost that is unavoidable and should not be accounted for in decision making 0 Job offers 70000 80000 90000 Compare bene ts of eachjob Assumejobs are all the same except for salary 9 most would take 90K most rational choice Bene ts of 70K job 0 70K 0 Cost oftaking 70Kjob 9 90K 20K worse off 0824 Anytime we make one choice it means we re giving up something else Bene ts of 80000job 0 80000 0 Cost oftaking 80Kjob990Kjob o The cost is not de ned by the difference between the value of each job 0 10000 lt 0 0 Would be worse off taking 80K over 90K Bene ts of 90K job 0 90K 0 Cost of 90Kjob9 80Kjob 0 10000 gt 0 0 Better off taking 90K over 80K Implicit costs vs explicit costs Free goods 0 Cost value of time 0 Getting something free there is still some kind of cost 0 Free gasoline cost of waiting value of time Costs of going to college o l min 5 n 392 u money you could have ea1ned ifnot in school rent parking food etc Explicit costs are books and tuition Implicit costs are forgone wages o Highlighted words are opportunity costs nonhighlighted words are sunk costs irreversible costs 0 Should not include sunk costs for any rational decision Mazzerati Car9 120K 0 At the time of purchase opp cost9 120K 0 After 2 weeks opp cost of owning car9 100K since it is used 0 20K is now part of the sunk cost 0 Best alternative of owning the car is to sell it The value of selling it is 100K Waiting in a restaurant 0 Wait9 30 min 0 After 45 min wait9 30 min more 0 45 min passed is a sunk cost 0 Compare the cost of the additional 30 min with the bene ts of waiting Multiple Quantities 0 When looking at multiple quantities still have to compare bene ts with costs but for o Marginal additional value 9 value of an additional unit 0 Marginal cost 9 cost of an additional unit 0 13 Krispy Kreme donuts o Marginal value gt marginal cost 9 DO IT 0 Marginal value lt marginal costs 9 DON T DO IT Costs vary across individuals 0 Biomedical Engineer owns a Mazzerati needs a tune up 0 BM Engineer can tune up the car in 1 hour 0 If he takes sit to a mechanic the mechanic can do it in 2 hours 0 Engineer makes 400hr The mechanic charges 100hr o If engineer does it it costs him 400 Mechanic will cost him 200 l39 11m 9 who can produce a good faster or who can produce more in the same amount of time 9 who has the lowest cost of production 2 people 2 tasks 0 Cleaning bathrooms and making beds Scott 0 Cleans 4 bathrooms in an hour or make 12 beds in an hour 0 Scott s costs I 4 bathrooms or 12 beds I 4 bathrooms cost 12 beds I 1 bathroom costs 3 beds Caroline 0 Cleans 3 bathrooms in an hour or make 10 beds in an hour 0 Caroline s costs I 3 bathrooms or 10 bed I 3 bathrooms cost 10 beds I 1 bathroom costs 3 13 beds Comparative and Absolute advantage goes to Scott for cleaning bathrooms Comparative advantage in making beds goes to Caroline v exists when at a zero cost the amount of goods that people want exceeds the amount available More of the good has to be desired than what is available To be scarce a good must be 0 Rare 0 Desired Basically if more of a good is wanted than what is readily available then it is scarce w statement of factual info that is occurring n was statement that involves opinions on what action should be taken o If one person has comparative advantage in one task the other person must have comparative in the other task o No one can have comparative advantage in everything 0 If costs are exactly the same no one not both have comparative advantage Production Possibility Frontier PPF Hm output that can be produced Characteristics of PPF s 0 They will always have a negative slope o The magnitude of the slope always re ects the marginal cost of X Economywide PPF 0 Max bathrooms 43 7 70 0 Max beds 1210 22 022 0 General shape of the graph will be a smooth curve The more people to the economy the smoother the curve The less people the bumpier the curve Characteristics of economywide PPF s 0 They will always have a negative slope o The magnitude of the slope always re ects the marginal cost of X o Slope gets steeper as X increases 0 Higher cost of X as X increases 0831 Economywide PPF Cars 0 2 4 6 8 Doughnuts 60 50 36 20 0 2 cars cost 10 doughnuts 9 1 car costs 5 doughnuts o Marginal cost of lSt car AND 2quotd car 5 doughnuts 430 is inef cient J Production Ef ciency 9 produce at the lowest cost focused on cost If you produce more of one good 9 decrease production of the other good Allocation Ef ciency 9 when resources are allocated to their most highly valued use focused on value To get to an unattainable point there would have to be a Shift in PPF When the production possibility increases then we have economic growth 0 Change in the level of resources 0 Change in productivity of resources What if a change affects only one good One intersect will change the other will stay the same DEMAND 0 Quantity a consumer is willing and able to purchase at various prices 1 increase in price 9 decrease in quantity demand decrease in price 9 increase in quantity demand 3 assumptions about consumer choice 0 Substitutability o All goods have value and goods with the same value can be substituted 0 L maximum amount of one good that you d give up to get one more unit of another good 0 Declining marginal values 0 As the quantity increases the marginal value falls Cookies Q boxes per month Paradox of Value What is more valuable water or diamonds Total value of water gt total value of diamonds Marginal value of 1 bottle of water lt marginal value of 1 diamond 0907 Assumptions of Consumer Choice 0 Substitutability o Declining Marginal Value 0 Rationality o Bene t 9 marginal value Cost 9 price If MV gt price 9 buy it If MV lt price 9 don t buy it 000 Price of cookies is 7 9 quantity demanded 3 Price of cookies is 5 9 quantity demanded 4 Price is Y variable QD is X variable Changes in Demand 0 The demand curve shifts 0 New line is called D D prime Increase means shift to the right not up Decrease means shift to the left not down Shifting on the original line means increasedecrease in Things that will change demand 0 Income o goods where demand rises when income rises and demand falls when income falls goods Where demand risi When income and demand when 1ncome risi 0 Changes in the prices of related goods r 2 goods that are used in place of one another I Price for good A rises demand for good B rises I Price for good A falls demand for good B falls goods that are used together I Price for good A rises demand for good B falls I Price for good A falls demand for good B rises o Expectations 0 Expect price to rise 9 rise in current demand 0 Expect price to fall 9 fall in current demand 0 Expect income to rise 9 increase demand for normal goods and decrease demand for inferior goods 0 Change in number of buyers 0 More number of buyers 9 increases demand 0 Less number of buyers 9 decreases demand 0 Taste and preferences 0 Advertising Change in price of a good 9 change in quantity demanded but not in demanded 0909 The 3 axioms of consumer choice 0 Substitutability and marginal value 0 Declining marginal value 0 Rationality 0912 Increase demand for wine increase in P of wine decrease of wine increase in income increase in P of cheese complement SUPPLY Maximum quantity a seller is willing and able to sell at various prices difference between total revenue and total costs TR P x QD TC economic costs 739 explicit costs mum39nm a 61 11 explicit costs and implicit costs Economic Pro t I 0 9 total revenue value here Itotal economic costs value elsewhere Economic Pro t I 0 9 total revenue value here I total economic costs value elsewhere Economic Pro t E 0 9 total revenue value here H total economic costs value elsewhere Ex If own a music store Total Revenue 9 600000year Explicit Costs 0 Wages 9 30000 0 Rent 9 100000 0 Instruments 9 20000 0 CDS 9 20000 0 Books 9 140000 0 460000 Accounting Pro t 140000 Implicit Costs 0 Value of time in an alternative case 0 Could work on Broadway for 300000year Explicit costs 9 460000 Explicit plus Implicit costs 9 460000 300000 760000 Economic Pro t 600000 760000 160000 Implicit Bene ts harder to measure 2 VIEWS OF SUPPLY 0 Supply from an existing stock 0 Implicit cost of selling value of keeping the item 0 Price gt cost of selling 9 sell 0 Price lt cost of selling 9 don t sell 0 Supply with production SUPPLY FROM AN EXISTING STOCK sell from bottom work your way up 1965 Ford Mustang Coup MV 10 10000 P 16000 P 22000 QS 4 QS 7 SUPPLY WITH PRODUCTION Production costs come from 0 Input prices 0 Input productivity 0 Marginal product additional output produces by l more worker 0914 SUPPLY WITH PRODUCTION prrice gt MC 9 supply the product prrice lt MC 9don t supply the product Assume labor is only variable input 39 l azl am M F the additional output produced by one more unit of labor MPL ChangeInQuantityChangeInLabor


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