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Ten Principles of Economics

  • How people make decisions
    • 1: People face trade-offs (conflicting relationships)
    • 2: The cost of something is the value of what you give up to get it. - opportunity cost
    • 3: Rational people think in marginal areas
      • What is “marginal”?
        • marginal
        • Minor modifications to the action plan
    • 4: People respond to various [incentives
  • How people influence each other
    • 5: Trade makes everyone richer
    • 6: Markets are usually a good way to organize economic activity
      • Adam Smith and the Invisible Hand
    • 7: Governments can also improve outcomes brought about by markets
  • How the economy works as a whole
  • 8: A country’s standard of living depends on its ability to produce goods and services
  • 9: If the government prints too much paper money, prices will rise.
  • 10: Society faces a short-term tradeoff between inflation and unemployment - Phillips curve

economy model - Flow Circulation Diagram - Goods, services and money flows - production possibility frontier - production possibilities frontier - Mankiw states that the production possibility frontier bulges outward from the origin - This approach assumes [marginal cost increase

Why do economists disagree?

  • Difference between empirical and normative claims

    • Existence of [trade-off
    • Difference between values [chopped burdock root (and sometimes carrot) cooked in sugar and soy sauce
  • interdependence and profit from trade

    • opportunity cost and comparative advantage
    • The opportunity cost of one good is the inverse of the opportunity cost of the other good

Demand and Supply Action in the Market - demand curve - Relationship between quantity demanded of a good and its price, usually falling right - The quantity demanded by all buyers will be added together horizontally - - When income increases, demand usually increases. Such goods are called normal goods (i.e. goods for which demand decreases when consumer’s income increases) (normal good). - inferior goods (inferior good): demand increases when income decreases. For example, the use of buses increases because people cannot afford cars. - substitute goods : A decrease in the price of X reduces the demand for Y. - Movie Ticket and Video Rental Prices - complementary good : When the price of X falls, the demand for Y increases. - Gasoline and Automobiles - supply curve - Relationship between supply of a good and its price, usually rightward

Three-step approach to analyze changes in equilibrium

  • Identify which curve (or both) shifts

  • Identify the direction of shift

  • See how the shift changes equilibrium price and [equilibrium trading volume

  • elasticity

  • elasticity of demand

    • When it reacts significantly to changes in price, it is “elastic”.
      • x/y
      • That’s just a gradient.
      • The greater the slope of the curve, the more “inelastic” we call it.
    • It is easy to be resilient when there are closely substituted goods. If margarine is expensive, use butter.
  • elasticity of supply

    • This elasticity (i.e., slope) only changes the change in total income (xy) when the curve shifts.
    • The line of constant total income is hyperbolic

Government Policy

  • price regulation
  • tax

market efficiency - consumer surplus - allowable amount of payment

  • Measuring consumer surplus using demand curves
  • Market Efficiency and Market Failure

Cost of taxation - dead load

international trade

Public Goods and Shared Resources - public goods (i.e. goods or services such as parks or highways) - free rider Problem - shared resources - Tragedy of Common Land

tax

Cost of production

  • opportunity cost
    • What?
  • capital cost
    • What?
  • Economics profit and accounting profit
    • What’s the difference?
  • production function
    • Total cost curve
  • Fixed and variable costs
    • What’s the difference?
  • Average and marginal costs
    • What’s the difference?
  • Cost curve and its shape
    • What curve?
  • Short-term and long-term costs
    • What’s the difference?
  • Relationship between short-term average total cost and long-term average total cost
    • What kind of relationship?

Companies in Competitive Markets

monopolization

  • natural monopoly
  • monopoly versus competition
  • Expense of welfare aspects due to monopoly
  • Public Policy Against Monopolies
    • Promoting Competition through Antitrust Laws
  • price discrimination

oligopoly

  • Between monopoly and perfect competition
  • Game Theory and the Economics of Cooperation
    • prisoner’s dilemma
    • Oligopoly as a Prisoner’s Dilemma
    • Social welfare as a prisoner’s dilemma
  • Public Policy Against Oligopoly

monopolistic competition

  • What?

factor of production market

  • labor market
  • Labor Demand of Businesses
  • Labor Supply
  • Other factors of production: land and capital

Earned Income and Discrimination

  • Economics of Discrimination

Income Inequality and Poverty

  • measure of inequality
  • income redistribution

Theory of Consumer Choice - budget constraint

  • preference - Expression of preferences by [indifference curve - A set of points that provide the same satisfaction

    • Four properties of nondiscrimination curves
      • The indiscriminate curve of information is more this
      • Non-discrimination curve declines to the right
      • Indiscriminate curves do not intersect.
      • The nondiscrimination curve bulges inward from the origin.
        • This makes the assumption of diminishing marginal utility.
    • Two extreme examples of nondiscrimination curves - wholly-supplied goods : 5 yen coins and 10 yen coins - wholly-supplemented goods : shoes for the right foot and shoes for the left foot
      • image
  • optimization

    • Consumers’ optimal choice
    • Impact of income changes
    • Impact of price changes
    • Income and substitution effects
    • Derivation of demand curve
  • 3 applications

    • What?
  • Conclusion.

Frontiers of Microeconomics - information asymmetry - Hidden Behavior - principal - agent - moral hazard - hidden nature - reverse selection - Lemon Market - Communicating private information: signalling. - Encourage disclosure: screening. - Information Asymmetry and Public Policy

Microeconomics


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