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
- What is “marginal”?
- 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?
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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
- The intersection of two curves is market equilibrium point.
Three-step approach to analyze changes in equilibrium
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Identify which curve (or both) shifts
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Identify the direction of shift
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See how the shift changes equilibrium price and [equilibrium trading volume
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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.
- When it reacts significantly to changes in price, it is “elastic”.
-
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
-
winners and losers (those who have succeeded socially, economically, etc.)
-
trade restrictions
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externalities and market inefficiencies
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Resolution of externalities by the parties
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Public Policy on Externalities
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
- Taxes and efficiency
- Taxes and equity.
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
- What is competition?
- profit maximization
- Supply curve of competing firms
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
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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
- Four properties of nondiscrimination curves
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optimization
- Consumers’ optimal choice
- Impact of income changes
- Impact of price changes
- Income and substitution effects
- Derivation of demand curve
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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
- political science and economics
- Condorcet’s Voting Paradox
- Arrow’s impossibility theorem
- The middle voter is king.
- Politicians are human beings too
- behavioral economics
- People don’t always act rationally.
- People respect fairness.
- People are not consistent throughout over the long term.
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