econ ch.1-3

• Efficiency refers to how well an economy uses resources to produce output.
• Allocative efficiency occurs when goods and services are allocated according to consumer preferences.
• Production efficiency occurs when all possible outputs are being produced at the highest level on the PPF.
• The production possibility frontier (PPF) is the boundary between what can be produced with available resources, given technology.
• Economics: The study of choices people make to attain their goals, given their scarce resources.
• Scarcity: A situation in which unlimited wants exceed the limited resources available to fulfill those wants
• Economists study these choices using economic models, simplified versions of reality used to analyze real-world economic applications.
• Bottom Line: We don’t have enough money, time, resources, etc. to do everything for everyone so we have to make choices.
• Three Key Economic Ideas: People are rational, People respond to incentives, and Optimal decisions are made at the margin.
• People are Rational: Economists generally assume that people are rational.
• Rational: People make choices based on what they believe will make them happy.
• People do not deliberately do things to make themselves worse off.
• Rational decision makers weigh costs and benefits.
• Example: You won’t buy a $5 cup of coffee unless you believe it will be worth at least the time and effort it takes you to earn $5.
• If the price of pizza is $14, an increase in the price of hamburgers from $1.50 to $2.00 increases the quantity of pizzas demanded from 55 to 60 per week and shifts us to Demand curve 2.
• The demand curve for pizza shows the relationship between the price of pizzas and the quantity of pizzas demanded, holding constant other factors that might affect the willingness of consumers to buy pizza.
• The slope of a straight line is constant, allowing us to use any two points in the figure to calculate the slope of the line.
• When the price of pizza decreases from $14 to $12, the quantity of pizza demanded increases from 55 per week to 65 per week, indicating a slope of −2 divided by 10, or −0.2.
• If we start on Demand curve 1 and the price of pizza is $12, a decrease in the price of hamburgers from $1.50 to $1.00 decreases the quantity of pizza demanded from 65 to 60 per week and shifts us to Demand curve 3.
• The slope of a non-linear curve can be measured by the slope of a tangent line to the curve, at the point we want to know the slope, as shown in Figure 1A.8b.
• A non-linear curve has different slopes at different points, as shown in Figure 1A.8a.
• The relationship between two variables is linear when it can be represented by a straight line.
• One important formula is the percentage change, which is the change in some economic variable, usually from one period to the next, expressed as a percentage.
• Using graphs to draw conclusions about cause and effect is dangerous, as demonstrated in Figure 1A.7.
• The positive relationship between disposable personal income and consumption spending is shown in Figure 1A.6.
• In a positive relationship between two economic variables, as one variable increases, the other variable also increases.
• Few economic relationships are actually linear, but linear approximations are simpler to use and often “good enough” in modeling.
• In a negative relationship, as one variable increases, the other decreases.
• The area of a rectangle is equal to its base multiplied by its height, and total revenue is equal to quantity multiplied by price.
• People Respond to Incentives: As costs and benefits change, so do the actions that people will take.
• Example: Canadian banks choose to get robbed?
• Total revenue is equal to the quantity of 125,000 bottles times the price of $2.00 per bottle, or $250,000.
• The base of the blue-shaded triangle is 150,000 − 125,000, or 25,000, and the height is $2.00 − $1.50, or $0.50.
• The quantity of Pepsi bottles sold per month is 125,000.
• Whenever you must use a formula, you should follow these steps: Make sure you understand the economic concept the formula represents.
• Make sure you are using the correct formula for the problem you are solving.
• The area of the green-shaded rectangle shows the firm’s total revenue.
• The demand curve for Pepsi is represented by the total revenue curve.
• The area of the blue-shaded triangle is equal to ½ multiplied by its base multiplied by its height.
• Make sure the number you calculate using the formula is economically reasonable.