SUPA economics Midterm review

• Scarcity


  Leads to a quandary of choice
• Opportunity cost


  The best forgone option (price you pay for a choice)
• Trade-off


  All other options
• Microeconomics


  Focuses on individual choices and markets
• Macroeconomics


  Focuses on economy-wide issues like unemployment, inflation
• Microeconomics covers 70% of the US economy
• Markets are amoral
• Neoclassical theory is the basis for mainstream economics
• Model building in economics

  1. Vision

  2. Analysis

  3. Assumptions

  4. Development
• Ceteris paribus


  Other things being equal
• Assumptions


  Used to construct models
• Assumptions


  • Strong
  • Weak
• Strong assumptions are invalid, weak assumptions are valid
• Consumption


  The act of deriving utility
• Consumption does not always mean the good is used up
• Satiation point


  Bliss point (marginal utility = 0)
• Individual choice theory


  • Want to be happy
  • The more consumption, the better
• Satisfaction decreases with continued use of a product
• Law of diminishing marginal utility


  As each successive unit is consumed, the utility derived decreases
• Assumptions of individual choice theory

  • No scarcity
  • No production is necessary
  • No future or sense of time passing
  • No risk or uncertainty
• Goods


  • Tangible, can be stored (e.g. food, sneakers)
  • Intangible, cannot be stored (e.g. haircut)
• People know what gives them utility and want to maximize it
• Rational behavior - Utility maximizing assumption
• Ceteris paribus, the utility one derives from the consumption of a good


  Decreases with each successive unit consumed
• Marginal utility


  The additional utility derived from the consumption of an additional unit
• The optimal allocation maximizes utility
• To optimize, balance the marginal utilities
• Endowment


  All the natural and human resources from which all goods and services are produced
• Factors of production


  • Natural resources
  • Labor
  • Capital (physical, human, financial)
• Techniques


  One way of combining inputs
• Technology


  Set of available techniques
• Marginal productivity of factors of production eventually diminishes if one factor is increased while others are held constant
• Intertemporal choice


  Deciding between present and future consumption
• Discount rate


  The rate at which future utility is discounted
• High discount rate means wanting things now, low discount rate means being willing to wait
• Present value (PV)


  The value today of a future amount
• Risk


  Unknown events to which we can attach a probability
• Uncertainty


  Absolutely unforeseen events that may occur
• Uncertain events become risky events once they occur
• Demand shifters


  • Tastes
  • Income
  • Market size
  • Expectations
  • Related goods prices