Econ 110

• Economics


  Studies how scarce resources are allocated and how incentive structures impact decision-making
• Scope of economics


  • Individuals and Businesses (Microeconomics)
  • Governments (Macroeconomics)
• Core concepts in economics

  • Scarcity, Opportunity Cost, and Production Possibilities
  • Comparative Advantage, Trade, and Output
  • Economic Organization
• Scarcity


  There is less of a good freely available than what people want
• Individuals have unlimited wants but are faced by a constraint called scarcity
• Scarcity leads to the question of how to choose between alternatives
• Opportunity cost


  The highest valued alternative
• The dollar value of opportunity cost is the dollar amount of the highest valued alternative
• Production Possibilities


  1. Prioritize actions

  2. Determine how good at doing these things
• Comparative Advantage The joint output of trading partners will be greatest when each good is produced by the low opportunity cost produc
• Three basic questions of economics

  • What goods will be produced?
  • How will goods be produced?
  • For whom will goods be produced?
• In market economies, the three basic questions are answered by interactions of buyers and sellers in a market
• In command economies, the three basic questions are answered by the government
• Examples of command economies

  • North Korea
  • Communist China
  • Soviet Russia
  • Cuba
• Economics


  Studies how scarce resources are allocated and how incentive structures impact decision-making
• Scope of economics


  • Microeconomics (individuals and businesses)
  • How markets allocate scarce resources in a society (demand, supply, and market organization)
  • Economic efficiency
  • Difficult cases for the market
  • Government intervention in markets
• Demand


  An individual's willingness and ability to purchase a good/service at a certain price
• Law of Demand


  There is a negative or inverse relationship between the price of a good or service and the quantity demanded
• As the price of a good/service increases


  Our willingness and ability to purchase it decreases
• As the price of a good/service decreases


  Our willingness and ability to purchase it increases
• Substitution effect


  As the price of this one good/service increases, we look for substitute items that are less expensive
• Income effect


  If more money needs to go towards this one good/service, we feel like we have less money for the other basket of goods/services we wish to buy
• Marginal value


  The value of the last unit consumed (or purchased)
• Total value


  The combined value of all units consumed (or purchased)
• Consumers will increase their consumption of a good until the price equals the marginal value of a good
• Consumer surplus


  The difference between what the consumer is willing to pay and what they have to pay
• Elasticity of demand


  The responsiveness of quantity demanded to a price change

  
• Elastic demand


  The quantity demanded is very responsive to a change in the price

  
• Inelastic demand


  The quantity demanded is not very responsive to a change in the price

  
• Flatter demand curves


  Relatively more elastic (less inelastic)
• Steeper demand curves


  Relatively less elastic (more inelastic)
• Demand shifters


  • Changes in consumer income, preferences, tastes, or expectations
  • Changes in the number of consumers
  • Changes in the price or availability of related goods (complements and substitutes)
• Increase in demand


  Outward (away from the origin) shift of the demand curve

  
• Decrease in demand


  Inward (towards the origin) shift of the demand curve

  
• Producer choice


  Producers purchase resources (land, labor, capital, entrepreneurial ability) to produce output (goods and services that consumers want to buy)
• Law of Supply


  There is a positive or direct relationship between the price of a good or service and the quantity supplied
• As the price of a good/service increases

  The amount of the good/service produced increases
• As the price of a good/service decreases

  The amount of the good/service produced decreases
• Elasticity of supply


  The responsiveness of quantity supplied to a price change

  
• Elastic supply


  The quantity supplied is very responsive to a change in the price