Economics
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| Economics | the study of choices on how to allocate the scarce resources
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| Macroeconomics | studies the economy as a whole
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| Microeconomics | studies parts of the economy or some certain type of market
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| Basic problem | resources are scarce; people's wants are unlimited but resources are limited
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| Principle 1 | People face trade-offs; if you want x, you must give up y because you can't have them both.
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| Principle 2 | the cost of something is what you give up to get it; opportunity cost:
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| Opportunity cost | next best alternative that you had to give up because you chose a particular option (best alternative); includes not only money but time spent too;
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| Principle 3 | rational people think at the margin
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| Marginal change | small incremental adjustments to an existing plan of action.
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| Marginal benefit | additional benefit resulting from a one unit increase in the level of an activity
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| Marginal cost | additional cost associated with one unit increase in the level of an activity.
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| Principle 3 Rule | when MB > MC, rational people will increase the activity; when MB < MC, rational people will stop doing this activity.
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| Principle 4 | people respond to incentives; ex - incentive is wanting to be fit and result is exercising.
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| Principle 5 | markets are usually good ways to organize the economic activities.
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| Competitive market | many sellers and many buyers; no one can influence the price
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| Monopoly market | one seller and many buyers
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| Oligopoly market | a few sellers and many buyers.
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| Principle 6 | Sometimes we need help form the government to improve the market outcome because of two phenomenons: market failure and market power:
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| Market Failure | market on its own fails to produce an efficient allocation of resources.
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| Market Power | the ability of a single person or small group to have a substantial influence on market prices.
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| Slope of Horizontal line | 0
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| Slope of Vertical line | infinity
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| PPF - production possibilities frontier | all combinations of output that an economy can possibly produce if resources are used efficiently.
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| What is always downward sloping? | PPF
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| What is the slope of a PPF? | opportunity cost
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| Positive statement | attempts to describe the world as it is.
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| Normative statement | attempts to prescribe how the world should be.
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| Perfect Competitive Market | many buyers and sellers; all goods exactly the same; free entry and exit; buyers and sellers can't influence price (called price takers).
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| Demand | the amount of a good that buyers are willing and able to purchase.
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| Law of Demand | when the price of a good rises, the quantity demanded drops; when the price of a good drops, the quantity demanded rises; makes a negative relationship.
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| Schedule of Demand/Supply | table that shows the relationship between the price of a good and the quantity demanded or supplied.
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| Demand curve or Supply curve | graph
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| Market demand or supply | horizontal sum of all buyers demands or all sellers supplies at each price.
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| Endogenous Variable | a type of variable that is shown in a model; ex - price of a good.
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| Exogenous Variable | type of variable that is not show in the model.
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| Rule of Endogenous variable | if there is a change in the endogenous variable, then a moving along the curve will occur in the model.
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| Rule of exogenous variable | if there is a change in the exogenous variable, then there is a shift of the curve.
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| Normal good | when income increases, the quantity demanded increases; they go to the same direction; ex - diamonds, expensive houses and car.
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| Inferior good | when income increases, quantity demanded decreases; they go in opposite directions; ex - instant noodles, bus rides, frozen dinners.
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| Substitutes | goods that can satisfy the same set of goals/preferences; ex - coke and pepsi, tea and coffee.
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| Complements | goods that are used in combination with each other; ex - tea and sugar, ketchup and fries.
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| Factors that affect a demand curve | Number of buyers, income, price of related goods, taste, expected price.
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| Supply | the amount of a good that sellers are willing to and able to sell
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| law of Supply | when the price of a good rises, the quantity supplied also rises; positive relationship.
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| Supply curve factors | input prices, technology, number of sellers, expected price.
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| P and q | p - equilibrium price; q - equilibrium quantity.
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| equilibrium | situation in which the market price has reached a level where quantity demanded equals quantity supplied.
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| Surplus | quantity supplied > quantity demanded; sellers will cut price and Qd will increase and Qs will decrease; won't stop until reaches equilibrium.
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| Shortage | Q supplied < Q demanded; sellers will increase price to raise profit; Qd will decrease and Qs will increase until equilibrium.
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| 3 Step analysis | analyze changes of equilibrium; Step1-determine whether the event affects supply, demand, or both; Step2-determine which direction curve shifts; Step3-use supply-demand diagrams to compare old eq point to new eq point and determine changes in the market.
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