Exam 1
Economics 2106 with Frost at Georgia State University
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Individual Choice
the decision by an individual of what to do, which necessarily involves a decision of what not to do, which necessarily involves a decision of what not to do
basis behind economy
Basic principles behind the individual choices
1. Resources are scarce.
2. The real cost of something is what you must give up to get it.
3. “How much?” is a decision at the margin.
4. People usually take advantage of opportunities to make themselves better off.
Resource
- anything that can be used to produce something
- are scare: quantity available isn't large enough to satisfy all productive uses
Opportunity cost
the real cost of an item
what you must give up in order to get it
crucial to understanding individual choice
Trade off
when you compare the costs with the benefits of doing something
marginal decisions
Decisions about whether to do a bit more or a bit less of an activity
marginal analysis
Making trade-offs at the margin
The study of comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less
Incentive
anything that offers rewards to people who change their behavior
people respond to incentives
Principles that underlie the interactionof individual choices
1. There are gains from trade.
2. Markets move toward equilibrium.
3. Resources should be used as efficiently as possible to achieve society’s goals.
4. Markets usually lead to efficiency.
5. When markets don’tachieve efficiency, government intervention can improve society’s welfare.
Trade
individuals provide goods & servies to others and receive goods & services in return
Gains from trade
people can get more of what they want through trade than they could if they tried to be self-sufficient
Specialization
each person specializes in the task that he or she is good at performing
causes increase in output
The economy, as a whole, can produce more when each person specializes in a task and trades with others
Equilibrium
economic situation when no individual would be better off doing something different.
Efficient
takes all opportunities to make some people better off without making other people worse off
Equity
everyone gets his or her fair share
it's hard to agree as to what is far, not well-defined concept
What do markets usually lead to?
Efficiency
incentives built into a market economy already ensure that resources are usually put to good use
opportunities to make people better off are not wasted
What makes the market outcome inefficient?
Market failure - the individual pursuit of self-interest found in markets makes society worse off
Why do markets fail?
- Indiv actions have side effects nottaken into account: externalities
- One party prevents mutuallybeneficial trades from occurring in attempt to capture greater share ofresources for itself
- Some goods cannot be efficiently managed by markets
Principles that underlie economy-wide interactions
1. One person’s spending is another person’s income.
2. Overall spending sometimes gets out of line with the economy’s productive capacity.
3. Government policies can change spending.
model
A simplified representation of a real situation that is used to better understand real-life situations.
“other things equal” assumption
all other relevant factors remain unchanged
production possibility frontier (PPF)
illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given production of the other
By specializing & trading...
... 2 individuals can produce & consume more of both goods
a comparative advantage
producing a good or service if the opportunity cost of producing the good is lower for that individual than for other people
absolute advantage
an activity if he or she can do it better than other people. Having an absolute advantage is not the same thing as having a comparative advantage
Barter
barter when people directly exchange goods or services they have for goods or services they want
circular-flow diagram
a model that represents the transactions in an economy by flows around a circle.
firm
an organization that produces goods and services for sale
income distribution
§how total income is divided among the owners of the various factors of production
determined by factor markets
Positive economics
the branch of economic analysis that describes the way the economy actually works
Normative economics
makes prescriptions about the way the economy should work
Economists can determine correct answers for _________ questions, but typically not for _________ questions, which involve value judgments
Economists can determine correct answers for positive questions, but typically not for normative questions, which involve value judgments
Thereare two main reasons economists disagree:
Whichsimplifications to make in a model
Values
competitive market
many buyers & sellers
same good or service
supply and demand model
a model of how a competitive market works
5 key elements to supply & demand model
§Demand curve
§Supply curve
§Demand and supply curve shifts
§Market equilibrium
§Changes in the market equilibrium
demand curve
representation of the demand schedule
it shows how much of a g or s consumers want to buy at any given price
As price rises, the quantity demanded _______
As price rises, the quantity demanded falls
the demand curve is __________ sloping
the demand curve is downward sloping
An increase in population causes
an increase in demand
a rise in the quantity demanded at any given price
shift of the demand curve
a change in the quantity demanded at any given price, represented by the change of the original demand curve to a new position, denoted by a new demand curve.
A movement along the demand curve is a change in...
...the quantity demanded of a good that is the result of a change in that good’s price.
What is the difference b/w a movement & a shift on the demand curve?
movement: the quantity demanded of a good that is the result of a change in the good's price
shift: changed in the quantity demanded at any given price
An increase in demand means
a rightward shift of the demand curve
at any given price, consumers demand a larger quantity than before
What causes a demand curve to shift?
changes in the prices of related goods (substitutes & complements)
changes in income (normal & inferior goods)
changed in tastes
changes in expectations
substitutes
two goods are substitutes is a fall in the price of one of the goods makes consumers less willing to buy the other good
complements
two goods are complements if a fall in the price of one good makes people more willing to buy the other good
normal goods
When a rise in income increases the demand for a good
Inferior Goods
When a rise in income decreases the demand for a good
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“I have been getting MUCH better grades on all my tests for school. Flash cards, notes, and quizzes are great on here. Thanks!”
Kathy
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