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Describes what people actually do. Factual statements can be confirmed by data. Objective statements about the world.
-Describing what has happened or predicting (because predictions are ultimately testable) what will happen is referred to as positive economics or positive economic analysis
Recommends what people ought to do. Advises individuals and society on their choices. Almost always dependent on subjective judgements (personal feelings, tastes, opinions)
-Economics believe that the person being advised should determine what preferences should be used.
Negative slope/What you can do efficiently, maximize all your money to spend
-considers tradeoffs (scarcity)/More you buy in one, less of the other.
-Price of a (# of A) + Price of b (# of B) = amount able to spend
List of activities that are squeezed out because of the choices you decide to make. Spend time doing one choice when you can be doing the other. Best alternate activity, what an optimizer is effectively giving up. The measure of what is given up when you do that activity. It IS the next best option of what is given up.
(simplified version of reality) A simplified description, or representation, of the world. Not perfect replicas of reality. May still help us to make good predictions and good plans for the future. Approximations that predict what happens in most circumstances... may not include all factors.
Use when you do not have a budget or time. It is an empirical study in which some process- out of the control of the experimenter- has assigned subjects to control and treatment groups in a random or nearly random way.
(not using a control group. Picking people random and separating)
When individuals specialize in what they do relatively best- we can all gain from trade
trade involves buyers and sellers- markets bring those parties together
1. Tastes and preferences / Income and wealth/ Availability and prices of related goods/Number and scale of buyers / buyers expectations about the future.
1. What do you like
2. What does it cost?
3. How much money do you have
|PED| > 1
If P increases by 1% Qd decreases by more than 1%
|PED| = Infinity
Qd falls to 0 wit any infinitesimally small increase in P. (sensitive to small changes)
QD does not change no matter how much P increases
How much does the quantity demanded of one good change when the price of another good changes? "Own Price Elasticity of Demand/Calculates sensitivity along the Demand Curve/Measures the sensitivity of quantity demanded for some good X to a change in the price of another good Y
IED Measures the sensitivity of quantity demanded for a good to a change in income, ceteris paribus. How much does quantity demanded change when income changes?
Percent change in QD/ Percent change in income
A situation in which no agent would benefit personally by changing his or her own behavior. The economic system is in equilibrium when each agent feels that he or she cannot do any better by picking another course of action. A situation in which everyone is simultaneously optimizing.
Developing models that explain some part of the world
Testing those models using data to see how closely the model matches what we actually observe. Enables us to explain the past and predict the future.
When someone chooses the best feasible option given the information that is available.
-Just requires logical appraisal of the costs, benefits and risks associated with each decision.
1. Amount produced by sellers= amount purchase by sellers
2. Sellers only produce to extent costs< Market price
3. Buyers only use product to extent benefits are at least market price.
1- Omitted variables
2. Reverse Casualty
1- can be answered
2- (relevant and important) addresses topics that are important to individual economic agents and/or to society
1. very buyer pays and every seller charges the same market price, no buyer or seller is big enough to influence that market price,
2. all sellers sell an identical good or service
tools and buildings
Period of time when some of the firm's inputs cannot be changed (change some inputs, but not big ones like machinery)
Some of the factors of production (and therefore costs) are fixed. Change output -> change labor
Period of time when all of the firm's inputs can be changed. Planning period. Firms can exit or enter an industry(Can change all factors of production) All factors (and therefore costs) are variable (changeable)
Change output--> Change all resources
Measures responsiveness of Qs to change in Price, Ceteris Paribus
PES= % Change in Q/ % Change in P
Bigger PES when firm has more inventory, more easily it can hire workers and the longer the time horizon
ATC Does not change as output increases. Ex- if inputs double, output doubles.
-gains from specialization all realized
ATC Increases as output increases
-ex if inputs double, output increases by less than double. Why? Top heavy, too much management.
- Limited Information
-Sorting through information can be complicated
Shifts- quantity demanded changes at a given price.
Movement- when the price changes and its demand curve has not shifted
-Closeness of Substitutes
-Necessity of use
-Time Elapsed since Price Change
-Proportion of Income Spent on Good/Service
Closer- Higher PED
Not many close- Lower PED
Luxury - Higher PED
Necessity- Lower PED
More time since change- Higher PED
Just Happened- Lower PED
High proportion- Higher PED
Lower Proportion - Lower PED
|PED| < 1
If P increases by 1%, QD decreases by less than 1%
If P increases by 1% Qd decreases by exactly 1%
Decrease in P
Increase in TR
Higher QD will more than offset the decrease in Per unit of Price
% Change in Q > % Change in P
Decrease in P
No Change in TR
Higher Q will exactly offset the decrease in per unit of P % Change in Q = % Change in P
Decrease in P
Decrease in TR
Higher Q will not offset the decrease in per-unit P
% Change in Q < % Change in P
- Number and closeness of substitutes
-Budget Share spent on the good
-Time Horizon available to adjust to price changes
-Diminishing marginal product of labor(marginal returns) and capital
-Each short run ATC curve is U shaped
-For each short run ATC Curve, the larger the plant, the greater is the output at which ATC is minimized.
Relationship between the lowest attainable ATC and output when the firm can change both plant size and quantity of labor. aka the Planning curve. tells the firm the plant size and quantity of labor to use at each output to minimize ATC. U shape means initially enjoys economies of scale> diseconomies of scale
Markets composed of only self-interested people can maximize the overall well being of society/ Directs consumers& producers to maximize their surplus&leads to the highest level of social welfare. Directs firms to seek out profits& keep costs low. And results in resources being allocated to their highest value.
The sum of consumer and producer surplus
-can fall if we dont allow people to trade
When no one can be made better off without making someone else worse off
-Social surplus is maximized
Total Surplus is maximized where Q is set at MC=MB (Marginal Cost= Marginal benefit)
-Doesnt mean everyone is equally happy, but leaning towards it.
-When market delivers an inefficient outcome
-Occurs when too much or too little of a good is produced
-Results in Dead Weightloss
The decrease in social surplus from market intervention or market failure. because it is not at an efficient outcome.
-Lost gains because unit not traded.
-Loss of TS Because units were not sold
-could increase TS if produced fewer units, freeing up resources to make other goods and services.
High transaction costs
Positive : MSB > sum of individual MB --> Under production
Negative: MSC< Sum of individual MB--> Over production
-Assuming it is competitive and has no failures and no interventions
-Efficient meaning resources put to highest valued use
-In certain situations, resource allocation can be accomplished well using other methods
1. Coordination Problem
2. Incentive Problem
-lottery/-first come, first served/majority rule /-contest/-personal characteristics (who needs it more)/-Force (best when huge inequities and only way to maintain order and fairness is redistribution
Prices direct flow of resources, provide incentives for participants
-best when too much info needed for central planner to make best decisions
The "Price" of one good in terms of the other; the exchange rate between goods.
Terms of trade ranges between Person A and B’s minimum and maximum price for one good.
Gains arise from specialization of labor.
-comparative advantage (wherever costs differ) the possibility for gains exist.
If property rights are clearly defined, then private bargaining will result in an efficient allocation of resources. efficient because the entity that values ownership the most will end up with the property right. this is true regardless of the initial definition of property rights- but initial allocation is indicative of who gets the surplus.
1. Transaction costs of negotiating are low enough. Parties must be able to negotiate economically. if there are too many parties at the table- this is not going to be possible.
2. Property rights must be clearly defined.
Bc negative and positive externalities lead to wrong equilibrium quantities. Pecuniary ext. do not do this, their impact is embodied in prices. The market price correctly reflects the society wide impact of market transactions.
- as goods become less or more scarce, their price should change.
1- those involved can negotiate economically is critically important.
2. property right is clearly defined.
3. number of agents on each side of the bargaining table matters.
no ne can prevent others consumption of that good. and one persons consumption does not prevent another persons consumption.
private goods- traded in markets where buyers and sellers meet, and if they agree on price, ownership is transferred.
deficit- tax revenues do not cover gov spending.
surplus- tax revenues exceed gov spending.
1. raise revenues to pay for public goods.
2. correct other market failures (externalities)
3. Redistribute income to address fairness issues.
4. Finance operations of government.
1. transfer payments--> unemployment
2. The tax structure--> taxing rich more or less etc.
-individual income taxes
-payroll taxes (tax on wages of workers, employers are required ti withhold from pay)
- corporate income - taxes paid by firms to the gov from their profits
excise - taxes paid when purchasing goods.
-misc taxes for roads, public transportation, tolls, licenses, fishing licenses. revenue from fed gov. given from fed gov used to distribute to poorer states. sales tax - percentage of a sale price of an item . Property tax- local gov rely to fund schools, libraries and public services. individual income tax. some also corporate income tax.
1- deadweight loss
2- increased costs due to bureaucracy
4. black markets.
the greater the number of regulations= the greater the number of government workers needed to enforce them.
Cost vs benefits
misuse of public funds. or the distortion of the allocation of resources for personal gain.
can be a cost of government activity.
Not confined to government sector- corruption exists in private sector as well.
- goods that are legally banned, they undermine the ban/avoid taxes and regulations. put legit businesses at a disadvantage/levy higher taxes by gov to compensate for lost rev/ criminals spend vast resources to evadethe law