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social science
study of decision making
how and why ppl make economic decisions |
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individual will take action if additional benefits are at least as great as additional costs
benefits out-weigh costs
ppl try to maximize economic surplus = benefits-cost
behavioral model |
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value of next best alternative that must be foregone to undertake an activity
what is given up
exist because of scarcity |
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| additional cost to do one more unit of activity |
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| Marginal Benefit >/ Marginal Cost |
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costs cannot be avoided or recovered at time of decision
--rational ppl will ignore sunk costs |
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| markets in which profit opportunities are eliminated almost instantaneously |
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| seeks to understand economic behavior w/o making judgements |
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| evaluates outcomes of economic behavior as good or bad |
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compilation of data to describe facts
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sets of statements about cause and effect
use models to explain behaviors |
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| efficient economy produces what ppl want at least possible cost |
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| if economic pie gets bigger everyone gets bigger slice |
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nat'l ouptut (size economy) grow steadily, w/ low inflation, and full-employment of resources
--shocks (even +) can impose adjustment costs |
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factors of production
inputs |
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| produced in order to be used in the production of other goods/services |
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| process transforms resources into usable goods and services |
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| judge alternatives using opportunity cost |
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produce good using fewer resources
doesn't matter |
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produce good using lower opportunity cost than another producer
--matters in division of production
--special in good that they have comparative advantage
--who gives up the least |
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| calculate opportunity cost |
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| OC good1 = good2/good1 = good 2 |
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| anything produced that will bu used for future production |
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creation of capital
**when invest in capital -- give up present consumption
**more capital increases future production/consumption |
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| goods produced for present consumption |
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| The Production Possibilities Frontier (PPF) |
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a graph that shows all possible combinations of two goods or services that could be produced if all of society's resources are being used efficiently
--shows constrained choice, opportunity cost, and scarcity |
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producing what ppl want -- least possible cost
CONDITIONS
1) use all resources effeciently
2) produce what ppl want |
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opportunity cost of good on x-axis
--how much good y give up for unit good x that we gain |
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| law of increasing opportunity cost |
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| the more and more that we produce, we have to give up more and more of the other good |
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| marginal rate of transformation |
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slope of PPF
opportunity cost of good X
rate at which good Y transformed into good X |
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| increase in total output in economy |
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economy in which a central gov't either directly or indirectly sets output, targets, prices, and incomes
COMPLETE CONTROL |
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"free market"
economy in which individual ppl and firms pursue their own interests w/o central direction or regulation |
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| institutions thru which buyers and sellers interact and engage in exchange |
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| idea that consumers ultimately decide what will be produced or not by choosing what to purchase or not |
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| freedom of individuals to start and operate private businesses |
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mechanism by which buyers and sellers coordinate exchange
how they communicate |
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wealth of nations
invisible hand determines prices and quantities |
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| first identify interaction of production cost and value that people place on products determine prices |
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organization that transforms resources (inputs) into products (outputs)
supply outputs
demand inputs (land, labor, capital) |
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consuming units of economy
demand outputs(products)
supply inputs |
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output markets (product markets)
input markets (factor markets) |
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behavior of buyers
how much they want to buy? |
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| shows relationship between price of product and quantity demanded |
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| amount of a product someone wants to buy at current market price |
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negative relationship between price and quantity demanded
when price goes up demand goes down |
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| as price rises, we substitute consumption of other similar goods |
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| as price rises, we substitute consumption of other similar goods |
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as prices rises, ceteris paribus(income) we can simply afford less of the good
income stays the same |
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| diminishing marginal utlity |
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as we consume more of a good, the marginal benefit from each additional unit decreases
marginal utility = marginal benefit |
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| demand curve intersect quantity axis |
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| amount of a good we can consume in a given period is limited, if only by time |
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| demand curve intersect price axis |
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| for ne good, there is a price above which no one will buy any of it |
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| shows behavior of all buyers in a market as a groups |
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at every pirce, ppl want to buy more of the good/service
at every quantity demanded ppl will pay more for it |
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| at each price, willing to buy fewer units of the good |
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| total value of what household owns minus with it owes |
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| goods for which demand increases as income/wealth increase, and for which demand falls as income/wealth fall |
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| goods for which demand increases as income/wealth decrease and for which demand decreases as income/wealth rise |
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| goods/services that can serve as replacements for one another |
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| identical products produced by different suppliers |
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| goods that are usually consumed together |
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| effect of demand on other good |
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price substitute increase, increase demand
price substitute decrease, decrease demand
price complement increase, decrease demand
price complement decrease, increase demand |
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| effect population on demand |
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increase in population, increase demand
decrease in population, decrease demand |
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| revenues from selling good minus cost of production |
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when equilibrium quantity unites are being sold for equilibrium price
where supply and demand intersect |
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price set below equilibrium
not enough being produced to satisfy demand |
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price is too high
producers begin to lower price |
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