Economics Principles Overview

Economics Study Notes - General

• Economics is the study of human behavior regarding scarce resources.
• Economists study decision-making, including work, purchases, savings, and investments.
• Economists also study how people interact, including how buyers and sellers determine price and quantity.

Economics Principles - Principles 1-4

• Principle 1: People face tradeoffs. Examples include choosing between guns and butter, or between efficiency and equity.
• Principle 2: The cost of something is what you give up to get it (opportunity cost).
• Principle 3: Rational people think at the margin, making small adjustments to plans of action. This involves weighing marginal costs against marginal benefits.
• Principle 4: People respond to incentives.

Economics Principles - Principle 5

• Principle 5: Trade can make everyone better off.
• Trade allows specialization, enabling countries to enjoy a wider variety of goods and services.

Economics Principles - Principle 6

• Markets are a good way to organize economic activity, as they are decentralized and influence firms and households in making their decisions.
• A free market maximizes quality and costs.

Economics Principles - Principle 7

• Governments can sometimes improve market outcomes, but not always.
• Governments may be needed to set rules about property rights or to intervene to prevent monopolies.

Economics Concepts - Macro vs. Microeconomics

• Macroeconomics studies the economy as a whole (inflation, unemployment, economic growth).
• Microeconomics studies how households and firms make decisions and how they interact in markets.

Economics Concepts - Market Failure

• Market failure is when a market left on its own does not efficiently allocate resources.
• This can occur if there is an externality (impact on a third party) or market power.

Economics Concepts - Inflation

• Inflation is an increase in the overall level of prices in an economy.
• Inflation is caused by factors that increase the rate of prices.

Economics Concepts - Unemployment

• Society faces a short-run tradeoff between inflation and unemployment.
• The business cycle refers to the irregular, unpredictable fluctuations in economic activity.

Economics Chapter 2, Thinking Like An Economist

• Economics uses observations and data like physics.
• Economists use models and theories to explain observations.
• Economists often cannot conduct experiments and must rely on observation.

Economic Concepts- General Assumptions

• Economists use assumptions to simplify their models, to reach relevant information.
• Assumptions are used to focus on the core elements of any given model or theory.

Economics Chapter 4 - Markets

• Supply and demand are the forces that determine prices and quantities in market economies.
• The law of demand states that prices and quantities are inversely related
• The law of supply states that prices and quantities are directly related
• Markets can be highly organized (e.g., agricultural markets) or less organized (local shops)
• The behavior of buyers and sellers determines market price and quantity.

Economics Chapter 5: Elasticity of Demand

• Elasticity is the responsiveness of quantity demanded or quantity supplied to a change in some determinant.
• A measure of how much buyers and sellers respond to changes in market conditions
• Total revenue is the amount buyers pay and received by sellers

Economics Chapter 5 (Continued): Elasticity of Demand (Continued)

• Demand can be elastic, inelastic, or unit elastic.
• The elasticity of demand depends on the availability of substitutes, the time horizon, and whether goods are necessities or luxuries.

Economics Principles - Chapter 6 (Government Policies)

• Price control regulations (price ceilings and price floors) can cause distortions in a market system
• Price ceilings cause shortages
• Price floors cause surpluses

Economics Chapter 7 - Consumers, Producers, and Welfare Economics

• Welfare economics examines how well-being is affected by resource allocation
• Consumer surplus is the difference between the willingness-to-pay and the market price for a good.
• Producer surplus is the difference between the market price and cost of production to a seller.
• Market efficiency refers to the value of allocating in a market

Economics Chapter 8 - Costs of Taxation

• The cost of a tax is not exactly the same as the loss in consumer and producer surplus
• Tax revenues can be larger or smaller, depending on the size of the tax
• Economic loss is a deadweight loss of the tax
• The size of the tax affects the consumer surplus and producer surplus

Economics Chapter 9- Self Read

• No specific concepts were found that need to be noted

Economics Chapter 10 - Externalities

• Externalities are uncompensated impacts of one person's actions on the well-being of a bystander
• Externalities can be negative or positive
• Negative externalities can be reduced by regulations that directly command and control behavior.
• Market solutions (negative externalities) can include taxes that will address incentives to decrease external costs

Economics Chapter 11 - Positive Externalities

• Positive externalities can be addressed with subsidies or quantity instruments (e.g. permits).
• The correct allocation is where social benefit = social cost

Economics Chapter 12 - Economic Costs and Firm Behavior

• Industrial organization studies how firms make decisions regarding market conditions.
• Firms aim to maximize profits
• Costs are categorized as implicit and explicit.

Economics Chapter 13: Costs of Production

• Firms study how they make decisions based on pricing and quantity
• Decisions can be based on perfect competition, monopolistic competition, oligopoly, or monopoly.
• Decisions based on profit maximization
• Explicit costs are monetary payments by firm.
• Implicit costs are not monetary payments or foregone opportunities
• Production function is a relationship between inputs and outputs.
• Marginal products are the rate at which output increases with extra input of one unit.
• Diminishing marginal product- If input increases, output falls

Economics Chapter 14 - Firms in the Competitive Market

• Competitive markets are widespread.
• In a competitive market there are many buyers and sellers.
• Firms in competitive markets are price takers. The firm must take market price.
• Firms must produce at the level where Price = Marginal Cost.
• Firms can decide to shut down or exit (long-run)

Economics Chapter 17 - Oligopoly

• Oligopoly is a market structure with a few sellers who offer similar or identical products.
• Game theory is the study of how people behave in strategic situations in the presence of others.
• Nash Equilibrium - dominant strategy.
• Players make choices based on what other players do

Explore the foundational principles of economics in this quiz. Understand key concepts such as trade-offs, opportunity cost, and the impact of incentives on decision-making. Test your knowledge on how these principles apply to real-life scenarios and economic interactions.