Intro to Economics: Units 1-8

• The course covers units 1, 2, 3 (sections 3.0-3.6 only), and unit 4 (sections 4.0-4.12).
• The final grade weight is 40%.

Unit 1: Economics and Livelihoods

• Economics studies interactions between people and their natural environment in producing livelihoods.
• Economics encompasses acquiring food, clothing, shelter, and free time.
• It includes interactions as buyers/sellers, employers/employees, citizens/officials, and family members.
• Economics includes interactions with natural environment - breathing and raw material extraction.
• It studies changes in each of these interactions over time.
• Historically, social status determined economic status.
• This was based on family standing and gender.

GDP per capita

• GDP (Gross Domestic Product) is the total value of all production in a period (e.g., a year).
• GDP per capita represents the average annual income.
• GDP is also referred to as gross domestic income.
• Relative incomes have shifted over time; In 1000 China was richest, 1500 Italy, 1900 Britain, and in 2018 the Unites States was the richest.
• Angus Maddison created a figure that demonstrates the GDP throughout the years.
• He dedicated his life to finding scarce data to find out how people in different parts of the world live in order to create it.
• The GDP changes throughout the years are shaped like a hockey stick.

Disposable Income

• GDP per capita measures average income, but disposable income reflects living standards better.
• Disposable income is the maximum amount of goods/services one can buy without borrowing or selling possessions.
• Disposable income includes wages/salaries, profit, rent, interest, transfers, minus taxes.

Industrial Revolution

• Significant scientific and technological advances occurred in Britain in the 18th century.
• These advances include textiles, energy, and transportation (steam engine).
• It is considered the biggest leap in technological progress in modern history.

Well-being and GDP

• GDP includes government-provided goods/services like schooling, defense, and law enforcement.
• These factors contribute to well-being but are not included in disposable income, making GDP per capita a better measure of living standards.

Adam Smith

• Adam Smith is considered the father of economics.
• He wrote "The Theory of Moral Sentiments" and "An Inquiry into the Nature and Causes of the Wealth of Nations."
• Smith popularized the idea that individual self-interest can serve the public good.
• He believed free markets generate prosperity but also advocated for government roles in defense, justice, education, and infrastructure.

Nominal GDP Formula

• Nominal GDP is calculated as (price × quantity) for all goods and services in the economy.
• It can be represented as: ∑ piqi, where pi is the price of good i and qi is the quantity of good i.

Real GDP

• Real GDP tracks changes in the quantity of goods and services produced, using a base year's prices.
• To assess growth, real GDP multiplies current quantities by base-year prices.
• If the GDP is the same from year to year but the products are made up of different compositions, the real GDP is unchanged.
• The growth rate of the economy in real terms is zero when real GDP is unchanged.

Purchasing Power Parity (PPP)

• When you're comparing living standards across countries, estimates of GDP per capita uses purchasing power parity (PPP) prices for equality in real purchasing power.

Growth Rates and Technology

• Growth rates can be compared across countries/periods by using a specific formula.
• A constant growth rate appears as a straight line on a ratio scale and a steeper line indicates faster growth.
• Technology includes machinery and equipment using scientific knowledge.
• Technology creates an output from materials, labor, and machines.

Capitalism

• Capitalism is an economic system combining specific institutions.
• It is a way an economy organizes the production and distribution of goods/services in an entire economy.
• Institutions are laws and social customs regulating distribution among families, businesses, and government bodies.
• Private property in a capitalist economy refers to equipment, buildings, and durable inputs called capital goods.
• Private property can be owned by individuals, families, businesses, or entities other than the government.
• Some valued things like air and knowledge cannot be owned or sold.

Markets

• Markets connect people for mutual benefit by exchanging goods and services through buying and selling therefore, they are voluntary.

Firms

• Firms organize production where individuals own capital goods, pay salaries/wages, and direct employees.
• The firm sells goods/services with the goal to make a profit.
• A firm still exists even if it takes on unpaid student interns if it pays wages and salaries.

Labor Market

• The labor market involves employers offering wages for work.
• Employers represent the demand side, while employees represent the supply side.

Economies of Scale

• Economies of scale occur when doubling inputs more than doubles output.
• A firm's long-run average cost depends on returns to scale and input prices.

Absolute Vs Comparative Advantage

• Absolute advantage means producing a good with less input than another.
• Comparative advantage means producing a good at a lower relative cost than another.

Capitalism as a Dynamic System

• Markets increase labor productivity, explaining economic growth by allowing people to produce goods which provide them with a comparative advantage.
• Capitalism becomes dynamic through private incentives, firms producing goods, public policies, and a stable environment.

Budget Constraint

• Assumes you are a worker with consumption equal to earnings.
• Consumption is wages times the hours you work (24-t), or c = w(24-t).
• For example, at $15/hour, the budget constraint is c = 360 - 15t.

Unit 2: Building Economic Models

• Ceteris paribus means "other things equal," simplifying analysis to focus on key variables.
• Incentives influence behavior by affecting the benefits and costs of actions.
• Relative prices is the price of one good compared to another which is usually expressed as a ratio.
• Economic rent from an action is the benefit beyond the next best alternative.
• Economic Rent = Benefit from option taken benefit from next best option.

Reservation Options

• The firms cost can be calculated by multiplying the number of workers by the wage, and the amount of tonnes of coal by the coal price.
• Let the wage be w, the number of workers L, coal price p, and coal tonnes R.
• The cost is expressed as: Cost = (wL) + (pR)

Isocost Lines and Creative Destruction

• An isocost line helps express the equation in the form y=a+bx.
• Profit/change in profit defined as revenue less costs.
• Creative destruction displaces old technologies with new ones. The innovations diffuse throughout the economy.
• Joseph Schumpeter identified creative destruction, where new technologies replace old ones, causing bankruptcies for firms that don't adapt.
• Old technologies were labor intensive, and new technologies are energy intensive.

Production and Labor

• Assume that land is divided into parts each worked by a farmer, who works hours during a year.
• Average product of labor equals total output divided by total farmers. For example, 500,000 kg grain/800 farmers = 625 kg/farmer.
• A production function describes the amount of output produced.
• Diminishing average product of labor occurs when additional labor decreases product of labor
• Diminishing average product of labor may be caused by more labor devoted to a fixed quantity of land, and more land brought into cultivation.
• Malthus’ model: diminishing average product of labor, and population increases if living standards increase

Subsistence Level and Malthusian Trap

• Subsistence level is living standards where population neither grows nor declines.
• Malthus's model creates an equilibrium with income at a subsistence level.
• Constant variables in this equilibrium are population size and income level.
• If conditions change, the economy will return to subsistence level income.
• Thomas Malthus viewed economic prosperity pessimistically, believing population would increase with prosperity, and the economy would return to poverty.
• The above view is known as the Malthusian trap, however it did not account for technology progress or the industrial revolution.

Unit 3: Key Economic Concepts

• Average product is total output divided by a particular input, for example per worker (divided by the number of workers) or per worker per hour (total output divided by the total number of hours of labour put in).
• Marginal product is additional output from increasing a particular input by one unit, with other inputs constant.
• Utility to the individul is shown by the indifference curve.
• An indifference curve is a curve of points which indicate the combination of goods.

Properties of Indifference Curves

• Indifference curves slope downwards due to trade-offs.
• Higher indifference curves equal to higher utility
• The curves are smooth, with no gaps and do not cross
• As you move to the right along an indifference curve, it becomes flatter.

Marginal Rate of Substitution and Returns

• Marginal rate of substitution (MRS) is the trade-off a person will make between two goods and it is the slope of the indifference curve.
• Diminishing returns occur when additional input increases output less than previous increase.
• It is also known as diminishing marginal returns in production
• A feasible combination is a combination of free time and a final grade.
• Outside the frontier is infeasible
• Marginal rate of transformation (MRT) is quantity of the good sacrificed to get another unit of another good. At a point, that point is the slope of the feasible frontier.
• The constrained choice problem is how to do best for ourselves given preference, constraints, and scarcity.
• John Maynard Keynes predicted productivity rises and suggested a 15-hour work week. He wrote his prediction in an essay on “Economic possibilities for our grandchildren".

Unit 4: Game Theory and Social Interactions

• Garrett Hardin described the tragedy of the commons as unregulated shared resources that individuals overuse for personal gain.
• The tragedy leads to long-term and negative consequences. Real world examples include overfishing, climate change and water scarcity.
• Social preferences (like altruism), repetition/reciprocity, and institutions can resolve these issues.
• Game theory analyzes strategic interactions.

Strategies and Games

• A strategic interaction is when people are engaged in a social interaction aware of affecting actions to others, and vice versa.
• A strategy is an action or plan chosen with awareness of mutual dependence of results for oneself and others.
• Models of strategic interactions are described as games
• A model of strategic interaction describes the players, feasible strategies, information, and playoffs.

Game Theory

• Game theory helps in economics and social sciences.
• Division of labor means specialization, where producers complete different tasks.
• Characteristics of Game Theory include:
• Players: Who is interacting with whom.
• Feasible strategies: Which actions are open to the players.
• Information: What players know when making decisions.
• Payoffs: What are the outcomes for each combination of actions

Specialization

• Specialization is better if markets are flooded with one crop if the market price falls.
• People do better making different goods if they are specialized for the crop more suited for their land.
• Best response gives player biggest playoff.
• A dominant strategy yields the highest payoff.
• John Nash created the Nash equilibrium.
• At a Nash equilibrium, no player changes strategy.
• The dominant strategy equilibrium in the invisible hand game is a type of Nash equilibrium.
• Nash received the Nobel prize.

The Prisoner's Dilemma

• In a Prisoner's dilemma, payoffs are lower for everyone than if no player played the dominant strategy.
• People acting in self-interest causes non-optimal socially conditions portrayed by traffic jams and climate change.
• This is a game about Thelma and Louise who choose to Accuse(implicate) or Deny involvement in the crime.
• If both Deny, they are freed after few days of questioning.
• If one Accuses and other Denys, accuser is freed immediately, and the denier gets 10 years jail.
• Lastly, if both Accuse, they get 5 years jail with cooperation.
• Social Preferences place a value on what happens to other people, even if it results in lower payoffs for the individual.

Zero Sum Game

• A zero sum game is when payoff gains and losses of the individuals sum to zero.

Public Goods

• Public goods are non-excludable and non-rival as everyone benefits from them.
• The public goods game, like the prisoner’s dilemma is there is gain for everyone in a pest control.
• There is something to lose if others free ride.

Elinor Ostrom

• Elinor Ostrom won the Nobel in economics for policy governance and the commons
• She studied how communities can use common resources without succumbing to commons
• She distinguished between common-pool (rival, non-excludable goods) and common properties (collectively managed.
• Revealed Preference is a way of studying preference.

Cooperation

• Cooperation means multiple benefits occur.
• Cooperation does not need agreement; Players still cooperate.
• Division of labor is demonstrated by the invisible hand crops.
• Abandonment of Terminator has resulted from the repeated prisoners' dilemma control of pest.
• Sustained high levels of cooperation demonstrates public goods game without agreement.
• Altruism means the willingness to bear a cost in order to benefit somebody else.
• Fairness provides one’s conception of justice.
• Reciprocity means helping others who are kind.
• A sequential game is when all players don’t choose the stategies.
• Minimum acceptable offer defines the smallest offer by Proposer.

Final Exam Preparation

• Royal Rover's articles provided every man with a vote while also implementing penalties to ensure regulations were followed.
• Institutions determines power, while power demonstrates economic power.

Allocation

• Allocation describes the people, consequences, and results who does what.

• Allocate based on efficiency, and fairness(subjective).

• Vilfredo Pareto created the Pareto Criterion of A dominating Pareto if one would be better while nobody would be off. In his word’s A Pareto dominate. Allocations are not Pareto and efficiency.

• The sloope’s Frontier demonstrates into grain while indifference demonstrates Marginal rare.

• John Raws determines fairness which will eliminate genetics.

• MRT of work = of work requirements.

• Reservation:

• A Pareto is that benefit from all parties.

• Pareto= is set and has no contract.

• It must have a pareto to be successful with Angela and Bruno.

• Willingness with maximum that acquire.

• Supply depend on Sellers and represent the.

• Demand Curve slopes.

• Supply is curves.

• Equilibrium is the quantity= Demand there is no change.

• When demand, prices rise.

• MC Is total Slope function.

• Utility and Increase variable.

• Market clearing price, is no supply

• Characteristic which will only affect market.

• Maximum at price

• Deadweight is no surplus.

• Consumer Price etc Welfare = surplus