Introduction to Economics: Core Principles

• Economics studies how society manages its scarce resources
• Scarcity implies choices, and economics analyzes these choices
• Microeconomics focuses on individual agents: households, firms, and markets
• Macroeconomics examines aggregate economic phenomena, such as inflation, unemployment, and economic growth

Core Economic Principles

• People face trade-offs: every decision involves giving up something else
• The cost of something is what you give up to get it (opportunity cost)
• Rational people think at the margin: they make decisions by comparing marginal costs and marginal benefits
• People respond to incentives: behavior changes when costs or benefits alter
• Trade can make everyone better off: specialization and exchange allow for greater efficiency
• Markets are usually a good way to organize economic activity: prices guide resource allocation
• Governments can sometimes improve market outcomes: addressing market failures or promoting equity

Supply and Demand

• A market is a group of buyers and sellers of a particular good or service
• Demand is the quantity of a good that buyers are willing and able to purchase at various prices
• The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises
• Factors influencing demand include income, prices of related goods, tastes, expectations, and number of buyers
• Supply is the quantity of a good that sellers are willing and able to sell at various prices
• The law of supply states that, other things equal, the quantity supplied of a good rises when the price of the good rises
• Factors influencing supply include input prices, technology, expectations, and number of sellers
• Market equilibrium is the point where the quantity demanded equals the quantity supplied
• The equilibrium price is the price that balances quantity supplied and quantity demanded
• Shifts in supply or demand curves lead to changes in equilibrium price and quantity
• Elasticity measures the responsiveness of quantity demanded or supplied to a change in one of its determinants
• Price elasticity of demand measures how much the quantity demanded of a good responds to a change in the price of that good
  • Calculated as percentage change in quantity demanded divided by percentage change in price
  • Demand is elastic if elasticity is greater than 1, inelastic if less than 1, and unit elastic if equal to 1
• Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers' income
  • Calculated as percentage change in quantity demanded divided by percentage change in income
  • Normal goods have positive income elasticity, inferior goods have negative income elasticity
• Cross-price elasticity of demand measures how much the quantity demanded of one good responds to a change in the price of another good
  • Calculated as percentage change in quantity demanded of good 1 divided by percentage change in price of good 2
  • Substitutes have positive cross-price elasticity, complements have negative cross-price elasticity
• Price elasticity of supply measures how much the quantity supplied of a good responds to a change in the price of that good
  • Calculated as percentage change in quantity supplied divided by percentage change in price

Market Structures

• Perfect competition: many buyers and sellers, homogeneous products, free entry and exit
• Monopolistic competition: many buyers and sellers, differentiated products, free entry and exit
• Oligopoly: few sellers, strategic interactions among firms
• Monopoly: single seller, barriers to entry

Costs of Production

• Total cost is the sum of fixed costs and variable costs
• Fixed costs do not vary with the quantity of output produced
• Variable costs vary with the quantity of output produced
• Average total cost (ATC) is total cost divided by the quantity of output
• Average fixed cost (AFC) is fixed cost divided by the quantity of output
• Average variable cost (AVC) is variable cost divided by the quantity of output
• Marginal cost (MC) is the change in total cost that arises from an extra unit of production
• Cost curves illustrate the relationship between quantity and costs
• Economies of scale occur when long-run average total cost falls as the quantity of output increases
• Diseconomies of scale occur when long-run average total cost rises as the quantity of output increases
• Constant returns to scale occur when long-run average total cost stays the same as the quantity of output changes

Art Markets

• Art markets are unique due to the characteristics of art as an economic good
• Artwork is often considered a luxury good with high income elasticity of demand
• Speculation plays a significant role in art valuation
• Art prices can be highly volatile and influenced by factors beyond traditional economic variables
• Information asymmetry is a challenge in art markets due to difficulties in authenticating and appraising artworks
• The art market can be segmented into primary (new works) and secondary (resale) markets
• Galleries, auction houses, and art fairs are key intermediaries in the art market
• Government policies, such as tax incentives and regulation, can impact art markets
• Globalization has increased international trade and investment in art
• Technological advancements, such as online platforms, are changing the way art is bought and sold

Economic Impact of the Arts

• The arts contribute to economic growth through direct spending, job creation, and tourism
• Arts organizations can revitalize communities and attract investment
• The arts can enhance education and workforce development
• Cultural tourism generates revenue for local economies
• The "creative economy" encompasses industries that produce or distribute artistic or cultural products
• Arts and culture can improve quality of life and social well-being
• Measuring the economic impact of the arts requires considering both direct and indirect effects
• Cost-benefit analysis can be used to evaluate the economic value of arts projects

Public Funding for the Arts

• Governments provide funding for the arts through various mechanisms, such as grants, subsidies, and tax incentives
• Rationales for public funding include market failures, social benefits, and cultural preservation
• Market failures in the arts may arise from positive externalities and information asymmetries
• Arts and culture can generate positive externalities by enhancing social cohesion and cultural identity
• Public funding can promote access to the arts for underserved communities
• Debates over public funding for the arts often involve questions of efficiency, equity, and artistic freedom
• Different countries have different models for arts funding, reflecting varying cultural values and priorities
• Nonprofit organizations play a crucial role in the arts sector, often relying on a mix of earned revenue and contributed income
• Philanthropy is an important source of funding for the arts, both from individuals and foundations