Scarcity and the Foundations of Economics

• The fundamental economic problem is scarcity, where desires exceed available resources.
• Economics studies how to allocate limited resources to satisfy unlimited wants, addressing scarcity.
• Scarcity exists because wants outweigh the ability to satisfy them with available resources.

5 Foundations of Economics

• Incentives matter as factors that motivate behavior, being either positive or negative.
• Direct incentives are straightforward, while indirect incentives can lead to unintended consequences, both negative and positive.
• Patents incentivize innovation, leading to economic growth and higher living standards.
• Life involves trade-offs, such as choosing a college major or government decisions on penalizing polluting companies.
• Opportunity cost represents the highest-valued alternative that must be sacrificed to obtain something else, not all alternatives.
• Marginal analysis evaluates whether the benefit of one more unit of something exceeds its cost.
• Trade creates value by bringing buyers and sellers together through markets, like Amazon.

1/22

• Trade is the voluntary exchange of goods and services between two or more parties, benefiting producers differently.
• Trade should be based on comparative advantage, producing goods/services at the lowest opportunity cost; without trade, everything would have to be self-produced.
• Assessment of the value of college involves factors such as direct costs (tuition, textbooks), indirect costs (opportunity costs), and potential earnings premium,
• College wage premium refers to the additional earnings potential from obtaining a degree.
• Choosing a major involves considering personal interests and abilities, not just potential earnings.
• Non-monetary benefits of college include improved job prospects, working conditions, a sense of accomplishment, and positive externalities from education.
• The Production Possibilities Frontier (PPF) models trade-offs. You cannot produce more of one thing without giving up another.
• The PPF model assumes fixed technology.

Linear PPF

• Resources are fixed
• Simplified two-good analysis is implied
• If the economy only makes pizza today and no chicken, this example illustrates Points C and D
• Points C and D both include pizza and chicken
• All points along the PPF are efficient, points inside the line are inefficient, and points outside the line are unattainable.
• Moving from one point to another on the PPF represents the opportunity cost.
• Comparative advantage compares two firms, one better at producing one product.
• Absolute advantage compares two firms -- one better at producing every product.
• Trade is based on opportunity cost.
• Linear PPFs have a constant opportunity cost, where the slope represents the opportunity cost.
• The slope (straight) is a constant opportunity cost
• Curved slope is the changing the opportunity cost at different points

1/27

• A non-linear PPF illustrates increasing opportunity costs, creating a bow shape.
• PPF shifts occur with new resources or technology that affect either one or both goods, leading to biased or general technology improvements.
• Specialization and trade involve decisions on whether to trade or produce more.
• Assumptions now include two goods (pizza and wings) and two people named Debra and Mike
• Production abilities include Debra making 60 pizzas or 120 wings
• Production abilities include Mike making 24 pizzas or 72 wings
• Absolute advantage means Debra's pizza and wings
• For Debra the oportunity cost is 2 wings for a pizza (120/60)
• For Debra the oportunity cost is 1/2 pizzas for a wing (60/120
• For Mike the oportunity cost is 3 wings for a pizza (72/24)
• For Mike the oportunity cost is 1/3 pizza for a wing (24/72)
• Comparative advantage involves lowest opportunity cost.
• Debra has the comparative advantage in pizza.
• Mike has the comparative advantage in wings.
• The trade-off is between present and future.
• Consumer goods are produced for current consumption such as food, housing, and clothing goods.
• Capital goods help produce other valuable goods like buildings, factories, and roads.

1/27 cont.

• Investment involves using resources to make new capital.

• Long-run PPF entails investing more in the future for greater growth.

• PPF shows potential production, not demand.

• Put the opposite in the numerator.

• Competitive markets feature many buyers and sellers, with no individual influencing prices determined by the market.

• Law of Demand says that with all other things being equal, there is an inverse relationship between price and quantity demanded.

• People buy more when the price us cheaper.

• The demand curve has price on the Y axis and demand on the X axis.

• Demand curve is a summation of every consumer demand

• A market demand curve has a downward slope.

• Shifts in demand are categorized into movement along the demand curve and shift in demand.

• Movement along a demand curve is caused by a change in the price of the good, reflecting the inverse relationship between price and quantity demanded.

• Shift in Demand is caused by non-price factors, shifting the entire demand curve either left or right.

• Non-price factors cause the demand curve to shift to the left or right, increasing or decreasing demand at any price.

• Demand shifters include changes in income (normal or inferior goods), prices of related goods (complements or substitutes), tastes and preferences, future expectations, and the number of buyers.

• Normal goods result in increased demand with increased income.

• Inferior goods result in decreased demand with increase income.

• Complements entail goods that go together, an example is peanutbutter and jelly.

• Substitutes entail one or the other goods.

• Future expectations influence today's consumption based on anticipated price changes.

• More buyers leads to market increase.

Article Summary

• Raising prices during emergencies can be seen as unfair.
• Small entrepreneurs may have taken advantage of raising prices.
• Larger businesses remain commited to longer turn customer loyalty.

1/29 Discussion

• A competitive market entails multiple buyers and sellers and is ruled by price
• Under law of demand, it is the inverse price and quantity relationship
• A quantity is on the x axis and rice is no the y axis
• There are at least two concepts you should know: Demand vs quantity demanded. Each varies.

2/3 cont.

• Changes in price don't mean the quantity demand goes up
• Marker demand is "horizontal (the sum of individual damands).
• Under the law of supply "all things equal, there is a direct relationship between the price and quantity suplied.
• There is typically an upwards slope in the supply curve bc direct relationship.
• A movement along the quantity supply curve is caused by a change in the price foe a good
• With shifts in supplu there are shifts in supply caused by non-price factors
• the entire supply curve will shift to the left or the right
• Profit = total resources - total cost
• These factors include: cost of inputs, changes in technology, taxes and subsidies
• Tax is the tax paid by the producer-added cost of production
• Subsidy includes the goverment paying sellers to produce ggods.
• If subsidy this would lead to and increae in the supply
• More indivudual sellers make more market supply
• If the price is higher ecpected tomorrow- they will delay the sales of those unitl a later date
• Equilibrum entail graphivally the intersection fo supply and demand
• An equilibrium occurs when there price thst equals quantity demanding and when the price that "clears the market"

2/3 Cont.

• If the price ia too low, they slide down the supply curve and up the demand so there is is SHORTAGE
• if the price is aboce the equilibrium pricen demand goes down and supply foes up and theres a SURPLUS
• Attempts to set or manipulate prices through govermnet involvement in the market

Price Ceiling

• Legally established maximum price for goods or service and there will be a shortage to the market.

Price Floor

• Legally established maximum price for goods or service and there will be a surplus to the market.
• Rent control is when there is a price calling on apartments
• Unintended consequences include shortage and reduction in apaerment quality
• Price floor are always above the equilibrium price

2/5

• The taxes include higher demand cruved- price concumers are willingness to take

Price and consumers

• Actual cost to consumers is measured and they are willing to pay based on market price
• Difference between what consumers are willing to pay and actually oay is determined consumer surplus
• high supply curve= minimum they want go sell and cover their production

Burden of taxation

• Higher demand curve= price concumer is willing to pat
• The producer surplus is market price minus the miminjm price the seller is willing to take
• Gains from trade (cs + ps)
• Tax on supplier- supply goes down, shortage and the price goes up, and quabtity ares go down
• Tax revenue = tas and new quabtity sold.
• Companies don't get any of the taxes
• Companies are worse off with a tas
• Producer suruls is smalles
• Quanitity sold godes doqn
• DWL = deadweight loss

2/5 CONT.

• If the price goes up in a shortage
• If the prices are rising- people will buy more of the stuff and goods

Discussion

• A discussion should incldue: Denand bs quantit
• Demand shift- caued by non-price factors
• Quantitu is cause by price
• Normla as imferior goofs

Depend on peipke's incone/changes in income Normal good- increase in income, increase in demand. Interioe- incresse in income, decrease in demand.

• shift supply -technology, nastural disaster, taces sand subsidies..
• MArket supplu = is horizontal snmation
• The price floor is on top of theg raph

Elasticity 2/10

• Model as shifted un supply and demand, Use supplely i this class Shidfts ti the keft. the stick price is the price
• the quantitu demanded chsngds significant,y ad the as result of a price change
• Demandi is iclastic of the quantitu changes

2/12 determinants

• These include of the pierve east it’s of demand. -existence go substitutes goods w lots to subsides goods w goo subsidieas share of d the budget spent of the good demand in more eastick for "big time and at a djustnent process generally denand goo

2/12 Gas

• Defining a goods gas as ok ink general no others subsides

• Elasticity- Midpoint. old orie p1 resulting q1 5 new resulting q2 5

2/12

• Denominator, is. -Denomimtaor is the midpoint. horizontal straight. For homogenous goo

perfectiy nealistic Numerator is 0

2/12 deman Elasticity is the a and tonal revenues-

• tonal revenues= price quantich

2/17Income East ity. Don't the absolute value cross price

2/17 government Burden of taxation the will pas

Externaoliries expeeiecnd by 3rd parties -

Disney said they 1,2,3

Review video from lecture

Positive externalities

They might to not may do as a result of th this. Government action Externalities Costs

An overview of the fundamental economic problem of scarcity, where desires exceed available resources. Explore the five foundations of economics: incentives, trade-offs, opportunity cost, and marginal analysis. Understand how these principles guide decision-making and resource allocation in the face of limited resources.