Econ 1 Principle Econ Micro Notes PDF

Econ 1 - PRINCIPLE ECON MICRO Class Overview: An introduction to microeconomic analysis. Economic theory related to demand, production, competitive and non-competitive product markets, input markets, and welfare. Applications of microeconomic theory including its use in evaluating and...

Econ 1 - PRINCIPLE ECON MICRO Class Overview: An introduction to microeconomic analysis. Economic theory related to demand, production, competitive and non-competitive product markets, input markets, and welfare. Applications of microeconomic theory including its use in evaluating and forming public policy Week 1 1/6: Introduction -​ How would certain individuals behave with different incentives? -​ The performance of the economy depends on each subcategory of individuals -​ Economics tells us how people and firms act and behave depending on certain constraints 1/8 and 1/10: Inequality, Poverty, and Redistribution ★​ Describe the extent of economic inequality in the U.S (income and wealth) ○​ 39% of households made less than 25k in 2014 ○​ The average pretax household income in the top 1% ( the richest 1% of the individuals in the U.S) is 2.7 million. ○​ The graph shows the percentile of the income of U.S 2023 households before tax from 2023 ​ A percentile is a way to compare a number to a group of numbers. It shows the percentage of values in the group that are less than or equal to that number. ​ For example, if you score in the 90th percentile on a test, it means you did better than 90% of the people who took it.  ○​ In the graph, the order of the x-axis or the percentile goes from the poorest households to the richest. ​ Information from the graph: The graph shows that 20% of the U.S. population earned $.. per year. ○​ It lets you see the percentage of people making a certain amount of money ○​ The top 1% is what 99% of the population is not making ○​ The bottom 50% of the U.S income earns 25.1k a year per household ○​ The middle 40% earns 116k a year per household on avenge ○​ In the graph, there is a gentle slope ○​ The top 1% earns 2.7 million a year per household ​ We can say the 99 percentile makes less than 2.7 million a year ○​ Most economists examine data before taxes to understand the potential for income generation. If earnings were more equal, there might be less need for redistribution to reduce inequality. ○​ This shows the difference in the amount of money made from the 1% ★​ How has inequality changed over time ○​ As we can see in the early 20th century there were similar inequalities but during the time post WW2 there was a decrease in inequality. ○​ If what is required to report to the IRS or tax incentives change then it changes the data ○​ Previously, incorporating a business allowed individuals to keep earnings within the company, deferring (avoiding) personal income tax until funds were distributed. However, the IRS now scrutinizes both corporate and personal finances to prevent tax avoidance through excessive earnings accumulation. The Accumulated Earnings Tax (AET) imposes a 20% penalty on corporations retaining earnings beyond reasonable business needs to avoid shareholder taxation. ​ Attribution rules allow the IRS to consider certain corporate earnings as directly owned by individuals, ensuring appropriate taxation. ​ These measures ensure that income is taxed appropriately, regardless of whether it remains in corporate accounts or is transferred to personal accounts. ○​ BASICALLY, the increase shown in this graph can be fake since it could be individuals not being able to hide their earnings from the IRS anymore ○​ Why Aren't There More Income Tax Brackets for the Top 5%? (asked by a student) ​ The lack of additional tax brackets for the wealthiest Americans is often a political issue. For example, policies like those under Trump favored tax cuts for the rich. ​ Pro-Taxing the Wealthy Arguments ​ Supporters argue there’s no valid reason not to tax the rich more heavily.  ​ Higher taxes could address income inequality and fund public services ​ Against Higher Taxes for the Wealthy Arguments ​ Claim that high taxes might discourage new creations and investments by wealthy people like Jeff Bazos, who drive economic growth. ​ This view is often challenged, as studies suggest many wealthy people create for money and because they enjoy it. ★​ Ultimately, finding Empirical evidence is crucial to address fairness and economic incentives. ○​ Empirical evidence is information or facts gathered through observation, experience, or experiments rather than theory or personal opinion. ○​ BASSICALLY It's data you can measure and verify, like scientific studies or statistical findings. ○​ Income vs wealth ○​ For most people in the U.S., their house is their biggest form of health. ○​ If we look at the wealth 10% of individuals control 70% of the wealth of the United State ○​ The middle 40% control 30% of the wealth of the U.S ○​ And 50% of the households in the United States do not have any wealth ○​ Wealth inequality is much more severe than the rest of the world. ★​ What about the rest of the world ★​ ★​ The graph compares the US, Europe, and Western Europe and shows how the share of national income earned by the top 10% has changed since 1980. ★​ Are people aware of existing wealth inequality? What would they like it to be like? ○​ Quantile: A way to divide a data group into five equal parts. Each quintile represents 20% of the data, helping to compare different segments of a population or dataset. ​ For example: if you divide household incomes into quintiles: The first quintile includes the lowest 20% of earners. The second quintile includes the next 20%, and so on. The fifth quintile represents the top 20% of earners. ​ Quintiles are often used in economics and statistics to study income distribution, wealth, or other data patterns. ○​ The wealthiest quintile owns 90% of the wealth, the middle quintile holds a small portion, and the lowest quintile owns nothing. ○​ Perceived Distribution: People often overestimate the wealth of the lower-income population. ○​ Ideal Distribution: The concept of an equal distribution suggests that everyone would have the same amount of wealth ★​ Why study inequality: ○​ Inequality may arise due to factors such as differences in workability, effort, initiative, social norms, opportunities, parental support, financial staus, and social capital. ○​ Wealth inequality arises from factors such as differences in past savings behavior, inherited assets, and rates of return. ​ Example: people with higher education, access to top financial advisors, and better opportunities often have greater guidance on how to manage and grow their wealth. ★​ Intergenertatoin income mobility ○​ In a country with low intergenerational income mobility, a child's opportunities and income are heavily influenced by their parents' circumstances.  ○​ High-income mobility means that a child's opportunities and income are less dependent on their parent's situation, allowing for more social and economic advancement. ○​ There is a huge correlation with who your parents are and who you will become ○​ If it didn't matter who your parents are on average you would be in the middle it would be a straight line down 50 ★​ Why do these patterns of intergenerational mobility occur? ○​ Is it due to factors such as neighborhood, education, family structure, upbringing, or even environmental issues like pollution? ○​ Neighborhoods and Social Environment: ​ The neighborhood a child grows up in can shape their opportunities and outcomes. For example, access to high-quality schools, safe public spaces, resources, and exposure to role models often differ between neighborhoods. In areas with poverty, children may face higher crime rates, underfunded schools, and limited professional networks, which can restrict upward mobility. ○​ Education Quality and Access Education: ​ Access to quality education is highly unequal. Children from rich families often go to well-funded schools with better teachers, advanced courses, and extracurricular opportunities. On the other hand, low-income families may have limited access to quality education, perpetuating the cycle of poverty. ○​ Environmental Factors Pollution and other environmental issues ​ It disproportionately affects lower-income families, who are more likely to live near industrial areas or highways. Exposure to pollutants, lead, or unsafe drinking water can have long-term effects on health, cognitive development, and educational achievement, further hindering upward mobility. ★​ In the United States, the probability of moving from the bottom 25% of income to the top 10% is just 7.5%. ○​ Understanding these trends requires extensive research, often relying on over 40 years of data. 1/10 ★​ ★​ The graph shows the relationship between intergenerational mobility and income inequality ○​ Higher parental income elasticity (P) indicates lower mobility (i.e., your income is more dependent on your parents' income). ○​ Ideally, elasticity would be 0, meaning that your income does not depend on your parent's income, and everyone has equal opportunities. ★​ ○​ What does it mean to be in poverty? ○​ Absolute Poverty Rate: When a person's income is so low that they cannot afford basic necessities like food, clean water, shelter, and clothing. ​ It is based on a fixed income threshold, which does not change unless adjusted for inflation. ​ For example: in the U.S., an individual earning less than $14,000 per year is considered to be living in absolute poverty. ​ This measure looks at whether someone has enough money to meet essential needs, regardless of how wealthy or poor others in their society are ○​ Relative property rate: when a person’s income is significantly lower compared to the average income in their society, making it hard for them to maintain a standard of living considered normal in that society. ​ For example: If the median income in a country is $50,000, and someone earns less than 50% of that ($25,000) may be classified as living in relative poverty.  ​ This measure focuses on inequality and how far someone is from the typical lifestyle in their community, not just whether they can meet basic needs. ★​ Relative vs Absolute poverty ○​ ○​ Absolute Poverty focuses on whether you have enough for survival, while Relative Poverty focuses on how your income compares to others in your society and your ability to live a "normal" life. ○​ It would be possible for someone to be in poverty in relative terms but not absolute one ★​ Measuring poverty rate: ○​ Why do we normalize measuring in family size ​ Ideally, we would define poverty at the individual level, based on personal consumption, but many goods/resources are shared within the family (rent, meals, transportation, etc.) and who pays or who benefits from these shared goods is unobservable ​ Resource Distribution within a family makes it hard to observe how income and goods are distributed. ​ Does each person in the household have equal access to food or other resources? Do children in the family receive as much benefit as adults? ○​ Without observing individual consumption, we assume that resources are shared equally within the family. ​ The measured poverty rate is therefore based on consumption or disposable income at the family level and everybody within the  family has the same poverty status, irrespective (regardless) of whether this is true or not ​ To account for family size, statisticians use "equivalence scales" that adjust income thresholds: ○​ Larger families need more money to meet basic needs, but not proportionally (adding a child doesn’t double the cost of living). ○​ ​ This helps reflect the economies of scale within families (e.g., two people living together share housing costs, which is cheaper than living separately). ★​ Poverty line: An income threshold below which a family is defined as living in poverty. ○​ Poverty thresholds vary based on household size ( a family of 2 has a higher threshold than an individual). ​ To check for poverty it depends on the household size ○​ Who is in Proverty ? ​ ★​ Poverty dynamic ○​ Short-term vs. long-term poverty:  ​ Many people fall into poverty temporarily due to events like job loss or divorce. ​ Others remain in long-term poverty, often due to structural barriers. ​ Over 50% of people who escape poverty return within 5 years due to a lack of safety nets or stable resources. ○​ Groups disproportionately affected by poverty: ​ Racial groups: Black and Hispanic populations face higher poverty rates compared to Whites and Asians. ​ Children: More likely to be in poverty compared to seniors or adults. ​ Single-parent families: Single mothers face the highest poverty rates, followed by single fathers. ​ Employment: Unemployed individuals are more likely to experience poverty than those with full-time work. ★​ What if society is unhappy with economic outcomes? ○​ Intervention is often necessary if society is unhappy with economic outcomes. ○​ Government involvement can address inequality, market failures, or individual failures. ○​ Governments aim to design redistribution and social insurance programs that Minimize negative behaviors like moral hazard and dependency while also Maximizing benefits like increased productivity, social stability, and reduced inequality. ​ Example of a Balanced Policy: ​ Earned Income Tax Credit (EITC): Provides financial support to low-income workers, encouraging work while reducing poverty. ★​ How should the government intervene? ○​ Redistribution: Redistribution means the government takes resources (through taxes) and reallocates them to those who need them more (through social programs). ​ Example: taxes collected from high earners are used to fund programs like unemployment benefits, food stamps, or free school lunches. ​ Acts as social insurance against risks (job loss, illness, or poverty). ​ Can increase aggregate (total) well-being by redistributing resources where they are needed most. ​ Reason for Redistribution: ​ Equality of outcomes: Ensures everyone has similar living standards, regardless of effort or luck. ​ Equality of opportunity: Provides access to resources like education, healthcare, and safety nets to level the playing field.  ○​ Social Insurance ​ The government provides a safety net to protect people against life’s risks, such as: ​ Job loss: Unemployment benefits help people pay bills while they find new work. ​ Illness: Subsidized healthcare ensures people can afford treatment. ​ Old age: Programs like Social Security help people avoid poverty in retirement. ★​ Redistribution and social insurance can influence people’s behavior in different ways, both positively and negatively ○​ Positive Behaviors: ​ It may encourage Entrepreneurship ​ Reason: knowing there’s a safety net (e.g., unemployment insurance) can make people more willing to take risks, like starting a business or pursuing further education. ​ Improves Health and Productivity ​ Reason: access to healthcare or food programs can lead to better health, allowing people to work more effectively and contribute to the economy. ​ Social Stability Reduces Crime and Inequality ​ Reason: redistribution reduces extreme poverty and inequality, which can lower crime rates and promote social harmony. ​ Increased Access to Opportunities ​ Reason: Social insurance programs (e.g., student loans, training programs) can help individuals improve their skills and earning potential, benefiting society overall. ○​ Negative Behaviors (Moral Hazard): ​ Riskier Decisions ​ Reason: When people know they’re insured against certain risks, they may take less care to avoid those risks. ○​ Example: Someone with unemployment insurance might not search as hard for a new job because they have a financial cushion. ​ Reduced Work Incentives ("Welfare Trap") ​ Reason: If benefits phase out too quickly as income increases, individuals might avoid working or earning more to avoid losing those benefits.  ○​ Example: A person might choose part-time work over full-time because full-time income disqualifies them from housing or food assistance. ​ Dependency: Over-reliance on Government ​ Reason: Some individuals may become dependent on social programs instead of seeking long-term, sustainable solutions, like better education or job training. ​ Tax Avoidance and Evasion High Taxes Affect Behavior ​ Reason: Wealthier people or businesses may try to avoid taxes through legal loopholes or illegal evasion. This reduces the funds available for redistribution and can create inefficiencies in the economy. ★​ The Maxim principle: a way of thinking about fairness and justice in society. It says that we should focus on improving the situation of the people who are the worst off. ○​ The Maximin Principle says that we should make decisions that help the poorest or most disadvantaged people the most, even if it doesn’t make everyone better off equally. ○​ The idea comes from philosopher John Rawls, who argued that a fair society should be judged by how well it treats its least fortunate members. ○​ It ensures that basic needs are met for everyone, creating a safety net for those who are struggling the most. ★​ Market failures ○​ When left alone Markets sometimes fail to allocate resources (distribute resources efficiently and effectively). Examples include: ​ Externalities: Side effects of economic activities, like pollution, that affect others. ​ If left alone the market will not fix itself ​ Individual failures: Individuals sometimes make decisions that are not in their best interest due to a lack of information, poor planning, or behavioral biases. ​ Before social security, many people in retirement would fall into poverty ​ Why It’s a Problem? ​ These behaviors lead to higher societal costs, such as increased healthcare expenses or reliance on government support program ​ Government Solutions ​ Implement policies like mandatory savings ( Social Security) or public health campaigns. ​ Offer incentives, such as subsidies for retirement savings or taxes on unhealthy products. ★​ What are Externalities? Externalities occur when the actions of individuals or businesses affect others who are not directly involved in the activity. These effects can be negative or positive. ○​ Negative Externalities ​ Definition: When an activity harms others, and the costs are not borne by the individual or business causing the harm. ​ Examples: ​ Pollution: Factories emit greenhouse gases or dump waste into rivers, causing health and environmental damage without compensating those affected. ​ Traffic Congestion: Each additional car on the road increases travel time and pollution for everyone else. ​ The market produces too much of the harmful goods )pollution) because the costs are not factored into the price. ○​ Positive Externalities ​ Definition: When an activity benefits others, and those who benefit don’t pay for it. ​ Examples: ​ Education: An educated person contributes to society by being more productive and innovative. ​ Vaccination: A vaccinated person reduces the spread of disease, benefiting others around them. ​ The market produces too little of the beneficial good because the benefits are not fully captured by the individual or business ○​ Government Solutions: ​ Tax negative externalities (carbon taxes for pollution). ​ Subsidize (providing finicial support of insentives) positive externalities (government-funded education or vaccination programs). ★​ Imperfect/asymmetric information: For markets to work well, buyers and sellers need equal and accurate information. Asymmetric information occurs when one party knows more than the other, leading to inefficiency ○​ Adverse Selection: People at higher risk (poor health) are more likely to buy insurance, increasing costs for everyone. ​ Example: Someone with poor health is more likely to buy health insurance. This increases costs for insurers, making insurance more expensive for everyone. ​ Problem: Healthy people may opt out of buying insurance, causing a "death spiral" where only the sick buy insurance, further driving up costs.  ○​ The death spiral refers to a situation where an insurance market (or similar system) becomes unsustainable because of adverse selection. It happens when higher-risk individuals dominate the market, driving up costs, which leads to a cycle of rising prices and fewer participants. ○​ ​ Example 2: Used Car Market ("Lemons Problem"): Sellers know more about the quality of a car than buyers, leading buyers to assume all cars are of low quality and avoid the market. ○​ Why It’s a Problem ​ Drives low-risk participants out of the market, leading to inefficiency or market collapse ( insurance death spiral) ★​ Moral Hazard: When people take riskier actions because they are protected from the consequences. ○​ Example 1: A driver with car insurance may drive less carefully because they know damages will be covered. ○​ Example 2: Someone may delay looking for a job if they have financial support such as unemployment ○​ Why It’s a Problem ​ Increases costs for insurers or taxpayers and reduces accountability for actions. ○​ Government Solutions: ​ Adverse Selection: ​ Require participation (mandatory health insurance) or subsidize markets to include low-risk participants. ​ Moral Hazard: ​ Design programs with limits (copayments for insurance or time-limited unemployment benefits). ★​ Why Market Failures Matter? ○​ Market Failures often lead to many things such as: ​ Inefficiency: Resources are not used in ways that maximize overall well-being. ​ Inequality: Certain groups may suffer disproportionately (those affected by pollution or unable to access insurance) ​ Government Intervention: Policymakers often step in to correct market failures, though interventions can have their own trade-offs and unintended consequences. ★​ Social insurance: Government-provided insurance against risks like job loss, disability, old age, and more. ○​ Examples: Social Security (most effective in lessening the poverty rate), Unemployment Insurance, Disability Insurance, Refundable Tax credit (may be seen as a handout and typically given to single parents), Economic impacts/ stimuls, Snap and Free School Lunches ○​ Problemts: Insurance spiral ○​ What are the effects of thise intervention? ​ Redistribution in the U.S. significantly reduces inequality but has trade-offs in terms of efficiency. ★​ Why are Government Intervention Costly: ○​ Taxation and Incentives: ​ Taxation Reduces Incentives to Work ​ Higher taxes on income or profits can discourage people and businesses from working harder, investing, or innovating. ​ Example: If someone knows a significant portion of their earnings will go to taxes, they might choose to work less or not pursue higher-paying jobs. ​ Behavioral Responses: People may avoid work or reduce effort if they perceive benefits (like unemployment insurance) as a better alternative to working. ○​ Tax Avidance, Evasion, and Fraud ​ Tax Avoidance: ​ Using legal strategies to minimize taxes. ​ Example: Businesses moving profits to countries with lower tax rates. ​ Tax Evasion: ​ Illegally underreporting income to pay less tax. ​ Fraud: ​ Abuse of government programs, such as filing false claims for benefits. ​ These behaviors reduce the revenue available for public programs, increasing the burden on honest taxpayers. ○​ Why goverment incetive if they are costly? ​ Simply it is beacause people respond to incentives ★​ Equity vs efficiency - Government intervention often seeks to balance equity (fairness) and efficiency (economic productivity). However, these goals can conflict. (two extremes you want to balance) ○​ Equity: Ensuring fairness and reducing inequality by redistributing resource  ​ Pros vs cons ​ Reduces income inequality. ​ Ensures basic living standards for everyone (food, shelter, healthcare). ​ Promotes social stability by reducing resentment among disadvantaged groups. ​ Reduces incentives to work, innovate, or take risks (if redistribution is too aggressive). ​ May lead to over-reliance on government programs. ○​ Efficiency: Maximizing economic output and productivity. ​ Pros vs cons ​ Encourages hard work, innovation, and investment by allowing individuals and businesses to keep more of what they earn. ​ Promotes growth, creating more resources for society as a whole. ​ Can leave vulnerable individuals without support (the poor, elderly, or disabled). ​ May lead to social instability due to large income gaps. ★​ The Balancing Act ○​ Governments must strike a balance between equity and efficiency: ○​ Extreme Redistribution: ​ Reduces inequality but also reduces incentives to work or innovate. ​ Example: Taxing all income at 90% could ensure fairness but discourage people from working hard. ○​ No Redistribution: ​ Maximizes economic output but creates significant inequality. ​ Example: A system with no taxes or safety nets may leave the poorest without basic needs. ○​ Compromise: Moderate Redistribution: ​ Governments design tax and welfare systems to support the vulnerable while maintaining incentives for productivity. ​ Example: Progressive tax systems (higher taxes for the rich) and work-incentive programs like the Earned Income Tax Credit ★​ Government intervention comes with trade-offs: ○​ Too much intervention can reduce incentives, harm economic growth, and create dependency.  ○​ Too little intervention can leave vulnerable groups without support and increase inequality. The challenge is designing policies that balance fairness and productivity to achieve the best outcomes for society. ★​ For economists to change something we should see how people will react ○​ A lot of economists don't believe we should intervene because the economy can be the best it can be ○​ But it can also be extremely unfair ★​ Gains of intervention: more equitable income distribution ○​ ○​ The current redistribution system does help alleviate inequality ★​ Economists generally agree that markets are efficient at allocating resources in many situations, but they also recognize that markets can lead to unfair outcomes and fail to meet society's broader needs. This is where government intervention can play a role. 1/9 (Section) ★​ Wealth vs Income ○​ Wealth: the total value of all assets owned by an individual, household, or entity, minus any liabilities (debts). ​ It reflects what you own rather than what you earn. ​ Can be assets, cash, savings, investments (stocks, bonds, real estate), business ownership, and other valuable possessions like jewelry or art. ​ Liabilities include mortgages, loans, credit card debt, and other financial obligations. ​ Net worth ○​ Income: the money you receive on a regular basis, typically as compensation for work, investments, or government benefits ​ It reflects what you earn. ​ Income can come from wages, salaries, business profits, rental income, dividends, interest, or pensions. ​ Expressed as annual income or monthly income ★​ Different inequalities ○​ Economic inequality: disparities in wealth, income, and economic opportunities among individuals or groups. ​ Income inequality ​ Wealth inequality ​ Access inequality: Limited access to resources like loans, credit, and investment opportunities. ​ Causes: Education gaps, systemic discrimination, tax policies, and globalization. ○​ Gender inequality: unequal treatment or opportunities based on gender ​ Wage gap ​ Underrepresentation ​ Discrimination ​ Cause: cultural norms, patriarchal systems, lack of legal protections, and unpaid caregiving roles. ○​ Racial and Ethnic inequlaities: Discrimination and unequal outcomes based on race or ethnicity ​ Systemic racism ​ Disparities in housing, employment, and healthcare ​ Cause: Historical injustices, structural racism ○​ Education Inequality: uneven distribution of education resources and opportunities ​ Unequal qualities of school ​ Disparities in access to higher education based on socioeconomic status, ​ underfunded schools in low-income areas ​ Cause: Economic disparities, residential segregation, and unequal goverment funding ○​ How do you measure wealth? ​ Income share ​ This method is commonly used to measure income inequlaotu but can also provide some insight into wealth inequality ​ Divide the toal wealth held by a specific group but the toal wealth in the population ​ Wealth of group/ total wealth * 100 ​ Gini Coefficent: a numerical measure of inequality where 0 represents the perfect equality (everyonen has the same wealth). Adn 1 represents the maximum inewyalty (1 person owns all the wealth)  ​ ​ You plot the lorenz cure, wihch shows the cumultive (total) wealth help by a population, and measure the are between the cure and the line of perfect equality ​ The area between the Lorenz curve and line of equality/ total is under the line of equality ​ The amount a specific group made/ by the toal ​ Palma ratio: the ratio of wealth owned by the top 10% to that owned to the bottom 40% ★​ High vs low mobility vs no mobility ★​ Types of measuring poverty ○​ Relative ○​ Comparing someone to the rest of theri country ○​ Absolute poverty Week 2 1/13 and 1/15: Decision making ★​ Cost and Benefits: is a fundamental concept in economics that guides decision-making by evaluating whether the positive outcomes (benefits) of a decision outweigh the associated negative aspects (costs)  ○​ Some factors (displeasure from shopping) can be seen either as a reduced benefit or an added cost. The math works out the same. ○​ When making a decision you have to weigh the pros and the cons ​ Cost: Any negative factors or sacrifices incurred when making a decision. (you have to think beyond price and consider hidden costs, such as time and effort) ​ Monetary Costs: Direct financial expenses, such as the price of a product or service. ​ Time Costs: The amount of time required to complete an action, which could be spent on other activities. ​ Effort Costs: Physical or mental energy required to pursue a choice. ​ Non-Monetary Costs: Includes factors like stress, inconvenience, or displeasure (disliking shopping in person). ​ Benifits: The positive outcomes or satisfaction gained from a choice. (they are subjective. People derive different levels of happiness from the same action, making the principle highly individualistic) ​ Happiness/Utility: How much joy the decision brings (owning Air Jordans). ​ Functional Value: Practical uses or improvements (comfortable or stylish shoes). ​ Emotional Value: Personal significance or pride (feeling confident in new shoes). ○​ Decision Rule ​ If Benefits > Costs, take the action. ​ If Benefits ≤ Costs, avoid the action. ★​ Example:Suppose you’re deciding whether to buy a pair of Air Jordans for $180 ○​ Cost: ​ Monetary Cost: $180 for the shoes. ​ Additional Expenses: Shipping fees, sales taxes, or travel expenses (gas or bus fees) if purchased in-store ​ Time Cost: Time spent researching, driving to the store, and waiting in line ​ Effort/Displeasure: If you dislike shopping in person, the frustration of crowds and inconvenience may add to the cost. ○​ Benifts: ​ Utility (Happiness): You love how the Air Jordans look and feel. ​ Social Value: The shoes may improve your confidence or help you fit in with people.  ​ Functional Use: They are durable and provide comfort during exercise or daily wear ○​ If the happiness and satisfaction (valuing the shoes at $200) exceed the total costs ($180 + taxes + time + effort), the decision to buy is justified. ​ Benefit > cost ★​ How about if you don't like shopping in person, where would you put it? ○​ It doesn't matter it can be price + displeasure = cost ​ Or it can be the enjoyment of air Jordan - displeasure of shopping in person ★​ Economic Surplus: Total benefit minus total cost from an economic activity (the net value of a decision) ○​ Positive Surplus: Benefits exceed costs, making the decision worthwhile. ○​ Zero Surplus: Benefits and costs are equal, meaning you "break even." ○​ Negative Surplus: Costs outweigh benefits, making the decision undesirable. ○​ Consumer Surplus: The benefits consumers receive when they pay less for a product than they are willing to. ​ Formula: Producer Surplus = Price Received − Cost of Production ○​ Producer Surplus: The benefit producers receive when they sell a product for more than it costs to produce ​ Producer Surplus=Price Received−Cost of Production ​ Example: If it costs $100 to make a pair of Air Jordans and they are sold for $180, the producer surplus is: 180 − 100 = 80 ○​ Total Economic Surplus The combined surplus of consumers and producers in a market. ​ Formula: Total Economic Surplus = Consumer Surplus+Producer Surplus ​ It measures the overall welfare generated by market transactions. ○​ Buyers perceptive: for a pair of $180 sneakers, if willingness to pay is $200 ​ Buyers economic surplus is 200(benefits) - 180(cost) = 80 ○​ Seller perceptive: for a par of $180 sneakers, if the cost of making them is $100 ★​ Opportunity Principle: The most valuable alternative you are giving up to get it ○​ Resources are scarce → with every decision you make, you are giving up something else ○​ What could you be doing with your limited resources instead? ​ Limited money ​ Limited time ​ Limited attention ​ Limited production capacity in business ★​ Decssions rule: only raje the action if the benefit is at leasta s large as the actions opportunity cost ○​ Will this make me happy? ○​ Should i buy this or something else that make me more happy? ★​ ○​ Monetary cost (to buy the air jordan & transportation cost), attention cost (can make abuisness idea), time cost (staying in line) ★​ Example: You go to the store to get a sandwich ○​ Cost: going to the cafe, the price in the sandwich ○​ Benefit: the happiness/ satification of not being happy ○​ Opportunity cost: you can prepare the sandwich yourself, you can buy something less costly, or go to another alternative restaurant ​ Different action has different compormnets in them ★​ Example 2: studding for Econ 1 exam ○​ Cost: Time spent, ○​ Benefit: ○​ Opportunity cost: studying for another class, hanging out with friends ★​ Are all cost oppurnutiy cost? ○​ Sunk cost: cost you have already incurred that cannot be reversed ​ Not relevant for decision making ​ You come across these cost either way, rresoective of your decision →these are not opportunity csts and these should not affect your new decisions ○​ Example : you bought a special air jordons cleaning brush (that you cant return) in anticipation on air jordans purchase ​ Wheather you buy air hordns or not, the money on the brush is already spent ○​ Example 2: you bought air jordons and they hurt your feet ​ Weather you wear he=them or not uou already spent the money. ★​ Marginal Princpile  ○​ Thinking on the margin, instead of asking whether or not you should buy something, or how many to buy, ask yourself “should I buy one more?”, “should I do this one more time? ○​ COmbinnig the marginal principles with the cost and benoft principle: ​ Should i but this? Yes if the befit of one more unit is at least as large as the cost of ONE MORE unit ○​ ​ The marginal cost lower because youre getting the smae type of shoes ○​ ★​ Interdependence Principle (very vague) ○​ Our chice in an economy are not isolated ​ How your decisions interact with your other choices ​ How your choices depend on the opinion of other people ​ How the decisions in one market depends on another ​ Hw todays chives is affects by past and future choices ★​ Applying the principles togethinges: ○​ The mairginal principle (think “one more” instead of “how many?) →The cost-benifit principle (evaluate marginal cost and marginal benefit) →The opportunity cost (what instead?)→Interdependce principle (what else) ★​ Example 1: a new season a series you love just dropped and you're trying to decide if you should watch some ○​ Cost: time spent, the subscription fees (if you already have a subscription, than it is a sunk cost) ○​ Benefits: the enjoyment you get from watching a show, avoiding spoilers ○​ Watch if benefit>cost  ○​ Opputunitity principle: ​ Time: Can be studying, watching another series, sleep, workout ​ Subscitu=ion fee: buying lunch, ○​ why should we use marginal principle ​ Because you need to decide how many episodes you are going to watch (asking for one more) ​ The more if something you get the more boring it gets ○​ Interdepedce principles: ​ You may spoil it others (how it effects other people) ​ Affecting the subscription profit (how it effects other markets) ​ Eating snakes (getting takeout) ​ Gettin 1/13 section ★​ Marginal is about comparing about one addiitional unit adn cost and benift is like totatal cost vs total benfit ○​ Marginal vs cost and benefit ★​ Example of Marginal prinocle: to decide how many job openings you should apply for ○​ It will be using marginal proinciple because when it is a quanitty question it becomes a how more question ​ You then compare marginal benfit and cost ​ Keep doing something if teh marginal benifit is greater than cosr ​ Then cost beifits vs cost ​ Applying for more there is a higher likelyhood of getting higered ​ Cost will be time and effort and having to deal with being rejected ​ Supose the marginal cost is constant: is it take the same cost and effort to apply to another ​ If it wasnt constant , it would be like the frist resume ​ Cost cant be negetive ​ Example of marginal beinfits increasing: the probality getting a job increase with each job application ★​ Example of Oppurtunity Cost: he gets a job but then geta job offer of another place and no he has to deciide which job ○​ Because its an this or that scenior it becommes mainly oppurtunity cost (when comparingthe befits of 2 diffrent desions) ​ Benoifts- salary, commute hours  ​ Cost- comfortablity, salary, ★​ Example of sunk cost: he payed to go to the part but he feels sick but he knows if he goes he wont enjoy it shoudl he go? ○​ No because going or not doesnt affect the moeny he payed ★​ Interdependent example: molly doesn't go to office hours because if she goes the teacher won't answer her question cause there is a lot of people ○​ Example 2: she doesnt goes on friday because office horus don't fit into her schedule 1/15 ★​ Example 2: goingo to graduate schoo; ○​ Youre are deciding wheather you should go to grad school to get a MBA ​ Marginal roincpile: doesnt apply as this is a yes or no questiona nd not a how many more question ​ Interdeprendence princpiple we will disregard for simplicty ○​ Cost benidyt orincoile: will tell you to look at costs, benefits, and do it if the benefits are at least as high as the costs => do the MBA if the benefit exceeds the tuition cost. But is tuition the only relevant cost? So the Opportunity Cost principle is your best friend! ​ Cost: tuition (80000, quite job, rent (26000), 10 hours per studying) ​ Cost of next best alternative (no tuition, he arns (90000 from his job, rent it (26000, 10 hours per day working) ​ Opportunity cost: the cost of an MBA, relative to working a full time job): 80000 from tuition, 90000 he is forgoing if not working, no opputnitu cot for rent or time ○​ ​ Consider aleternive paths, and the onquenece that result from them ★​ Business hairsalon example: you open a hair salon and your friend gives you a space for free sn fyou already bought the equipment, now you have to see how many people you hire ○​ The salon has 4 chairs for cutting hair and 3 chairs for washing hair. Each employee can do 10 haircuts per day but only as long as a chair is available The price of a haircut is $20 The daily wage is $150 The more workers you  hire, the more haircuts you can sell BUT not every worker will be able to do 10 haircuts if there are not enough chairs availa ○​ Marginal principle because you are asking how many people are working ○​ Cost and benefit: see if the employee will cost you more or make you more than you make ○​ Opportunity cost: not really think about innthis example but you can buy more chairs ○​ Interdepence: i ★​ ○​ Marginal benefit= the extra nbeinift an extra sum makes ○​ Positive action? ○​ You maximixae your profit by following the marginal principle “​ Week 3 1/17: & 1/22 : Demand ★​ Individual Demand ○​ Definition: The quantity of a good that a single consumer is willing to buy at various prices. ○​ Example: James’ demand for Boba tea: Price $7: 1 tea Price $3: 7 teas ○​ Demand Curve: Plots price (vertical axis) against quantity demanded (horizontal axis). ​ ​ Typically downward-sloping due to the Law of Demand (quantity demanded increases as price decreases). ​ What is the demand curve: A set of plans of how many units to buy on a given price ​ Because you only want to buy items that are worthwhile you can assume … is the same ​ Here we can se the quantity of 2 boba teas is like 6, 4boba tea is around 4.5 ​ The margincal benift it the additianl unit (happiness) you derrvie from ​ Frind marginal benefit go up from x axis and see where it lands on the y-axis ​ If there is no shift in demand you just move along the curve ★​ Extensive Marginal respnce ★​ Intesive marginal resoinse ○​ What is the price range for james to experiance extensive marginal response ? ​ Ask yourself within what price wage will james experiance etensive marginal response  ​ It will be $7 and below, if the price decreases he is going to buy more ○​ When something increase in price you buy less. If price decreases from what you thought youll buy more (movement along teh curve ★​ ★​ ★​ Law of Demand: ○​ Diminishing Marginal Benefit: Each additional unit provides less benefit than the previous one. ○​ Example: The first Boba tea satisfies a strong craving, but subsequent teas provide less satisfaction. ○​ Marginal Benefit: Determines the price a consumer is willing to pay for each unit. ​ Every time we see a price tag we are faced with the choice: “at this price, how much would I buy, if any?” ★​ Market Demand: Total quantity demanded by all consumers at various prices. ○​ If the number of customers decreases the curve will shift to the left ○​ How to calculate: ​ Survey Consumers: Ask how much they’d buy at each price. ​ Add Quantities: Total demand across all individuals. ​ Scale Up: Adjust survey data to reflect the entire market. ​ Plot the Curve: Graph total demand at each price. ★​ Demand Shifts (Shifts in Demand vs. Movement Along the Curve) ○​ Factors That Shift Demand ○​ Income:  ​ Normal Goods: Higher income increases demand for demand goods. Quantity demands increase (Ubers, better food, fancier clothes) ​ When people have more money to spend, they are willing to buy more of these goods, even if their prices remain the same ​ Example: When a person's income increases, they may choose to take Uber more often instead of using public transportation or walking, as Uber are perceived as more convenient or comfortable. ○​ ​ Higher income leads to an increase of demand which leads to a shift to the right of the income curve ​ Inferior Goods: Higher income decreases demand (bus rides increase in price). ​ When you have more income you do not want to buy them (depends on the perception of the public) ​ Those where demand decreases as income rises because people substitute them with a higher-quality or more desirable alternative ○​  ​ Higher income leads to a decreace in demand which will shift the demand curve to the lefts ○​ Tastes and Preferences: ​ Trends and advertising can shift demand. ​ ​ When it becomes fashionable it will shift to the right adn when its unfashinable it will shift to the left ​ The main goal of advertising is to shift the demand curve to the right ​ Like Stanley getting popular off tik tok so demand increases ○​ Prices of Other Goods: ​ Substitutes: Good that replace each other, you buy one or the other ​ Demadn increaces when the price of subsitye rises ​ An increase in the price of one increases demand for the other ( chai vs. coffee). ​  ​ This is like dupes. So when the price of the original increases the demand of the dupes increases as well. ​ Complements: Increase in the price of one decreases demand for the other (coffee and donuts). Goods that go together ​ Demand decreases when the price of complementary increaces ​ This refers to the concept of goods, which are products or services that are often consumed together. ​ People often enjoy coffee and donuts together as a pairing. If the price of coffee rises significantly, fewer people may buy coffee, reducing the demand for donuts because they are usually purchased together. ​ When the price of ubers decreace you will take the bus less (and can be vice versa) ​ The more you go out the more users you get (complemt) ​ Why does this happen? ○​ Joint Consumption: Complementary goods are valued together, so the demand for one is linked to the availability and price of the other. ○​ Increased Cost of Bundling: When one good becomes more expensive, the total cost of consuming the pair increases, making the combination less attractive ​ ​ ​ How to tell the difrece:  ○​ If you are told the demand has increace when the price of the other increase (subsitute) ○​ And the opposite are complemets ○​ Expectations: ​ Future price expectations can alter current demand. ​ If you think the price of something si going to fall you are going to wait (if the item us storable) ​ But if you think the price will increase then you will buy it right away ​ If the question is about fruit, then you act on it ​ But if it is about technology you can easly buy it today or tommowrrow ○​ Network and Congestion Effects: ​ Network Effects: A good becomes more valuable as others use it (social media, message software, Microsoft words, speaking english rather than portgeusee). ​ Increased use by others will increase demands ​ Congestion Effects: A good becomes less valuable as others use it (roads during rush hour, buying a dress during prom season). ​ An increase used by others will decrease demands ○​ Number and Type of Buyers: More buyers increase market demand. ○​ ★​ Market demnd is the sum of individual demans ○​ But that doesnt shift individual demands ★​ Extensive vs. Intensive Margins ○​ Intensive Margin: Consumers buy more at lower prices. ○​ Extensive Margin: New consumers enter the market at lower prices. ​ When you go from 0 to a small positive number  ​ Example: James’ Boba Tea price drop from $4 to $3 increases his quantity demanded (intensive margin). ​ New consumers like Ali may also enter the market (extensive margin). ​ Cookies Example: Kate’s marginal benefit for cookies decreases with each additional cookie. ​ She buys until Marginal Benefit ≥ Price. ★​ Market demand: you add all the individual demand only when you are told a certain type of person ★​ When a change in price makes it shift along the curve ○​ Up the curve if the price increases & down the curve if the price decreases Section 1/23 (Demand and Marginal Benifit) ★​ When you have nothing youre willing to pay more and when you have more of something youll pay less ★​ The worth is the marginal befiit 1/24 and 1/27: Supply Individual Supply ★​ What is it? ○​ Individual supply shows how much of a product a business is willing to produce at different prices. ○​ Key Points: ​ Businesses face a decision at every price: "At this price, how much should I produce?" ​ (selling at) Higher prices → businesses supply more (because it's more profitable). ​ (selling at) Lower prices → businesses supply less (because it's less profitable). ​ Example (Mojo Asian’s Boba Tea): At $7, they produce 215 teas; at $3, they produce only 35 teas. (the prices they are selling boba) ​ The individual supply curve is upward-sloping because higher prices encourage more production.  ○​ An individual business supply curve illustrates how the quantity supplied changes as the price changes ★​ Individual supply curve ( a set of pans) ○​ S hows the relationship between the price of a product and the quantity a single business is willing to supply at each price level. It reflects how a firm’s production decisions change in response to price changes. ○​ The quantity of a product you will produce depends on the price ○​ The lower the price, the lower the quantity a business plans to sell at each price ○​ The cheaper Boba tea is, the less quantity Mojo Asian is willing to supply ○​ Key Features: ​ Upward-Sloping Curve: The individual supply curve slopes upward because of the law of supply: ​ Higher prices → incentivize businesses to supply more (because profits are higher). ​ Lower prices → businesses supply less (because profits are lower). ○​ "Plans" for Production: ​ The curve represents a business’s plans for how much to produce at each price, assuming other factors (like costs or technology) remain constant. ○​ Graph: The vertical axis represents price. The horizontal axis represents quantity supplied. ★​ Firms will pick prices that will maximize profits ○​ Perdect Competiotion: ​ All business in the market sell the same (identical) product ​ There are many buyers and sellers each whom is small relative to the market (they have no market power) ○​ If you charge at a high price you wont sell adn if you sell at a lower price you wont make no profit  ○​ Price Taker:A business that take price as given by the market ★​ Example: a place you wants to steal your costumers they wiill sell what you want sadn then lower the price from both their and your store but then the price go donw to a price that they wont make profits ★​ Perfect Competition is an excellent theoretical idea for small restaurants and business however there are some that are not (cable TV, natural monopoly, iPhone) ○​ All businesses sell identical products. ○​ Many buyers and sellers, each with negligible (small to none) market power. ○​ Firms cannot set prices (they are price-takers); selling at a higher price results in no sales, and selling below market price leads to losses. ★​ Rational Rule for competitive business: sell another item if the price is greater than (or equal to) the marginal cost ○​ Sell more items if the price is greater than or equal to the marginal cost (MC). Ensures maximization of economic surplus (profit). ★​ Marginal Cost and Supply Curves ○​ The cost of producing one more unit of output. ○​ Marginal cost increases as production expands, influencing the upward slope of the supply curve. ○​ Show the price associated with each quantity ○​ If you follow ratio rule for sellers is if trhe profit > marginal cost ( ○​ Supply cost curve also goves us the marginal cost curve ○​ The marginal cost increases as the number of units increase ○​ Because the frim would only sell if they will ebnifit from it ○​ For each additional unit the marginal cost increases ★​ Understanding Marginal Cost ○​ Variable Cost: Cost that vary the quantity of output produced ​ Wages, straws, cups ○​ Fixed cost: costs that stay tconstant regardless of the quantity of output rooduced ​ Large equipment, building/rent, ect ○​ Fixer cost dont change weather you produce another unit or not ​ So fixed cibst are irreveklent when deciding how many units you produce ​ You shold not use it to decudeing the quantity of a product  ○​ Are fixed cost always fixed?(it depends on the time horizon) ​ In the short run: planning horizon over which some inputs cant be changes ​ Size of the store→ cant be cahneged in the shortun ​ Ingredients used, mateias, and labor can be cahnegd in the short run ​ Has both fixed and cost avribales ​ In the short run most business have fixed adn vairbale run ​ In the long run: planning over whi h all inputs can be change ​ Everything can be changed ​ Only have variable cost ○​ Marginl cost only incudes the vairbale cost ○​ The theory of supply is the theory of marginal costs: if you want to know a firm’s marginal cost, look at its supply curve ★​ Coast and Marginal Cost ○​ Variable Costs: ​ Costs that change with production (e.g., wages, cups, straws). ○​ Fixed Costs: ​ Costs that stay the same regardless of production (e.g., rent, equipment). ○​ Important Notes: ​ Fixed costs don’t matter when deciding how much to produce; they don’t change based on quantity. ​ Only variable costs affect marginal costs. Short-Run vs. Long-Run: Short-Run: ★​ Short run: Some inputs are fixed (estore size). L ★​ Long-Run: All inputs can change (e.g., expand the store or add new equipment ○​ t ★​ Why are marginal cost increasing 1.​ Diminishing Marginal Product: a.​ Adding more inputs (workers) leads to smaller and smaller increases in output. b.​ Example: If a store is small, adding more workers might lead to crowding, slowing production. 2.​ Rising Input Costs: a.​ Buying more inputs increases costs (e.g., transportation, scarcity of materials). i.​ This is more noticeable for large businesses that use many resources. ★​ Market Supply  ○​ Market supply combines the supply curves of all businesses in the market. ○​ How to Find Market Supply: ​ Survey Businesses: Ask how much they’ll produce at each price. ​ Add Quantities: Add up the quantities supplied by all businesses. ​ Scale Up: Adjust to reflect the entire market. ​ Plot the Curve: Create a graph of total supply at each price. ​ Example: If Mojo Asian and Boba 805 supply 175 and 150 teas at $6, the total market supply at $6 is 325 teas. ○​ ★​ Supply Shift ○​ What shifts the curve? ​ Changes in anything other than price can shift the supply curve. ○​ Input Costs: ​ Higher costs (expensive ingredients) → supply decreases. ​ Lower costs ( cheaper materials) → supply increases. ○​ Productivity and Technology: ​ Improved technology or efficiency → supply increases (because marginal costs decrease). ○​ Prices of Other Outputs: ​ Substitutes-in-Production: If producing coffee becomes more profitable, a business may reduce Boba tea production. ○​ Complements-in-Production: ​ If beer production increases, its by-product (Vegemite) also increases. ○​ Expectations: ​ If prices are expected to rise in the future, businesses may produce less now and more later. ○​ Number of Sellers: ​ More sellers → market supply increases. ​ Fewer sellers → market supply decreases. ○​ Price vs. Shift: ​ Price Change → movement along the curve. ​ Other Factors shift of the entire curve. ★​ Production decisions How do we make shutdown decisions? ★​ Short-Run: ○​ If Variable Costs > Revenue, stop production. ○​ If Variable Costs ≤ Revenue, produce where Price = MC. ★​ Long-Run: ○​ If Total Costs > Revenue, shut down.  ○​ If Total Costs ≤ Revenue, produce where Price = MC. 1/29: Equilibrium 2/3: Equilibrium ‘ 2/5 and 2/7: Elasticities 2/10 and 2/12: Government regulations 2/19 and 2/21: Efficiency 2/24: Comparative advantage 2/26: Trade 3/3: Trade 3/5 and 3/7: Externalities 3/10, 3/12 and 3/14: Labor markets