ECON 103 Simplified Notes

**ECON 103 Simplified Notes** Important Economists - Julian Simon (1932-1998) - Wrote the book, Ultimate Resources. - Stated that resources are made by people, not nature - Nothing is a resource until humans can find a way to make them useful. - The more peopl...

**ECON 103 Simplified Notes** Important Economists - Julian Simon (1932-1998) - Wrote the book, Ultimate Resources. - Stated that resources are made by people, not nature - Nothing is a resource until humans can find a way to make them useful. - The more people we have, the more creative minds, the more creative minds, the more resources we have. - Adam Smith (1723-1790) - Known as the Father of Economics. - Wrote the Book, the Wealth of Nations. - Noticed that ordinary people began to have a standard of living that was rising more than before. - The books led to the beginning of modern economics. Foundations of Economics - We don't make any of the things we consume or know who makes them. - Our ancestors would make everything they consumed (their own chairs, house, etc) - We are dependent on strangers. The 12 Foundations of Economic Theory 1. Most fundamental: Our world is one of escapable scarcity - When something is scarce, there is not enough to go around to satisfy every human desire. - Almost everything is scarce. - One thing that's not scarce is air, there is enough to satisfy everyone. 1. Scarcity implies choice and cost - Since things are scarce, there has to be some mechanism to choose how scarce things are put to use. - Scarcity Choice Cost 2. Human wants are unlimited. 3. We assume that the typical person is rational and self-interested. - Each person cares more about themselves, their loved ones and friends more than they care about strangers. 4. Don't Confuse costs with money - Money is the language we use to describe costs and benefits. - It's not money that makes us rich, it's the goods and services money can buy. 5. People respond predictably to incentives. 6. We assume that more is preferred than less. 7. The assumption that all social phenomena are ultimately the results of individual human action. All choices and all actions are done ultimately only by individuals. - Methodological Individualism: we trace all observed phenomena back to individuals making decisions. 8. All tastes and preferences are subjective. 9. Actions speak louder than words 10. Intentions are not results. Beware of unintended consequences. 11. All decisions and choices are made at the margin. Marginal: means a little bit more, or a little bit less. Marginal Thinking: comparing the benefit of the next decision to its cost. Fallacies - Sunk cost fallacy - when you focus too much on what they paid for an item and not enough on their best choices right now. - Ad hominem Fallacy - When someone judges the merit of the argument exclusively by the identity of the person making the argument. - Post Hoc Fallacy - When someone concludes that just because event A happened in time before event B, that event A caused event B. - Fallacy of Composition - When someone concludes something that was just true for part of the group, that it is necessarily true for the whole group. - Naturalistic Fallacy - Identified by David Hume - When someone concludes that just because something exists, that that something is ethically justified. Specialization - Ceteris Paribus - "All other things being equal" or "other things held constant." - Causes of Wealth - According to Adam Smith, the division of labor, or specialization - When society grows richer, the output per person goes up - Changing the way we work, changes the output. 3 Reasons to Specialization 1. When workers specialize, they don't spend time moving from task to task. 2. When we specialize at doing a task, we become better at doing it. 3. Specialization encourages mechanization. - Non-human productions such as machines and chemicals. Comparative Advantage - David Ricardo - Introduced the term. - Can't have comparative advantage without comparative disadvantage. Consumption goods: the outputs we want to consume to make our lives better. Capital Goods: Goods that only have value because they have an affected means of producing other goods and services. - Tools - Increase the ability to produce other things. - Dry erase markers, cranes, delivery trucks. - To build a capital good, someone hopes that it will increase the productivity in the future. (Willing to reduce consumption in hope of consuming more in the future) Interest: the rate you pay when borrowing money. Barter: exchanges not in money. A world without money is a world without specialization. 3 Functions of Money 1. It is a median of exchange 2. Unit of Account - Money measures market values. - Economic calculation, whether we should pay \$3 for a product of \$4. 3. Money is a store of value - This function is not unique to money because houses and expensive paintings are also store of values. Fiat money: money not backed from anything. - Back then, money was backed by precious medals. Banks: act as a financial institution - Specialize identifying good business plans and honest people - Allow entrepreneurs to create more consumptions goods. Production Probability Curve: all possibilities of production, telling us what is possible to produce. There Ain\'t No Such Thing As A Free Lunch (TANSTAAFL) - Impossible to get something from nothing. - In order to gain something, something else must be given up due to scarcity. What causes the production probability curve to shift up? - Access for more resources - More people - Production Technology - Infrastructure - Good Socio-political Institutions - More Capital Goods Price Theory: actual monetary term of exchange - Price doesn't come from the labor itself. Theory of Consumer Behavior - Productions is a means of consumption - People act in an attempt to maximize their utility Utility: the value of a good or service that one gains from using it. Consumer: all consumer actions are participated in order to maximize utility for that person. The Law of Diminishing Marginal Utility - The greater the access that person has to some good or service, the less utility that person gets from it. - The more you have of any one unit, the less you sacrifice. - Fewer units, more utility. More units, less utility. The Law of Demand - The higher the price of a good, the lower the quantity that will be purchased by consumers. - The lower the price of a good, the higher the quantity that consumer will buy. - The price only changes that quantity demand, but never the demand itself. Output image Quantity demand: the amount of a good or service that consumers are willing to buy at a given price over a period of time. The 6 Determinants of Demand (What causes the position of the demand curve to shift) 1. Buyer's Taste and Preferences 2. Purchasing Power of consumer income - Normal goods: a good or service if the consumer's income changes, that the demand changes. (If I'm rich, I can own a private jet) - Inferior goods: as income changes, the opposite of the demand changes. (If rich, less demand for fast food because I can eat better somewhere else) 3. The Availability of Related Goods - Substitute Goods: 2 goods are substitutes if the availability of one changes the demand for the other in the opposite direction. (Coca-Cola and Pepsi) - Complementary Goods: 2 goods complement each other if the availability of one change, the demand for the other changes in the same direction. (Coffee and sweetener) 4. Information about the Good 5. Expectations of future availability of the good - If buyers expect that the goods will be more available in the future, demand for the good today falls. - If buyers believe the good will be less available in the future, demand for the good today rises. 6. The number of Buyers in the Market (applies only to the Market Demand curve) - Individual demand: my demand for goods - Market demand curve: the demand of 2 or more people for goods - The greater the number of buyers in the market, the higher the demand Elasticity of Demand: how responsive is the quantity demand to price. High elasticity: when quantity demanded changes significantly in response to price changes. - High end products like smartphones - If the price drops, more people are willing to buy it Low elasticity: when quantity demanded changes very little in response to price changes - Essential goods like gas - If price drops, demand won't rise since people only need a certain amount Total Revenue (TR) Method: the total amount of money a seller takes in by selling a good. - This is NOT a profit - TR= Price (P) x Quantity (Q) Inelastic Demand: when price AND revenue increase. - Means consumers are not sensitive to price changes. - With higher prices, consumers will buy same amount. - Essential goods like medicine. If meds cost more, people will still buy it because they need it, so demand doesn't change. But if price drops, people won't buy more because they only need a certain amount. Elastic Demand: when price increases and revenue decreases OR price decreases and revenue increases. - Consumers are sensitive to price changes. - Small change in price leads to large charge in quantity demand. - Non-essential goods like movie tickets. If ticket costs rise, less people would choose to go. If they drop, more likely to go (increase in demand) High elasticity = Elastic Demand (large response to price changes) Low Elasticity = Inelastic demand (small response to price changes) The Determinants of Elasticity of Demand 1. The percentage of the buyer's budget that is spent on the good 2. The number of available substitutes a. More substitutes = elastic demand b. Fewer substitutes = inelastic demand (they have no choice but to buy the same product) 3. Time c. More time = elastic demand (they can find alternatives, change habits, over time find substitutes) d. Less time = inelastic demand (might not be able to find substitutes in short term) Supply: transfer of property rights from a rightful owner to a legitimate buyer. Supply Curve: show the cost of production - As price changes, the [quantity supplied] changes  The One Determinant of Supply: Cost of Production - The cost of producing any one good or service Normal Profit: The cost to the owner of operating a firm. - The amount left over for the owner to remain as the owner's operator. - Not really a profit Residual Claimant: What the owner receives after all operating costs are paid for. - Makes owners self-interested to keep costs low as possible but quality as high as possible. Change in Supply: caused by a change in per unit cost production. - Cost production decrease = supply increases (supply curves shift right) - Cost production increases = supply decreases (supply curves shift left) What changes cost in production? 1. The Price of inputs used in production 2. Production Technology Theory of Price - Equilibrium Price: when the price at which quantity equals quantity demanded. If the price is above equilibrium, a surplus occurs. - Prices are not arbitrary. They come from interactions from buyers and sellers in the market. - Surplus: when the price is above equilibrium. Sellers tend to cut prices to sell excess inventory. - Below equilibrium (shortage), buyers compete to raise prices until equilibrium is reached. Natural Disaster - Price Gauging: Raising prices excessively high during natural disasters or shortages. - Greed Theory: the belief that prices increase after disasters because the seller is greedy. - Supply and Demand Theory: explains that price changes are due to shifts in supply and demand. - When natural disasters strike, they both put equal pressure on price, the demand for goods goes up and the supply falls at the [same time]. - Demand for essential goods increase, while supply decreases, creating higher prices. - The severity of the disaster influences how high prices will rise and how long they take to decrease. - High prices during disasters reflect underlying realities, such as supply shortages and increased demand. - Rising prices creates incentives for buyers to use these resources more carefully. To delay taking care of minor needs to take care of major needs. (Example using plywood to fix a gazebo vs. fixing a roof) - Supply and Demand Return to normal levels when workers are able to go back to work, electricity is restored, roads are cleared up. Price Controls: are government restrictions on the movement of prices. Placed at local or state level. Very rarely, imposed nationally. - Price Ceiling/Price Cap: a government prohibition on prices rising above a certain maximum. - Price Floor: not as common, but when the government prohibits prices falling below a specified minimum. 6 Consequences of a Price Ceiling 1. Creates a shortage - Price Ceilings set below equilibrium prices lead to a situation where quantity demanded exceeds quality supplied. 2. Need of Rationing - Methods must be established to allocate limited supplies among consumers. 3. It reduces the amount consumers actually get 4. Increased Market Value - Goods become scarcer due to reduced supply, their marginal value increases, leading consumers to be willing to pay more than the ceiling price 5. Encourage Corruption 6. Reduce the quality of the Good