note-micro-mid-10-principles-of-economics-supply-and-demand-surplus-and-shortage.pdf

lOMoARcPSD|45784898 Note Micro Mid - 10 principles of economics, supply and demand, surplus and shortage. Introduction to Microeconomics (London School of Business and Finance) Scan to open on Studocu Studocu is not sponsored...

lOMoARcPSD|45784898 Note Micro Mid - 10 principles of economics, supply and demand, surplus and shortage. Introduction to Microeconomics (London School of Business and Finance) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by janelle escalicas ([email protected])  lOMoARcPSD|45784898 Chapter 1: Ten Principle of Economics - Scarcity: the limited nature of society’s resources - Economics: the study of how society manages its scarce resources + How people decide what to buy, how much to work, save and spend. + How firms decide how much to produce, how many workers to hire. + How society decides how to divide its resources between nation defense, consumer goods, protecting the environment, and other needs. TEN PRINCIPLES OF ECONOMICS: The principle of: HOW PEOPLE MAKE DECISIONS - Principle 1: PEOPLE FACE TRADEOFFS + All decisions involve tradeoffs. Ex: 1. Going to a party the night before your midterm leaves less time for studying. 2. Having more money to buy stuff requires working longer hours, which leaves less time for leisure. 3. Protecting the environment requires resources that could otherwise be used to produce consumer goods. + Society faces an important tradeoff: Efficiency vs Equality  Efficiency: when society gets the most from its scarce resources  Equality: when prosperity is distributed uniformly among society’s members + Tradeoff: To achieve greater equality, could redistribute income from wealth to poor. But this reduces incentive to work and produce, shrinks the size of the economic “pie”. Downloaded by janelle escalicas ([email protected])  lOMoARcPSD|45784898 - Principle 2: THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT + Making decisions requires comparing the costs and benefits of alternative choices. + The opportunity cost of any item is whatever must be given up to obtain it. Ex: The opportunity cost of 1. Going to college for a year is not just the tuition, books, and fees, but also the foregone wages. 2. Seeing a movie is not just the price of the ticket, but the value of the time you spend in the theater. - Principle 3: RATIONAL PEOPLE THINK AT THE MARGIN + Rational people: - Systematically and purposefully do the best they can to achieve their objectives. - Make decision by evaluating costs and benefits of marginal changes, incremental adjustments to an existing plan. Ex: 1. When a student considers whether to go to college for an additional year, he compares the fees and foregone wages to the extra year income he could earn with the extra year of education. 2. When a manager considers whether to increase output, she compares the cost of the needed labor and materials to the extra revenue. - Principle 4: PEOPLE RESPOND TO INCENTIVES + Incentive: something that induces a person to act, i.e. the prospect of a reward or punishment. + Rational people respond to incentives. Downloaded by janelle escalicas ([email protected])  lOMoARcPSD|45784898 Ex: 1. When gas prices rise, consumers buy more hybrid cars and fewer gas guzzling SUVs. 2. When cigarette taxes increase, teen smoking falls. The principle of: HOW PEOPLE INTERACT - Principle 5: TRADE CAN MAKE EVERYONE BETTER OFF + Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods. + Countries also benefit from trade and specialization:  Get a better price abroad for goods they produce  Buy other goods more cheaply from abroad than could be produced at home - Principle 6: MARKETS ARE USUALLY A GOOD WAY TO ORGANIZE ECONOMIC ACTIVITY + Market: a group of buyers and sellers (need not be in a single location) + “Organize economic activity” means determining:  What goods to produce?  How to produce them?  How much of each to produce?  Who gets them? + Famous insight by Adam Smith in “The Wealth of Nations” (1776): Each of these households and firms acts as if “led by an invisible hand” to promote general economic well-being. + The invisible hand works through the price system:  The interaction of buyers and sellers determines prices.  Each price reflects the good’s value to buyers and the cost of producing the good.  Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well-being. Downloaded by janelle escalicas ([email protected])  lOMoARcPSD|45784898 - Principle 7: GOVERNMENTS CAN SOMETIMES IMPROVE MARKET OUTCOMES + Important role for government: enforce property rights (with police, courts) + Market failure: when the market fails to allocate society’s resources efficiently. + Causes of market failure:  Externalities: when the production or consumption of a good affects bystanders (e.g. pollution). #not related to income, income tax,…  Market power: a single buyer or seller has substantial influence on market price (e.g. monopoly) + Public policy may promote efficiency. + Government may alter market outcome to promote equity. The principle of: HOW THE ECONOMY AS A WHOLE WORKS - Principle 8: A COUNTRY’S STANDARD OF LIVING DEPENDS ON ITS ABILITY TO PRODUCE GOODS & SERVICES + Huge variation in living standards across countries and over time:  Average income in rich countries is more than 10 times average income in poor countries.  The U.S standard of living today is about 8 times larger than 100 years ago. + The most important determinant of living standard is PRODUCTIVITY, the amount of goods & services produced per unit of labor. + Productivity depends on the equipment, skills, and technology available to workers. + Other factors (e.g. labor unions, competition from abroad) have far less impact on living standards. - Principle 9: PRICES RISE WHEN THE GOVERNMENT PRINTS TOO MUCH MONEY Downloaded by janelle escalicas ([email protected])  lOMoARcPSD|45784898 + Inflation: increases in the general level of prices. + In the long run, inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to fall. + The faster the government creates money, the greater the inflation rate. - Principle 10: SOCIETY FACES A SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT + In the short-run (1-2 years) many economic policies push inflation and unemployment in opposite directions. + Other factors can make this tradeoff more or less favorable, but the tradeoff is always present. + Giảm lạm phát -> tăng lãi suất -> tăng tỉ lệ thất nghiệp + Demand of goods & services increase -> price increase -> inflation MCQs: - Economic deals primarily with the concept of “scarcity”. - Scarcity exists when there is less of a good or resource available than people wish to have. - A good definition of equality would be “fairness”. - A marginal change is a small incremental adjustment. - In a market economy, economic activity is guided by “prices”. - The “invisible hand” directs economic activity through “prices”. - The invisible hand works to promote general well-being in the economy primarily through “self-interest”. - The invisible hand is more efficient at ensuring efficiency than it is at ensuring equality. - “Budget deficits” tends to decrease productivity. Chapter 3: INTERDEPENDENCE AND THE GAINS FROM TRADE Downloaded by janelle escalicas ([email protected])  lOMoARcPSD|45784898 - Exports & Imports: + Exports: goods produced domestically and sold abroad. + To export means to sell domestically produced goods abroad. + Imports: goods produced abroad and sold domestically. + To import means to purchase goods produced in other countries. - Where do these gains come from? + Absolute advantage: the ability to produce a good using fewer inputs than another producer.  If each country has an absolute advantage in 1 good and specialize in that good, then both countries can gain from trade. - Opportunity Cost & Comparative Advantage: + Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer. MCQs: - Without trade a country’s production possibilities frontier (PPF) is also its consumption possibilities frontier. - A country’s consumption possibilities frontier can be outside its production possibilities frontier “with trade”. - Comparative advantage is based on opportunity costs. - Trade is based on comparative advantage. - Absolute advantage is found by comparing the productivity of 1 nation to that of another. Chapter 4: THE MARKET FORCES OF SUPPLY AND DEMAND - Markets & Competition: Downloaded by janelle escalicas ([email protected])  lOMoARcPSD|45784898 + A market is a group of buyers and sellers of a particular product. + A competitive market is one with many buyers and sellers, each has a negligible effect on price. + A perfect competitive market:  All goods exactly the same.  Buyers & sellers so numerous that no one can affect market price – each is a “price taker”. - Demand: + Demand comes from the behavior of buyers. + The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase. + Law of demand: the claim that the quantity demanded of a good falls when the price of the good rises, other things equal. + Demand schedule: a table shows the relationship between the price of a good and the quantity demanded. - Market Demand versus Individual Demand: + The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price. - Demand Curve Shifters: + Buyers: An increase in the number of buyers causes an increase in quantity demanded at each price, which shifts the demand curve to the right. + Income:  Demand for a normal good is positively related to income. (An increase in income causes increase in quantity demanded at each price, shifting the demand curve to the right.)  Demand for an inferior good is negatively related to income. An increase in income shifts the demand curve to the left. + Prices of related goods: Downloaded by janelle escalicas ([email protected])  lOMoARcPSD|45784898  2 goods are substitutes if an increase in the price of one causes an increase in demand for the other. Ex: 1. Pizza and hamburgers. An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the right. 2. Coke and Pepsi, laptops and desktop computers, compact discs and music downloads.  2 goods are complements if an increase in the price of one causes a fall in demand for the other. Ex: 1. Computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left. 2. College tuition and textbooks, bagels and cream cheese, eggs and bacon + Tastes:  Anything that causes a shift in tastes toward a good will increase demand for that good and shift its demand curve to the right. Ex: The Atkins diet became popular in the ‘90s caused an increase in demand for eggs, shifted the egg demand curve to the right. + Expectations:  Expectations affect consumers’ buying decisions. Ex: 1. If people expect their income to rise, their demand for meals at expensive restaurants may increase now. 2. If the economy turns bad and people worry about their future job security, demand for new autos may fall now. - Supply: + Supply comes from the behavior of sellers. Downloaded by janelle escalicas ([email protected])  lOMoARcPSD|45784898 + The quantity supplied of any good is the amount that sellers are willing and able to sell. + Law of supply: the claim that the quantity supplied of a good rises when the price of the good rises, other things equal. + The supply schedule: A table shows the relationship between the price of a good and the quantity supplied. - Market Supply versus Individual Supply: + The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price. - Supply Curve Shifters: + Input prices:  Ex: wages, price of raw materials.  A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the supply curve shifts to the right. + Technology:  Technology determines how much inputs are required to produce a unit of output.  A cost-saving technological improvements has same effect as a fall in input prices, shifts the supply curve to the right. + Sellers:  An increase in the number of sellers increases the quantity supplied at each price, shifts the supply curve to the right. + Expectations:  Suppose a firm expects the price of the good it sells to rise in the future.  The firm may reduce supply now, to save some of its inventory to sell later at the higher price.  This would shift the supply curve leftward. Downloaded by janelle escalicas ([email protected])  lOMoARcPSD|45784898 Downloaded by janelle escalicas ([email protected])