Economics Definition:
The study of the attempt to satisfy unlimited wants with limited resources.
Opportunity Cost Definition:
The cost of the next best forgone alternative.
Syn. = trade-offs
What two things are important in economics?
Choices & Scarcity.
Microeconomics:
Allocation decisions made by:
-Households
-Firms
-Industries
Also maximize shareholder wealth/stakeholder utility
Optimize value/utility WITHIN economic units --> Product Efficiency
Concept of lifting up our own boat
Macroeconomics:
Allocation made to:
-Encourage economic growth
-Achieve price stability
-Accomplish low unemployment (or high employment)
Expand the economy/improve standard of living
Optimize distribution of resources
Maximize Utility ACROSS all economic units --> Allocative Efficiency
Concept of lifting up all other boats
Utility Definition:
The ability to satisfy.
Syn. = Useful/usefulness
Product Efficiency Definition:
No better way to rearrange resources to increase value.
Ceteris Paribus Definition:
Assumption that variables are constant
Efficiency Definition:
How well resources are used/allocated
Positive Questions Definition:
Can be answered with available information/typically is what is true.
Normative Questions Definition:
Questions you really have to think about
Markets promote?
Efficiency through the invisible hand (Adam Smith)
C
E
L
L
Capital - Interest
Entrepreneurship - Profit
Land - Rent
Labor - Wages
Production & Forms of Utility:
Adding or creating value:
Form - taking parts and making something new
Possession - feeling good about a purchase/owning the item
Time - Valentine's flower example
Place - Amazon delivery example (don't have to be in store to get it)
Allocative Efficiency Definition:
Mix of goods and services produced is the most desired by society.
Production Efficiency:
Mix of goods is produced at the lowest possible resource/opportunity cost by society.
PPFs
Left of PPF = attainable + inefficient
Right of PPF = unattainable + not possible
On PPF = possible + efficient
What can make PPF grow?
-Increase in labor
-Different policies
-More RnD
-Less inflation
-Less taxes
-More international trade
Positive-Sum Game
Trade between countries, benefits all
Comparative Advantage Definition:
When the opportunity cost to produce a good is lower than another country's.
Profit Formula:
Total Revenue - Total Cost
OR
$ Remaining = $ in - $ out
Value Formula:
First thing * Cost to produce + Second thing * Cost to produce
Diminishing Marginal Return Definition:
When resources start bending away from being productive.
Comparative Advantage Formula:
Give/Get
Comparative Advantage Example:
India Brazil
5000 Cotton 3000 Cotton
20000 Rice 11000 Rice
1 Cotton for India = 4 Rice
1 Rice for India = .25 Cotton --> Lowest (out of the two options for cotton)
1 Cotton for Brazil = 3.75 Rice --> Lowest (out of the 2 options for rice)
1 Rice for Brazil = 3/11 Cotton
Demand Curve:
Downward slope to the right
QD is usually dependent on the price
Law of Demand:
Holding all else equal, as price goes up, quantity demanded goes down, and as price goes down, quantity demanded goes up.
Supply Curve:
Upward slope to the right
Positive relationship
As price goes up, QS goes up | as price goes down, QS goes down
Equilibrium:
Where QS = QD
Market Definition:
Institution that allows buyers and sellers to interact.
Demand Definition:
Max amount of a product that buyers are willing and able to purchase over time at various prices
Determinants of Demand
P
R
I
C
E
Preferences/taste
Related Goods (substitutes/complements)
Income of buyers
Count/# of buyers
Expectations of future prices, supply, or events (natural disasters, etc.)
Demand Curve Shifts
Shift to the left = decrease in demand
shift to the right = increase in demand
Reduce in price = increases QD, DOES NOT shift | movement along
QD changes when?
Price changes
Decrease in Demand:
Tastes & preferences go down
Income goes down
Price of substitutes goes down
Price of complements goes up
# of buyers goes down
Price expectations go down
OPPOSITE FOR INCREASE IN DEMAND
Decrease in Supply:
Tech goes down
Resource costs go up
Price of production substitutes go up
Price expectations for future go up
# of sellers goes down
Taxes/Subsidies go down
OPPOSITE FOR INCREASE IN SUPPLY
Surplus:
Price above market equilibrium, QS is higher than QD
Shortage:
Price lower than market equilibrium, QD higher than QS
Minimum Wage is an example of:
A price floor
Total Revenue formula:
P * Q
First set equations to QD = QS
Set QD = 0 to find?
Set QS = 0 to find?
QD - QS = ?
Max selling price
Max supply
Opportunity
QD = QS Example Problem
Demand: 75 - 4P
Supply = -24 + 6P
P = 9.9 --> Plug back in
QD & QS = 35.4
When QD = 0 --> 18.75
When QS = 0 --> 4
Elasticity Definition:
Measure of responsiveness/indication of resistance to some force
Force = Price
Response = QD
Elastic
Abs. Value (Large% change in QD/small% change in P)
If > 1, elastic
Typically not steep curves
Luxury Cars
Inelastic
Abs. Value (small% change in QD/Large% change in P)
If < 1, inelastic
Usually steep curves
Gasoline is an example
E
L
A
S
T
I
C
Luxuries
Absolute Value > 1
Substitutes
Time, a lot
Income % - large
Coupons
Inelastic
N
A
F
N
S
P
Necessities
Absolute Value < 1
Few Substitutes
Not a lot of time
Small % of income
Price and TR in same direction
Quantifying Midpoints formula:
Abs. Value ((Q2 - Q1/(Q2+Q1)/2)/
(P2-P1/(P2+P1)/2))
Cross Price Elasticity Formula:
QD change with change of related good price
% change of Qa / % change of Pb
Same as midpoint formula, no need to divide by 2 in either
if +, then substitute
if -, then complement
Income Elasticity Formula
% change in Q / % change in Income
if +, then normal good
if -, then inferior good
Price Elasticity Formula:
Abs. Value (% change in Qd / % change in P)
Fixed Costs:
Variable Costs:
Not going to change
Will change
Implicit Costs:
Explicit Costs:
Constant Costs
Actual out of pocket costs
Average Fixed Cost:
Average Variable Cost:
Average Total Cost:
Marginal Cost:
Marginal Revenue:
Total Fixed Cost / Q
Total Variable Cost / Q
Total Cost / Q
Change in total cost / change in Q
Change in total revenue / Q
When is profit maximized?
When MR = MC
Perfect Competition:
-we get to set the price
-duplication of resources
# of sellers - very many
Product Type - undifferentiated/common
Control over price - None/price taker
Barriers to entry/exit - easy
Monopolistic Competition:
-we like choices
-lose control of price
# of sellers - many sellers
Product type - differentiated/seem unique
Control over price - limited/price maker
Barriers to entry/exit - few barriers
Oligopoly:
-price stability
-have fewer choices
# of sellers - few
Product Type - unique in function/differentiated in industry
Control over price - substantial price maker
Barriers to entry/exit - high
Monopoly:
(Market curves gradually get steeper)
-less wasted resources
-no price/substitute options
# of sellers - one
Product Type - unique
Control over price -price maker
Barriers to entry/exit - high
5 Market Failures
P
A
U
S
E
Public Goods (Excludable (toll road) vs. rivalrous (apple))
Asymmetric Information (insider trading)
Unequal Distribution of income among equals
Structural Failure (profit is favored over consumer)
Externalities - external costs/benefits
GDP Formula:
Consumption Spending + Investment Spending + Government Spending + (Exports -Imports)
Recession:
6 months of real GDP decline
Inflation:
increase in the general level of prices
Deflation:
Reduction in the general level of prices
Unemployment:
Out of work, looking for work, and able to work
Underemployment:
Work that seems below your skill-set
GDP:
Real GDP:
All goods & services produced
Same thing just adjusted for inflation
GNP:
Goods and services produced by American-owned all over the world
Unemployment Formula:
Unemployed/labor force + unemployed
3 Key Indicators:
Leading - predict where we're headed
Roughly Coincident - validate where we are
Lagging - verify where we've been
Cost Push Inflation:
Demand Pull Inflation:
Prices up, output down
Prices up, output up
3 Types of Unemployment
Structural - mismatch in skillsets/geography
Cyclical - nearly 0/ caused by recession
Frictional - temporary
Economic Growth:
Basically just GDP increases
Who provides GDP information?
Bureau of Economic Analysis
Who provides CPI information?
Bureau of Labor Statistics
Core Rate CPI:
Measurement of inflation that looks at all sectors except for food and energy
PPI:
Measures average selling price over time with domestic producers
GDP Deflator Formula:
GDP/Real GDP, then *100