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Econ 110
Tuesday, January 04, 2011
7:34 PM

Economics
Its all about making decisions
Scarcity- limited resources that a society cannot produce a quantity that the society wants
People have trade-offs
To get one thing, must give up another
Efficiency vs
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cost- opp
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Cost is not necessarily money
Incentive- something that influences us to act, or give up something/cost
Marginal changes- making decisions by comparing the costs & benefits at the margin,
benefit is less than the cost or vice versa, the decision is made at the margin
Principles of How people interact with one another
Trade helps everyone
Competition results in gains from trading
Specialization in what people do best
Markets are a good way to organize economic activity
Market economy- decentralized, little govt control,
Corporations decide values
Govt sometimes tries to improve market outcomes
Property rights must be enforced
Property rights- the ability of an individual to own and exercise control over scarce
resources
Market failure may be caused byExternality-the impact of one person's actions on the wellbeing of a bystander
Market power- a single economic actor has a substantial influence on market prices
Country's standard of living depends on its ability to produce goods
Standard of living
Income, location of home
Productivity- the quantity of goods and services produced from each unit of labor input
Inflation- increase or level of prices overall
Growth in the quantity of money
Lots of money, value decreases
Thinking like an economist
Every field has its own terminology
Chambless at a debate
United states gave 240 billion $ to charity-more than the GNP than Belgium or Sweden, countries that
take it by force
Stealing in the name of benevolence, blindfolded by "charity"
Govt can take your property-your income-but I could never be able to do that
Economic segregation in schools-poor school districts give bad education
Free-economy=bad for environment…?
Govt is unnecessary evil in the economy
Alma 42:16-23, 2Nephi 2:6-12
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Alma 42:16-23, 2Nephi 2:6-12
Specialization
Farmer, hunter, protector, & builder
Each one does something to help them all survive, community interaction
Govt was created to protect-it is the protector of life, liberty, & property
Private property
God made us all stewards over the whole earth
So where did private property come from?
Someone's labor that created something & made it their own
That person can sell that thing, because it is its property
Labor in the work place- e
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silicon chip that someone makes is not his, it is his companies, he is
paid & compensated for that chip/labor
Agency
The purpose of living-exercise our agency
The purpose of govt-protect our liberty/agency
Markets created societies
It is the only reason that people came together, began to interact
People got so good at doing what they do, that excess was created
This is how things like the arts, sports, etc
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S
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Help me at expense of someone else-immoral
2
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Hurt me & hurt others-immoral
4
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2 from Mankiw
10 principles
1
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Production possibilities' frontier-trade-offs, big one is food v
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S
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Marginal thinking-marginal cost, how much additional revenue will you make for producing
one additional unit
Diminishing marginal returns/benefit
Crown burger example
Each additional unit is valued less
4
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S
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4 of mankiw
Which comes first: supply or demand?
Chambless says supply-if you build something, people will want more
Mankiw says demand-a company won't build something unless the demand is there
Demand, then supply, then market
w/out supply & demand, there is no market
Initial demand creates supply & more supply creates more demand
Housing market
Artificial demand exploded the supply, everyone started buying & turning around selling to
try & make some money
People got loans, construction business went thru the roof
Then it busted & people couldn't pay their loans
Market & competitions
Market is a group of buyers & sellers of a particular product
Competitive market is one with many buyers & sellers
Perfectly competitive
Homogeneous products, all the same
Many buyers & sellers, no one has market power
Demand
Quantity demanded of any good is the amount of the good that buyers are willing and able
to purchase
Ferrari- willingness but no ability
Spinach- able to purchase, but not willing
Law of demand
Claim that a quantity of a good falls when the price of the good rises, other things
equal
Price goes up, want less, price goes down, want more
Individual demand
Demand schedule is a table that shows the relationship between the price of a good and
quantity demanded
Graph/curve: always slopes down
Market demand
Sloping down, but different slope
Demand curve shifters
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Demand curve shifters
Price-always & only affects quantity demand
The rest affect demand
Taste
Fashionable item increases demand, shifts demand curve to right
Income-demand for a normal good is positively related to income
Income increases, desire for normal good increases
Income increases, desire for inferior good decreases
Price of relative goods- substitutes or complements
As the price of the substitute increases, desire for other project increases
Pepsi can be 1
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50, but if coke rises to
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s
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k
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determinants of supply
Input Price-always & only affects quantity supplied
Price of raw materials, wages, machinery
Technology- determines how many inputs are required to produce a unit of output,
increases efficiency
Better technology increases supply
# of sellers
More sellers, more suppliers = more supply/increase in supply
Expectations
Ex
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k
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excess supply
When quantity supplied is greater than quantity demanded
Rise in minimum wage, decreases demand & increases supply
Companies demand people less (they don't want people), but more people are
willing to work for more, so supply increases
So what does market do to make return to equilibrium???
Black market- b
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decide whether event shifts S curve or D curve or both
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price change
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2
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determinant of S or D change
D=which one and which direction
S="
"
4
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impact on price
6
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Elasticity
Basic idea: measurement of how much one variable responds to changes in another variable
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Why do we want to know price elasticity?
To know how much I can raise prices and not decrease my profit
Goods with more substitutes are more elastic
Price goes up, buyers buy substitutes
Narrowly defined good is more elastic
Price elasticity is higher for luxuries than it is for necessities
Goods in the long are more elastic than goods in the short run
Slope of curve is related to elasticity
Flatter the curve, the bigger the elasticity
Steeper the curve, the smaller the elasticity
Price ceilings & price floors-gov't controls that alter the private market outcome
If e'm price is above the price floor= it is not binding
Market organizes the economic activity & prices are signals that guide allocation of society's
resource's
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Price controls often intended to help poor, actually hurts the poor
Gov't has power to levy taxes
Either buyers or sellers pay the tax
Tax can be % of the good's price, or a specific amount for each unit sold
Inelastic products/necessities put most of the burden of the tax on to the consumer
Elastic products/luxuries put most of the burden of the tax on to the producer
Incidence of the tax is how the tax burden is distributed between consumer & producer
It doesn't matter who is taxed, the incidence is always the same
The outcome is the same
Whichever curve is less elastic pays more of the tax
Welfare economics
How much utility is someone getting out of something
Utility/welfare/well-being is not measured with the dollar
Congress likes to measure it with the dollar
Allocation of resources
How much
Who produces it
Who consumes it
Willingness to pay
Maximum amount the buyer will pay for that good
Measures how much the buyer values the good
Consumer surplus is the difference between wtp & the actual price paid
Marginal buyer= the next buyer, the most recent buyer
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Marginal buyer= the next buyer, the most recent buyer
Consumer surplus is the area beneath the curve to the price axis
When the price rises:
2 reasons for CS decreasing
Buyers leave market
Buyers willing to still pay, pay more money & get less CS
Willingness to sell- cost and the supply curve
Cost= value of everything a seller must give up in order to produce a good
Includes cost of all resources (time, labor, etc
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Welfare econ
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Corrective tax
A tax designed to induce private social optimum
Piguvian tax
Corrective tax that equals social benefit
Corrective taxes & subsidies
Align private incentives with society's interests
Make private decision-makers take into account the external costs and benefits of
their actions
Move economy toward a more efficient allocation of resources
Corr
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regulations
Efficient outcome: firms with the lowest abatement costs reduce pollution the most
A pollution tax is efficient:
Firms with low abatement costs will reduce pollution to reduce their tax burden
Firms with high abatement costs have greater willingness to pay tax
Corr
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Tax gives incentives as long as the const of doing so is less than the tax
Cleaner tech
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Coase theorem
If private entities can form a large enough stance that the externality fixes their
problem because to pay off the private entities is more expensive
Public Goods
National parks, clean air & water, national defense
When goods have no prices, the market forces that normally allocate resources are absent
Private market does not supply an efficient amount of such goods for
Important characteristics
Excludable is if a person can be prevented from using it
Rival in consumption is if one person's use of it diminishes others' use
Kinds of goods
Private: excludable, rival in cons
food
Public: not " "
National defense
Common resources: rival but not excludable
Fish in the ocean
Natural monopolies: excludable but not rival
Cable TV
Public goods and common resources create externalities cuz something of value has no
price attached to it
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--the amount a firm receives from the sale of its output
Total cost--the market value of the inputs a firm uses in production
Explicit costs--require an outlay of money e
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wages, also accounting costs
Implicit costs--do not require a cash outlay e
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time
Both explicit & implicit costs weigh into a firm's decisions
Accounting profit=total revenue minus total explicit cost
Economic profit=total revenue minus total costs (explicit & implicit costs)
Production function=quantity of output compared to # of workers
Marginal product= the increase in output arising from an additional unit of that input,
holding all other inputs constant
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why?
Average fixed cost(AFC)=fixed cost/quantity of output
Average variable cost (AVC)=variable cost/quantity of output
Average total cost (ATC)=AFC+AVC
Efficient scale=the quantity that minimizes ATC
When MCWhen MC>ATC, ATC is rising
MC curve will always intersect the ATC curve at its lowest point
Long run: all inputs are variable
Short run: some inputs are fixed
Perfect competition
Characteristics
1
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the goods offered for sale are largely the same
3
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(AR) = total rev
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(MR)= change in total rev
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(MR)=Price (only true in a competitive market)
A firm in a competitive market should produce the quantity at which marginal rev
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exit
Shutdown = cost of shutting down: rev
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Shut down if PNew Section 1 Page 8

Shut down if PSunk cost: a cost that has already been committed & cant be recovered
Irrelevant to decision since firm must pay
Exit
Cost of exiting the amrket: rev
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The problem with socialism is the
equal distribution of misery
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g
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A single firm owns a key resource
DeBeers diamonds
2
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Competition: Demand curves
In a competitive market, the market demand curve slopes downward
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In a monopolistic market, Marginal revenue is not the same as the demand curve as it was in
a perfectly competitive market
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Now, go up from that Q to the demand curve & that is the maximizing price
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The monopoly Q is too low- could increase total surplus with a larger Q
Thus, monopoly results in a deadweight loss - harmful to welfare of consumers
Price discrimination
Discrimination: Treating people differently based on some characteristic, e
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race or
gender
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g
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g
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Public policy against monopoly
Increasing competition with antitrust laws
Ban some anticompetitive practices, allow gov't to break up monpolies
e
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Sherman Antitrust Act, Clayton Act
Regulation
Gov't agencies set the monopolist's price
For nat'l monopolies, MC ...

Public ownership
USPS, AMTRAK
Problem: Public ownership is usually less efficient since no profit motive to minimize
costs
Do nothing
Conclusion
Pure monopoly is rare
Many firms have market power
Ch
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monopolistic competition, P>MC
Perfectly competitive, P=MC
Product-variety externality: surplus consumers get from the introduction of new products
The business-stealing externality: Losses incurred by existing firms
Advertising -- instruct & inform, "I'm better than you are"
Perfectly competitive - cannot benefit
No product differentiation, advertising won't help
e
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milk, same product, but has to show customers that a particular company of milk
that is better
Monopolistic - nope
Monopolistic competition - can benefit from marketing
More product differentiation, firms will buy into advertising
Oligopoly markets
Concentration ratio: the percentage of the market's total output supplied by its four largest firms
The higher the concentration, the less competition
Oligopoly has high concentration ratios
Oligopoly = a market structure in which only a few sellers offer similar or identical products
Game theory = the study of how people behave in strategic situations
The nash equilibrium = the point where two dominant strategies intersect
Collusion= an agreement among firms in a market about quantities to produce or prices to charge
Firms are better off keeping agreements
Lose profit if they break agreement & compete with one another
Output effect: if P>MC, selling more output raises profits
More firms = more competition = smaller price effect
International trade introduces more firms to market, makes the market operate more
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International trade introduces more firms to market, makes the market operate more
efficiently cuz firms must place price at MC
Theory of consumer choice
People face tradeoffs
Budget constraint: limit on the consumption
The slope of the budget constraint= the opportunity cost
Income effect: fall in price boosts purchasing power of income, allowing more purchases
A fall in income shifts the budget constraint down, rise shifts up
A change in price of one of the goods pivots the budget constraint
If increase, pivots inward
Indifference curve: 1 downward sloping, 2 higher indifference curves are preferred to lower ones,
3 indifference curves cannot cross, 4 inddifference curves are bowed inward
Marginal rate of substitution (MRS): the rate at which a consumer is willing to trade one good for
another
MRS = slope of indifference curve
Perfect substitutes: two goods with straight-line indifference curves, constant MRS
Perfect compliments: a perfect right angle indifference curves, two goods that must go with each
other, e
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I will only want more left shoes if I get more right shoes
The optimum point is the highest possible point of the indifference curve
Normal goods vs

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Title: Basic Macro and Micro Economics
Description: Micro and Macro Economics taught at BYU-Provo

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