4 econ resources:
1. land
2. labor
3. capital
4. entrepreneur
4 primary markets
1. labor market
2. capital market
3. business services market
4. foreign exchange market
micro- individual and firm decisions
macro- dealing with performance, structure, and behavior, and decision making of the entire economy
opportunity cost- the cost of any activity measured in terms of the best alternative forgone
what you get / what you give up
production-possibilities frontier- graph that compares the production rates of two commodities that share the same factors of production
http://en.wikipedia.org/wiki/Production-possibility_frontier
normative economics and analysis- part of economics that expresses value judgement about economic fairness of what the economy ought to be like or what gaols of public policy ought to be
market orientation – perspectives include the decision-making perspective, market intelligence perspective, culturally based behavioral perspective, strategic perspective, and customer orientation perspective
corellation != causation(material implification)
In an economic system these questions should be raised:
1. What should be produced?
2. How to produce it/them?
3. Who for?
a. What about for those who cannot afford?
4. Will people be fully employed @ capacity
5. Will the economy grow?
Division of labour – is the specialization of cooperative labour in specific, circumscribed tasks and like roles.
represents an qualitative increase in productivity
http://en.wikipedia.org/wiki/Division_of_labour
5 fundamental elements of monetary exchanges to work effectively
1. Private property (Rights)
2. Flexible prices
3. Market icentives
4. Legal system that’s generally obeyed
5. Effective monetary system (Stable prices)
Federal Reserve is responsible for monetary policy in the U.S.
Comparative Advantage- two countries can both gain from trade if, in the absense of trade, they have different relative costs for producing the same goods. Even if one country is more efficient in the production of all goods(absolute advantage), it can still gain by trading with less-efficient country, as long as they have different relative efficiencies
Gains from trade – The net benefits of each country
Opportunity Costs:
SS OJ SS OJ
Hugh 4 8 8/4 4/8
Liz 4 4 4/4 4/4
Liz has comp adv. SS
Hugh has comp adv. OJ
SS OJ SS OJ
Hugh 0 8 1:1 trade 2 6
Liz 4 0 2 2
Law of demand- in an economic law that states that consumers buy more of a good when its price decreases and less when its price increases
Quantity demand and demand are two different things
Law of supply- tendency of suppliers to offer more of a good at a higher price
Supply and demand-
http://en.wikipedia.org/wiki/Supply_and_demand
Cetris Paribos – All else equal
Shifts in Demand
1. Income
2. Taste
3. Population
4. Price of other goods
5. Expected future price
6. Taxes
7. Subsidies
Shifts in Supply
1. Cost of Inputs
2. Technology(includes human capital)
3. # of sellers
4. Price of other potential outputs
5. Expected future price
6. Taxes
7. Subsidies
Nations with free market policies have better growth than those who don’t
Supply
Factors Increase P Q
Technology Up v ^
Cost of Inputs Down ^ v
# of Sellers Up v ^
P of poten outs Down ^ v
Exp. Future $ Down ^ v
Taxes Down ^ v
Subsidies Up v ^
Missing demand
Elasticity = %change in Q / %change in P, goods that will be bought regardless of price
e > 1 elastie
e = 1 unitary elastic
e < 1 inelastic
Excludeability & Rivalry
High Low
High Private goods, pizza Exclusive goods, countr. club
Low Congestible good , roads Public good, national defense
Govt is necessary in public good and some congestible good
–Skip 3 days–
Major sources of monopoly in the United States- Most utility companies are natural monopolies, technical conditions (commercial airlines[these things require a huge investment in capital])
1. licensing restricts number of competitors and allows them to charge at a higher rate
2. marketing edge
3. controlling an essential resource
4. capital intensity
Marginal revenue – Extra revenue that an additional unit of product will bring. Equal to the change in total revenue / change in quanity when equal to 1 unit
Marginal revenue and price are equal if a firm is a pure competitor otherwise marginal revenue will be less than price. Justify:
Cannot influence price with a pure competitor. Monopolist can sell more by lowering price below market value.
Profits are maximized when: marginal rev = marginal cost
Monopoly table. (Est. not realistic values)
Qauntity Price Marginal Cost Total Revenue
1 50 20 50 30
2 45 20 90 50
3 40 20 120 60
4 35 20 140 60
5 30 20 150 50
6 25 20 150 30
7 20 20 140 0
8 15 20 120 -40
9 10 20 90 -90
10 5 20 50 -150
a. Whats firm’s total rev for each quanity?
price * quanity
b. What is the firm’s marginal revenue for each quanity?
MC1 – MC2
c. What quanity and price should the firm choose to maximize its profits?
Total revenue – total cost
d. Suppose the monopolist is currently producing five units of the good. What actions should it undertake, and why?
Stop producing one, cutting into profits
e. Use the information above to plot the demand curve faced by the monopolist, the monopolist’s profit-maximizing level of output, and the profits earned by the firm.
Monopolist can charge anything it desires. Validity?
False, entities in a market place always maximize profit. (In the long run)
Cartels are formal agreements amoung competing firms that operate price by controlling output.
What can make cartels fail?
1. Motivation to cheat
2. Can bring other competitors into the market
Economic rent seeking, people applying for patentents or copyrights. Incentivates innovation (can get money back)
Political rent seeking, typically results in innappriate allocative efficiencies. Argues theres no benifits to innovation.