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CHAPTER 1

Economics : we can’t get everything that we want, we have to make choices. The choices that we make are the best options available given the
circumstances

 A social science concerned with making optimal choices under conditions of scarcity
 Economic wants exceed society’s productive capacity

Economic perspective: The economic perspective is the way economists view the world.

Scarcity and choice: Because we have to make choices, there is a cost to every choice and that’s called “opportunity cost.” Resources are scarce
,Choices must be made ,Opportunity cost ,There’s no free lunch

Purposeful behavior : rational self-interest, the goal is to maximize utility or satisfaction. This does not mean that we are completely selfish or that
we can’t make wrong decisions. We can derive utility by helping others and often when we make decisions, we don’t have all of the information, so
wrong decisions can be made. Firms are rational when they make choices about which products to produce in an attempt to maximize their profits.
People make decisions with some desired outcome in mind. Rational self-interest , Individuals and utility ,Firms and profit , Desired outcome

Marginal analysis : We will choose to do something if the marginal benefit is greater than the marginal cost because that is rational and will help to
maximize utility.If a person says, “That’s not worth it,” then they are saying the marginal cost is greater than the marginal benefit. Marginal
benefit , Marginal cost ,Marginal means “extra” , Comparison between marginal benefit and marginal cost

SCIENTIFIC METHOD : , economic principles and theories are created. Observing real world behavior, formulating a possible explanation or
hypothesis, testing this, and deciding to accept, reject, or modify the explanation. Continue to test the hypothesis again real-world facts.

ECONOMIC PRINCIPLE : Economic principles are generalizations about economic behavior that are true for the average person. The other-things-
equal assumption is the ceteris paribus assumption which means that all variables other than those under consideration are held constant or is
assumed to not change for a particular analysis. Generalizations ,Other-things-equal assumption : Ceteris paribus ,Graphical expression’

Microeconomics : The study of the individual consumer, firm, or market

Macroeconomics : The study of the entire economy or a major aggregate of the economy

Positive economics : Economic statements that are factual

Normative economics : Economic statements that involve value judgments

The economizing problem :Limited income and unlimited wants

The budget line : Attainable and unattainable combinations , Trade-offs and opportunity costs

4 categories of economic resources: Resources refers to inputs that are used in the production of other goods and services. Land refers to all
natural resources. Labor is one of the human resources and refers to all physical and mental talents used in the production of a good or service.
Capital refers to anything man-made and used to produce goods and services. Capital is an investment good; it is not the same as money. Money
isn’t even considered a resource. Entrepreneurs are another type of human resource but is different from labor mainly because entrepreneurs are
risk-takers. Land , Labor ,Capital , Investment ,Entrepreneurial ability

Entrepreneurs : Employs the other factors of production , Takes initiative , Makes strategic business decisions , Innovates , Takes risk

Production Possibilities Model : Economic model that shows different combinations of two goods that an economy can produce Full employment ,
Fixed resources , Fixed technology , 2-good economy , Consumer goods and capital goods

Law of increasing opportunity costs : As more of a particular good is produced, its marginal opportunity costs increase

Production possibilities curve : Concave shape , Economic rationale

INTERNATIONAL TRADE : With international trade, resources are allocated more efficiently, and it essentially is the equivalent of an increase in
resources. Now a country can not only use its own resources, but it can also take advantage of foreign resources through trade. This leads to a
rightward shift of the production possibilities curve. Specialization, Increased production possibilities

Pitfalls to Sound Economic Reasoning : Biases , Loaded terminology , Fallacy of composition , Post hoc fallacy , Correlation not causation
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CHAPTER 2

Economic systems : Set of institutionalized arrangements , Coordinating mechanism

Differences in systems exist by : Degree of decentralized use of markets and prices in decision-making , Degree of centralized government control

LAISSEZ – FAIRY CAPITALISM - Ideal economy- “Keep the government from interfering with the economy” Power of government just needed to -
Protect private property from theft , Provide a legal environment for contract enforcement , People interact in markets to buy and sell

The command system is known as socialism or communism Government ownership of resources , Decisions made by a central planning board

The market system is a mix of decentralized decision making with some government control .Systems found in much of the world , Private markets
are dominant force ,Private ownership of resources ,Self-interested behavior

Characteristics of the Market System: Private property :Freedom of enterprise ,Freedom of choice ,Self-interest ,Competition ,Market and prices

Technology and Capital Goods : Advanced technology and capital goods are encouraged , Specialization , Division of labor Geographic specialization

Money makes trade easier : Medium of exchange - Without money, people would have to barter

Active, but Limited Government : Government may be needed to alleviate market failures ,Government can increase effectiveness of a market
system , Possible government failure

Consumer sovereignty: “Dollar votes” - Method for consumers to determine which goods will be produced -Determines which products and
industries survive or fail In a market system, the consumer ultimately decides what will be produced through their dollar votes for a product. If
there are not enough “votes” for a product, the firm will cease production of that product

Adam Smith is often referred to as the “father of economics.” His emphasis on the role of self-interest in motivating economic activity is especially
important.

The “invisible hand” : 1776 Wealth of Nations by Adam Smith - Unity of private and social interest.Virtues of the market system , Efficiency ,
Incentives ,Freedom

The coordination problem - Set output targets for all goods

The incentive problem -No adjustments for surplus or shortage

The circular flow diagram :Households , Businesses , Sole proprietorship , Partnership , Corporation , Product market and the resource market , The
real flow and the money flow

CHAPTER 3

MARKETS = Interaction between buyers and sellers Markets may be : Local , National , International

Price is discovered in the interactions of buyers and sellers

Demand = Demand schedule or demand curve = Amount consumers are willing and able to purchase at a given price

Other things equal , Individual demand , Market demand

Law of demand = Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls

Explanations : Price acts as an obstacle to buyers , Law of diminishing marginal utility , Income effect and substitution effect

Determinants of demand : Change in consumer tastes and preferences , Change in the number of buyers , Change in income : Normal goods ,
Inferior goods

Change in prices of related goods : Complementary good , Substitute good Change in consumer expectations : Future prices , Future income

Supply : Supply schedule or a supply curve = Supply schedule or a supply curve = Amount producers are willing and able to sell at a given price :
Individual supply , Market supply

= When creating supply, we are assuming that the only factor that causes firms to produce more or less is the price of the good. It is assumed that
all other factors that influence the amount that firms will produce are constant. Market supply is created by summing the individual firms’ supply
curves.
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Law of supply = Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls

Explanation : Price acts as an incentive to producers , At some point, costs will rise = Producers are willing to produce and sell more of their
product at a high price than at a low price. There is a direct relationship between price and quantity supplied. Given product costs, a higher price
means greater profits and thus an incentive to increase the quantity supplied.

Equilibrium occurs where the demand curve and supply curve intersect

Equilibrium price and equilibrium quantity

Surplus and shortage = Rationing function of prices , Efficient allocation

= equilibrium price is also known as the market-clearing price. Graphically, note that the equilibrium price and quantity are where the supply and
demand curves intersect. It is important to note that it is not correct to say supply equals demand. The rationing function of prices is the ability of
competitive forces of supply and demand to establish a price where buying and selling decisions are coordinated. At prices above this equilibrium,
note that there is an excess quantity supplied, or a surplus. At prices below this equilibrium, note that there is an excess quantity demanded, or
shortage. At equilibrium the markets are economically efficient.

Productive efficiency =Producing goods in the least costly way , Using the best technology , Using the right mix of resources

Allocative efficiency = Producing the right mix of goods ,The combination of goods most highly valued by society

= . Productive efficiency can occur without allocative efficiency. Goods can be produced in the least costly method without being the most wanted
by society. Allocative and productive efficiency occur at the equilibrium price and quantity in a competitive market. Resources are neither over-
allocated nor under-allocated based on society’s wants.

= Prices automatically rise and fall and bring a market closer to equilibrium. Prices are the best tool for eliminating market shortages and surpluses.

The ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent

Price ceiling = Set below equilibrium price , Rationing problem , Black markets : Example is rent control

= . Price ceilings are set on goods that are considered to be necessities, but the equilibrium price is so high that many people are unable to
purchase the item. To be effective, the price ceiling must be set below the equilibrium price. When price ceilings are placed on a good, this creates
a chronic shortage which makes it difficult to determine how to ration the limited output for all of the consumers who are willing and able to buy
the good.

Price floor = Prices are set above the market price , Chronic surpluses : Example is the minimum wage law

= A price floor is a minimum price fixed by the government. A price at or above the price floor is legal; a price below it is not.

CHAPTER 6

PRICE ELASTICITY OF DEMAND = Measures buyers’ responsiveness to price changes = The law of demand tells us that consumers will respond to a
price decrease by buying more of a product (other things remaining constant), but it does not tell us how much more.

Elastic demand =Sensitive to price changes , Large change in quantity

Inelastic demand = Insensitive to price changes ,Small change in quantity = If demand is elastic, there is a large change in quantity demanded even
when price changes by a small amount. When demand is inelastic, there is a very small change in quantity demanded even when there is a large
change in price.

Quantitative measure of elasticity, Ed = percentage change in quantity/ percentage change in price.

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= When the elasticity coefficient is greater than 1, it means that the percentage change in quantity demanded is greater than the percentage
change in price (based on the formula), indicating that consumers are sensitive to the change in price, so demand is elastic. When the elasticity
coefficient is less than 1, the percentage change in quantity demanded is less than the percentage change in price (based on the formula),
indicating that consumers are not very sensitive to price changes. When the elasticity coefficient equals 1, this is a special case called unit elasticity.
This means that the percentage change in price and the percentage change in quantity are exactly equal. Perfectly inelastic demand means that
consumers will buy exactly the same amount no matter how high or low the price. Perfectly elastic demand means that nothing will be purchased
if there is any deviation from the current price.

Total Revenue = Price X Quantity

Total Revenue Test = Inelastic demand = P and TR move in the same direction Elastic demand = P and TR move in opposite directions

Substitutability = More substitutes, demand is more elastic

Proportion of income =Higher proportion of income, demand is more elastic

Luxuries versus necessities = Luxury goods, demand is more elastic

Time = More time available, demand is more elastic

Large crop yields = Inelastic demand, lower total revenue Large crop yields mean that the supply of crops increases and shifts to the right. When
this occurs the equilibrium price falls. Since demand is inelastic, the lower price actually leads to lower revenue for farmers. Farmers are worse off
when there is a large crop yield.

Excise taxes = Inelastic demand, more total revenue When government wants to impose taxes on goods, it is important for them to understand the
elasticity of demand for the good. If they place a tax on a good with an inelastic demand, the higher price won’t decrease the quantity purchased
by much, thereby increasing the amount of tax revenue that government collects

Decriminalization of illegal drugs = Inelastic demand, more total revenueIf heroin and cocaine were legalized, their prices would decline according
to proponents of legalization. Demand for illegal drugs like this are inelastic for a drug addict so if the price dropped, the amount consumed at that
lower price wouldn’t change by much.

PRICE ELASTICITY OF SUPPLY = Measures sellers’ responsiveness to price changes Elastic supply, producers are responsive to price changes Inelastic
supply, producers are not as responsive to price changes

Time is primary determinant of elasticity of supply ,Time periods considered : Immediate market period Short run Long run

=Antiques and other non-reproducible commodities have an inelastic supply, for one-of-a-kind antiques the supply is perfectly inelastic. This makes
their prices highly susceptible to fluctuations in demand. The more inelastic the supply, the greater the changes in price when demand changes.
Reproductions, on the other hand, have a much more elastic supply so the prices tend to remain lower even when there is an increase in demand.
Gold prices are volatile because the supply of gold is highly inelastic, and unstable demand from speculation causes prices to fluctuate significantly.
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=Cross elasticity of demand refers to the effect of a change in a product’s price on the quantity demanded for another product. Measures
responsiveness of purchases of one good to change in the price of another good . Substitute goods if elasticity is positive . Complement goods if
elasticity is negative .Independent goods if elasticity is 0

INCOME ELASTICITY OF DEMAND = Measures responsiveness of buyers to changes in their income Normal goods if elasticity is positive Inferior
goods if elasticity is negative

INCOME ELASTICITY INSIGHT = High income elasticities = Most affected by a recession

Low or negative income elasticity= Not affected that much by a recession

ELASTICITY AND PRICING POWER =Charge different prices to different buyers based on price elasticities

Business air travelers=Business air travelers have a more inelastic demand for air travel, so they are charged higher prices since they will stay pay it.

Children discounts = Families are sensitive to prices, so firms will charge lower prices for children as a result of the more elastic demand.

College tuition=Students from low income households are offered assistance with paying for college since they have a higher price elasticity of
demand; students from higher income households will pay full price for their education unless they receive some type of merit based scholarship.

Chapter 7

Law of diminishing marginal utility = As consumption of a good or service increases, the marginal utility obtained from each additional unit of a
good or service decreases Explains downward sloping demand curve

Utility is the satisfaction one gets from consuming a good or service. Not the same as usefulness , Subjective ,Difficult to quantify

Util is one unit of satisfaction or pleasure

Total utility is the total amount of satisfaction

Marginal utility is the extra satisfaction from an additional unit of the good. MU = ΔTU/ΔQ

THEORY OF CONSUMER BEHAVIOR :

Rational behavior =is the assumption that the consumer tries to use his or her money income to derive the greatest satisfaction from it.

Preferences= Each consumer has clear cut preferences for certain goods and services available in the market and has some idea of how much
marginal utility they might get from purchasing and consuming additional units

Budget constraint = the consumer has a limited, fixed amount of money to spend.

Prices= Every good has a price and prices are unaffected by amounts purchased by the consumer. Goods and services have prices and are scarce
relative to the demand for them.

Income effect = The impact a price change has on a consumer’s real income

Substitution effect =The impact a price change on a product’s relative expensiveness

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Indifference curve analysis = Alternative to theory of utility maximization . Difficult to measure utility . Use rankings or order of preference for
products . Takes into account the consumer’s budget . Derive a demand curve

= Indifference curve analysis is another way to examine and explain consumer behavior. The indifference curve mod only requires that a consumer
be able to rank combinations of products, say product A and product B, in terms of preference. Once this has been established, indifference curves
can be developed

Budget Line =Combinations of two products a consumer can purchase with their money income

Slope = Ratio of the price of B to the price of A . Location varies with income changes .Location varies with price changes

= A budget line is a schedule or a curve showing the various combinations of two products a consumer can purchase with a specific money income.
The budget line can also be referred to as the consumer’s budget constraint. It is assumed that product B is on the horizontal axis. An increase in
income shifts the budget line to the right. A decrease in income shifts the budget line to the left. Change in the price of one or both products also
changes the location of the budget line.An increase (decrease) in the price of one product will shift the budget line down (out) reflecting the ability
to buy fewer (more) units of that product. If the prices of both goods increase (decrease) the budget line shifts left (right) reflecting the loss
(increase) in ability to purchase as much of both goods as before.

Indifference Curve =Combinations of two products that yield the same amount of total utility .The consumer is indifferent as to which combination
to purchase .Downsloping .Convex to the origin .Reflects the Marginal Rate of Substitution . The indifference curve is downward sloping because
more of one product means fewer units of the other for total utility to remain the same.

Indifference map = Series of indifference curves where each curve reflects different amounts of utility .Each successive curve outward reflects a
higher level of utility

EQUILIBRIUM AT TANGENCY= The consumer’s equilibrium position .Indifference curve is tangent to the budget line .Utility is maximized .MRS
equals the ratio of the price of B to the price of A

CHAPTER 9

ECONOMIC COST = The payment that must be made to obtain and retain the services of a resource

Explicit costs = Monetary outlay

Implicit costs = Opportunity cost of using self-owned resources . Value of next-best use . Includes a normal profit

Law of diminishing returns = Resources are of equal quality . Technology is fixed .Variable resources are added to fixed resources At some point,
marginal product will fall .Rationale

LONG RUN PRODUCTION COST = The firm can change all input amounts, including plant size . All costs are variable in the long run Long run ATC .
Different short run ATCs
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Minimum efficient scale (MES) = Lowest level of output at which long run average costs are minimized Can determine the structure of the industry

Natural monopoly = Long run costs are minimized when one firm produces the product

CHAPTER 10

PURE COMPETITION CHARACTERISTICS= Very large numbers of sellers . Standardized product . “Price takers”= Easy entry and exit

PURELY COMPETITION DEMAND = Perfectly elastic demand= Firm produces as much or little as they wish at the market price.Demand graphs as
horizontal line

= the average revenue is just the price of the good. Total revenue refers to the total amount of money that the firm collects for the sale of all of
the units of their good. Marginal revenue reflects the additional revenue that the firm will receive by producing one more unit of outpuT

Loss minimization =Still produce because MR > minimum AVC .Losses at a minimum where MR = MC .Producing adds more to revenue than to costs