Chapter 1

What is economic?
Assumptions: resources are scarce

- Scarcity: the limited nature of society’s resource

10 principles of economics

1. People face trade-offs

- To get something that we like, we have to give up something else that we also like
- Opportunity cost
2. The cost of something is what you give up to get it
- Opportunity cost: whatever must be given up to obtain some item
3. Rational people think at the margin
- People make decision by evaluating costs and benefits of marginal changes
4. People respond to incentive
5. Trade can make everyone better-off
- Exchanging their capabilities with other is far more efficient to specialize in producing a good or services. Free
trade allows competition to specialize in what each person does best
6. Markets are usually a good way to organize economic activity
- Organize economic activity means allocation of resources
- The price mechanism that guides our actions in a market(the invisible hand in the market works through the
price system)
7. Governments can sometimes improve market outcomes
- Government enforce property right
- Government promote efficiency
- Government promote equality
8. Country’s standard of living depends on lts ability to produce goods and services
- Productivity: most important determinant of living standards
9. Prices rise when the government prints too much money
10. Society face a short-run trade-off between inflation and unemployment

Chapter 2
Economic models

- Diagrams and equation

- Omit many details
- Simplify reality to improve our understanding of it
- Allow us to see what’s truly important
- Built with assumptions

Opportunity cost: whatever must be given up to obtain some item. Measure the trade-off between the two goods
that each producer faces
 The circular flow

 PPF (production possibilities frontier)

- A graph that shows the possible combination of output that the economy can produce using all the available
resources
- Factors of production and technology are given the available (using only labor as a factor: one resource)
- Illustrates the trade-offs facing an economy producing two goods
- Show the opportunity cost
- If the cost is constant PPF is straight line
- Efficient level of production = slope of PPF = opportunity cost
- In the slop of PPF, the any point which in the slope is efficient point.
- 생산 가능 곡선에 있는 점만이 가장 효율적인 점들이다.
- Increase of resources or an improvement in technology allow to produce more good -> PPF outward
- PPF 의 slope 는 change of Y axis/ change of X axis 로 나타낸다.

The shape of the PPF

- Straight line: constant opportunity cost

- Bowed outward:
Increasing opportunity cost
As more units of goods are produced, we need to give up increasing amount of the other goods produced
(this happens because resource are not equally suited to the production of both goods)
Different workers have different skill
Different opportunity costs of producing one good in terms of other.
Bowed outward PPF is much more realistic

Positive statements (descriptive) vs Normative statements (prescriptive)

Positive statement
- Objective and fact based
- Attempt to describe the world as it is
- Must be able to be tested and proved or disproved

Normative statement

- Subjective and value based

- Attempt to prescribe how the world should be
- Cannot be proved or disproved

Chapter 3 (interdependence and the gains from trade)

Gains from Trade.

- If it was original, one country cannot achieve any consumption point above their PPF, but because of trade
and specialization of one product two trading countries can achieve the new consumption or production
point which is above their PPF.

Two measure of the cost of a good.

Absolute advantage and comparative advantage

Absolute adv

- When one country needs little amount of labor or time to make one product than the other country, that
country has absolute advantage in making that product

Comparative adv

- In one country’s production of good A’s opportunity cost is lower than the other country’s than that mean
 that one country where has lower opportunity cost got comparative advantage.
- Specialize according to comparative advantage

기회비용 -> 하나의 재화를 만들기 위해서 얼마만큼의 재화를 포기해야 하는지를 알려준다. 하나의 재화의
기회비용은 다른 재화로 나타낸다.
만약에 문제가 재화의 개수로 나와있으면 기회비용을 구하는 재화의 숫자가 분자로 들어간다.

한국 일본
사과 20 개 30 개
바나나 10 개 45 개

이 경우 한국에서 사과의 기회비용은 바나나 1/2 개이다. 반대로 바나나의 기회비용은 사과 2 개이다.
(기회비용을 구하고자 하는 상품의 숫자가 분모로 들어감)

만약에 문제가 노동시간, 생산 시 필요한 노동인구 등등으로 재화가 아닌 다른 변수로 나오면 반대로 하면 된다.

미국 영국
컴퓨터 60 분 20 분
빵 15 분 10 분
이 경우 기회비용은 이렇게 계산함
미국의 경우 컴퓨터 하나의 기회비용은 빵 4 개 (60/15) 빵은 컴퓨터 1/4 개 (15/60)
영국의 경우 컴퓨터 하나의 기회비용은 빵 2 개 (20/10) 빵은 컴퓨터 1/2 개 (10/20)

기회비용을 봤을 때 미국의 빵의 기회비용이 더 낮으니까 빵을 생산하고 영국은 미국보다 컴퓨터 하나의 기회비용이
더 낮으니까 컴퓨터를 생산한다.
Chapter 4 The market forces of supply and demand

Each good or service has its own special characteristics that determine the quantity people are willing and able to
consume: Demand

- The price of the good or service itself

- Consumer preference
- Prices of related goods and services
- Income
- Demographic characteristics such as population size

The price and the quantity demanded

- The quantity demanded of a good or service is the quantity buyers are willing and able to buy at a particular
price during a particular period, all other things unchanged.
- People will purchase different quantities of a good or service at different prices

Market

- A group of buyers and sellers of particular good or service

- Buyers as a group -> determine the demand
- Sellers as a group -> determine the supply of the product

Market and competition

- Competitive market
Many buyers and many sellers, each has a negligible impact on market price
- Perfectly competitive market
All goods are exactly the same,
Buyers and sellers are so numerous therefore all of them are “price taker”
- In the real world: Imperfectly competitive market
- But we assume the market as perfect competition market

Demand

- Amount of a good that buyers are willing and able to purchase

- Law of Demand
 Other things equal, when the price rises the demand falls and vice versa
Exception: Veblen effect, Bandwagon effect, snob effect
- Market demand
Sum of all individual demands for a good or service
Market demand curve: sum the individual demand curves horizontally

Demand curve shifters

5 things are non-price determinant of Demand

1. # of buyers
- Increase in #of buyers -> shift D curve to the right
- Decrease in # of buyers -> shift D cure to the left
2. Income
- Normal good: increase in income leads to an increase in demand (D curve to the right) ex) 고기
- Inferior good: increase in income lease to an decrease in demand (D curve to the left) ex) 컵라면
3. Substitutes vs complements
- Substitute: increase in the price of one leads to an increase in the demand of the other
- Complement: increase in the price of one leads to decrease in the demand of the other (시리얼과 우유)
4. Tastes
- Consumers tastes could determine the total amount of demand
5. Expectations about the future
- Expect an increase in income -> increase in current demand
- Expect higher prices -> increase in current demand

Supply

- Amount of goods that sellers are willing and able to sell in the market
- Law of supply
If other things are equal, when the price of good rises the quantity supplied of the good rises
When price fall, quantity supplied fall
- Market supply
Sum of the supplies of all sellers of good or service
Market supply curve: sum of individual supply curves horizontally

Supply curve shifter

4things are non-price determinant of supply

1. Input prices
- Supply is negatively related to prices of inputs( wage, price of raw material)
2. Technology
- Saving input cost, improvement in technology = saving cost = marginal cost decrease
3. Number of sellers
- Increase the quantity supplied at each price.
4. Expectation about future
- More demand in future, decrease the supply in current situation.

Equilibrium price and quantity

Chapter 5 elasticity and its application

Elasticity(the flatter curve = the greater the price elasticity)

- Responsiveness of X to a change in another variable

- Measure of the responsiveness of Qd or Qs to a change in one of its determinants
- Ration of two changes
- It one product’s price rises and it affect the demand of that product dramatically, that product has strong
elasticity
 Price of elasticity of demand = percentage of change in Qd/ percentage of change in P
 Percentage of change = [(end value – start value)/ start value] * 100%

 Elasticity is different depends on the point where you start => need for midpoint method

Factors affecting elasticity

- When there are many substitution of one product -> that product’s elasticity is huge
- When consumer can change their product easily depends on the price of that product -> that product’s
elasticity is huge
- Luxury good -> elasticity is huge
- In long run -> elasticity is huge

The price elasticity of Demand

Elastic demand

1. When price elasticity of demand >1 (Elastic)

- D curve relatively flat

- Consumers’ price sensitivity is high

2. When price elasticity of demand <1 (inelastic)

- D curve relatively steep
- Consumers’ price sensitivity is low

3. When price elasticity of demand = 1 (unit elastic)

- D curve intermediate slope

- Consumers’ price sensitivity is intermediate

Price elasticity of demand

Variety of demand curves (perfectly elastic demand and inelastic demand)

When demand is perfectly elastic

- Price elasticity of demand = infinity

- Demand curve is horizontal

When demand is perfectly inelastic

- Price elasticity of demand = 0

- Demand curve is vertical
- Consumers demand quantity regardless of price

Elasticity changes along a line. It decreases as the price fall and the quantity demanded increase

Price elasticity of supply

1. When price elasticity of supply >1 (Elastic)

- S curve relatively flat

- suppliers’ price sensitivity is high

2. When price elasticity of supply <1 (inelastic)

- S curve relatively steep

- suppliers’ price sensitivity is low

3. When price elasticity of supply = 1 (unit elastic)

- S curve intermediate slope
- suppliers’ price sensitivity is intermediate

The determinant of supply elasticity

- the more easily sellers can change the quantity they produce -> more elastic
- in the long run -> more elastic

Price elasticity and Total Revenue

- 가격에 민감 할 수록 탄력적 (수요량 변화률 > 가격변화율), (공급량 변화율 > 가격변화율)
가격에 둔감 할 수록 비탄력적 (수요량 변화률 < 가격변화율), (공급량 변화율 < 가격변화율)
가격에 변화가 없으면 단위 탄력적 (수용량 변화율 = 가격변화율), (공급량 변화율 = 가격변화율)
- TR 과 관계
탄력적: P↑-> Q ↓-> TR ↓ P 의 증가로 인한 TR 의 증가보다 Q 의 감소로 인한 TR 의 감소가 더 큼
비탄력적: p↑-> Q ↓ -> TR ↓ 하지만 Q 의 감소로 인한 TR 의 감소보다 P 증가로 인한 TR 의 증가가 더 큼

Chapter 6
Supply, Demand, and government policies
Government can sometimes improve market outcomes
Two ways government intervene markets

1. Price control: price celling and price floor

2. Indirect price control: tax and subsidies

Price controls

- Because of unfair market outcome

- Amide a helping the poor
- Price celling: legal maximum on the price at which a good can be sold (Rent-control law)
- price floor: legal minimum on the price at which a good can be sold (Minimum wage law)

when price celling is settled above the equilibrium price -> not effect,
when price celling is settled under the equilibrium price -> create shortage
problem of shortage because of government intervention

- long line (줄세우기

- discrimination according to seller’s biases
- often unfair and inefficient

price floor -> minimum wage law

- it creates labor surplus in labor market -> it only effects on blue color workers

Tax

1. to raise tax revenue -> government spending

2. internalize externalities -> achieve socially optimal level of output
to curb the use of a particular good and to limit undesirable behavior(담배)

Direct tax vs indirect tax

- direct tax
1. direct taxes are the taxes in which the incident and impact falls on the same person or assesses
2. income tax
3. tax burden is directly borne by the assesses
 4. the burden cannot be shifted
- indirect tax
1. indirect taxes are such type of taxes where incidence and impact fall on two different persons
2. sales tax and VAT

tax incidence (세금은 소비자나 판매자 누구에게 관세하든 상관없이 효과는 같다. 하지만 가격의 탄력성이 낮은 쪽이
더 많은 세금을 부담한다.)

- manner in which the burden of tax is shared among participants in market

- depend on the relative elasticities of supply and demand
- a tax on buyers means buyers will have to pay more/ a tax on sellers means cost increase ad seller pass along
a portion of that increase to buyers in the form of higher prices

Indirect tax
1 Ad-valorem Tax (종가세): a tax that is levied as percentage of the selling price
2 Specific tax (종량세): a specific tax is a fixed amount tax charged on each unit

탄력성에 따른 세금 부담 구분
탄력적: 누구든 탄력적이면 세금 부담이 적어진다.
완전 탄력적: 누구든 완전 탄력적이면 세금 부담 하지 않음
비탄력적: 누구든 비탄력적이면 세금 부담이 많아진다.
완전비탄력적: 누군든 완전비탄력적이면 100 프로의 세금을 부담한다.

여기서는 공급자가 구매자보다 가격 탄력성이 높음으로 세금을 덜 부담

가격탄력성: 가격 변화에 따른 수요 혹은 공급량의 변화를 측정한 것. 가격탄력석이 높다 = 가격 변화에 민감하다 즉
가격 변동에 Quantity 의 량의 변화가 크다. Quantity 를 쉽게 바꾸지 못하는 쪽이 가격탄력성이 낮은 쪽 =세금 더
부담
기울기가 완만함 = 더 탄력적