Econ 201 Notes

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Economics 201 notes

Chapter 1 : First Principles

• Economics is science of decision making
• individual choice is the basis of economics
• methodology = cost-benefit analysis
• If it does not involve choice, it isn't economics.
• Resources (something used to produce something else) include capital like tools and equipment, land like natural resources and labor • Resources are scarce
• Opportunity cost are all costs that you must give up to get it. • trade-off is the comparison between the costs and benefits of doing something • decision of this type is called marginal decision

• study of them called marginal analysis
• An economy is efficient if all opportunities to make some people better off without making other people worse off are taken • There is often a trade-off between equity (fairness) and efficiency • gain from trade are the advantages of specialization

• economies normally move toward equilibrium
• Three basic econ. questions - What to produce? How to produce? For Whom? • Three economic system
➢ all of it answer those 3 basic econ. questions
➢ types - traditional, command/planned, market
➢ most of the country are mixed economies (more than one type)

Chapter 2 : Economic Models Trade-offs and Trade

• An important assumption in economic models is the other things equal assumption (ceteris paribus), which allows analysis of the effect of a change in one factor by holding all other relevant factors unchanged. • one important economic model is the production possibility frontier (PPF) • it illustrates opportunity cost, efficiency and economic growth • two basic source of economic growth: increases in factor of production and improved technology. • another important model is comparative advantage which someone can produce some good or service with a lower opportunity cost than everyone else • absolute advantage is an ability to produce a particular good or service better than anyone else. • The circular-flow diagram represents transactions within economy. [pic]

• Economist use economic models for both positive economics and normative economics • Positive economics is "what is" which is measurable, verifiable and objective • Normative economics is "what should be" which is opinionated and subjective

Chapter 3 : Supply and Demand

Demand (D) - relationship between P and QD (negative, inverse) Law of Demand when P↑ → Qd↓
change in quantity demand is shown by movement along the curve which cause by the price of the same good change in demand is shown by shift of D curve which cause by non-price determinant

Non-Price Determinant of Demand
- shown by shift of D curve
- cause D↑ or ↓
(1) Price of related goods
substitute: P↑of substitute → D↑
complements: P↑of complements → D↓
(2) Income of consumers
-for "normal goods", when income↑ → D↑
-for "inferior goods", when income↑ → D↓
(3) Number of consumers (population)
-consumers ↑ → D↑
(4) Tastes + Preferences
-tastes↑ → D↑
(5) Expectations of future prices or availability of product -expect future P↑→ D↑now

Supply (S) - relationship between P and Qs (positive, direct) Law of Supply when P↑ → Qs ↑

Non-price Determinant of Supply
- shown by shift of S curve
- cause S↑ or ↓
(1) Resource costs or availability
resources cost↑ → supply↓
Ex: corn subsidies → cost of production↓ → supply of corn↑ (2) Price or Profitability of other goods that could be produced price of other goods↑ → S↓
(3) Expectations of the future price or profitability
expect P↓later → S↓now
(4) number of producers
n of producers↑→ S↑ → P↓
(5) 3 "Ts"
-technology↑ → S↑
- "temperature"
- taxes: excise tax - specific good and services
e.g. cigarette, alcohol, gasoline
tax↑→ S↓ → P↑

Equilibrium (EQ)

-occur at a Price where Qs = Qd
-at EQ, no surplus (Qs > Qd) or shortage (Qd > Qs)
-"IDEA" that in a freely operating market (where prices are free to↑or↓), there is a tendency to move...
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