CHAPTER 1 Marginal analysis each additional unit of input would add to output but at a diminishing rate Economic decisions

s must be rational and purposeful costs and benefits are weighed Economic principle statement about economic behavior / economy that enables prediction of probable effects *generalizations tendencies of typical or average consumers, etc to buy more product when its price falls *otherthings equal assumption *graphical expression Positive Economics (what is) *facts (scientific-based analysis) *cause-and-effect relationships (description, theory testing and development) Normative Economics / (policy economics) (what ought to be) *value judgements about what economy should be like or what particular policy actions should be recommended to achieve a desired goal (policy economics) Economic Perspective stresses: (1) Resource scarcity and necessity of making choices *scarce resources all natural, human and manufactured resources that go into production of g&s (2) Assumption of purposeful (rational) behavior (3) Comparisons of mb & mc Economizing Problem (1) Limited Income per capita (average income / person) (2) Unlimited Wants *budget line (budget constraint) various combinations of 2 products a consumer can purchase w/n a specific money income e.g. income / price *trade-offs and opportunity costs Production Possibilities Model illustrate production choices given: *full employment *fixed resources *fixed technology *2 goods (consumer and capital goods) -trade off in production - a fully employed economy must sacrifice some of one good to obtain more of another good Law of increasing opportunity cost the opp cost of each additional unit of 1 good is greater than the opp cost of the preceding one = production of good 1 / opp cost of producing addtl unit Growing Economy *increase in resource supply *advances in technology *improvement in resource quality Optimal Allocation - expansion of a goods output until MB & MC are equal Pitfalls to Sound Economic Reasoning 1.) Biases not supported by facts 2.) Loaded Terminology emotionally biased

3.) Fallacy of consumption statement true for an individual but not for all 4.) Post Hoc Fallacy because event A precedes event B, A is the cause of B 5.) Correlation but not causation

Chapter 2 Economic systems set of institutional arrangement & coordinating mechanisms Differ based on: (1) Who owns the factors of production (2) What method used to motivated, coordinate and direct economic activity 2 Points: 1.) Command System socialism / communism -government owns most property resources -economic decision central economic plan Premise of the Command System -coordination and incentives problem misjudgement of the amount of g&s 2.) Market System (capitalism) -private ownership of resources -use of markets & prices to coordinate economic activity -freedom of enterprise & choice -results in competition *Pure Capitalism / laissez-faire (let-it-be) governments would protect private property; keep government from interfering with the economy Invisible Hand guides firm and suppliers to obtain their own self-interest Virtues of the Market System: 1.) Efficiency 2.) Incentives encourages skill acquisition, hardwork and innovation 3.) Freedom Characteristics of the Market System: PFSCMTS (Please Forgive Shi Coz Maan Truly Shy) *Private Property (private frms / indivs, intellectual property) *Freedom of Enterprise and Choice (to produce g&s) *Self-interest trying to achieve a goal by delivering value to others *Competition 2 or more buyers /sellers *Markets & Prices bring demanders &sellers together *Technology & Capital Goods *Specialization use of resources of a firm to produce one or a few goods to be exchanged for a full range of desired products; human & geographic specialization Five Fundamental Questions in the Market System: what, how, who, howsystem, howpromoteprog 1. What to produce? TR greater than TC; expanded production Consumer Sovereignty determines types & quantities of goods produced 2. How to Produce? -combination / ways that minimize cost -use of technology 3. Who will get the Output? -consumer who has the ability and willingness (income, price, preferences) 4. How will the System accommodate dynamic change?

-resources now become obsolete later (changes in taste, resources, technology) 5. How will the system promote progress? -technological advancement (reduce prod&dist cost, lower pay) -capital accumulation

CHAPTER 3: Demand, Supply and Mkt. Equilibrium Markets composed of buyers & sellers who exchange g&s at competitive prices Demand amount of product that consumer is willing & able to purchase at a specific time at various prices, ceteris paribus *Law of Demand inverse relation; P inc /Qd dec Causes of inverse relation: 1.) Common sense 2.) Diminishing marginal utility people buy additional product if price decreases 3.) Income and substitution effects Lower Price more purchasing power At a higher price, consumers buy the less expensive product. Determinants of Demand: 1. Consumer taste 2. Number of buyers 3. Consumer income Normal goods willing &able to buy when income increases and price decreases Inferior goods buyers willing & able to purchase as income decreases (e.g. gas grill) 4. Prices of related goods Substitute goods (P of substitute increase) Complementary goods(P of complementary increase) 5. Consumer expectations Supply schedule / curve that shows the various amounts of a product that producers are willing and able to make available for sale at each series of possible prices during a specific period Law of Supply direct relation -firms will produce & offer for sale more of their product at a high price than at a low price Determinants of Supply: 1.) Resource Prices ( Resource Prices decrease) 2.) Technology (improvement in technology - increase) 3.) Taxes and Subsidies () - decrease 4.) Prices of other goods ( price of substitutes decrease) 5.) Producer expectation 6.) Number of sellers ( number of producers decrease) Equilibrium Price (market-clearing price) price where intentions of buyers & sellers match Surplus excess supply Shortage excess demand Rationing function of prices ability of the competitive forces of supply & demand to extablis a price @ w/c selling & buying decisions are consistent (to eliminate surplus / shortage)

Efficient Allocation *productive efficiency production of any good in the least costly way *allocative efficiency particular mix of g&s most highly valued by society Price ceiling maximum legal price a seller may charge for a product / service -creates shortage -price at or below ceiling is legal Solutions to Price Ceiling: *Govt. can give rationing coupons Consequence: Black markets prices above the ceiling Price floor minimum price fixed by the government Solutions to surplus: -govt. can restrict supply -govt. must purchase surplus / store / dispose Consequence: -failure to achieve allocative efficiency -increase tax burdens

CHAPTER 6: Price Elasticity Price elasticity of demand responsiveness / sensitivity of consumers to a price change = Midpoint formula: = Interpretations of Ed 1.) Elastic Demand modest price ; Ed greater than 1 - An increase in price results in a larger % of Qd - Small reductions causes buyers to increase their purchases from 0 to all they can get *perfectly elastic consumers are completely responsive to a Price change 2.) Inelastic Demand consumers pay less attention to price changes *perfectly inelastic P -> no in Qd 3.) Unit Elastic P and Qd same Total Revenue amount the seller receives from the sale of a product in a particular time period TR = P x Q Determinants of Price Elasticity 1.) Substitutability (the larger the number of substitutes, the higher the Ed) 2.) Proportion of Income (price relative to income) 3.) Luxuries vs Necessities (luxuries are more elastic) 4.) Time waiting when product decline Application of Price Elasticity of Demand

*Large crop yields inelastic *excise taxes inelastic *discrimination of illegal drugs Price Elasticity of Supply how quickly producers can shift resources between alternative uses Es = %Qs / %P Elastic supply Qs by producers is relatively responsive to P Market period period that occurs when the time immediately after a change in market price is too short for producers to respond w/ a in Qs; perfectly inelastic supply Short-run time too short to change plant capacity but long enough to use fixed plant more or less extensively; inelastic supply Long-run time too long enough for firms to adjust plant sizes and to enter the industry; elastic Cross Elasticity of Demand measures how sensitive a consumer purchases of one product are to a change in the price of different but related good

Income elasticity of Demand the degree to which consumers respond to a change in incomes by buying more or less of a particular good

Consumer Surplus difference between the maximum price a consumer is willing to pay & the actual market equilibrium price Producer Surplus difference between the actual price a producer receives for a good & the minimum acceptable price

Chapter 9: Pure Competition Pure Competition (banks) -large number of producers -firms produce standardized products (identical, homogeneous) -Individual firms are price takers no firm has control over the market -new firms can freely enter & exit the industry -perfectly elastic demand Pure Monopoly (electric company, airline) -one firm is the sole seller of a product or service -entry of additional firms is blocked -Pure monopolist produces a single unique product (no product differentiation) Monopolistic Competition (clothing, furniture, books) -relatively large number of sellers producing differentiated products

-nonprice competition (attribute-based design, workmanship) -entry or exit is easy Oligopoly (petroleum, telecommunications market, atumobile, bank) -few sellers of standardized or differentiated products -each firm is affected by the decision of its rivals and take those decisions into account in determining price and output -difficult entry limited control over product price because of mutual interdependce -nonprice competition Externalities cost or benefit accruing to an individual or group (third party) that is external to a maket transaction *negative externality leads to overproduction & overallocation of resources *positive results in underproduction & underallocation of resources

CHAPTER 24 Expenditure Approach Personal Consumption (Consumption Expenditures by households) Investment Expenditures by business (Gross Private Domestic Investment) *Gross Private Domestic Investment Depreciation = Net Investment Government purchases of g&s (for public service..social capital goodsschools) Expenditures by foreigners (Net Exports) X-M GDP

Income Approach Compensation of Employees (Wages) Rents Interest Proprietors Income Profits (corporate profits) Taxes on Production and Imports National Income (measures income through country-owned resources whether domestic or abroad) (Net Foreign Factor Income) Statistical Discrepancy Consumption of Fixed Capital (depreciation) GDP (consumption of fc (depreciation)) Net Domestic Product (statistical discrepancy) Net Foreign Factor Income National Income *Personal Income NTSCUT National Income (Tax on production and Import)

(Social Security contributions) (corporate income taxes) (undistributed corporate profits) Transfer Payments *Disposable Income Personal Income Personal Taxes Or Consumption + Savings Nominal GDP - Based on the prices that prevailed when the output was produced Real (adjusted) GDP - GDP that has been inflated / deflated to reflect changes in the price - Use base year price - (Price of specific mkt basket in specific year / price of same basket in same year) x 100 GDP Price Index price of a specified collection of g&s in a given year compared to the price of an identical (similar) collection of g&s in a reference year = (price of mkt basket in a specific year / price of mkt basket in base year) x 100 Y Units of output (1) Price of Pizza / unit (2) Price Index (100) (Nominal / real GDP) x 100 100 200 Unadjusted / Nominal GDP (1) X (2) Adjusted / Real GDP *nominal / price index (in hundreds) $50 / 100 X 100

1 2 3

5 7 8

$10 20 25

$50 140 200

Shortcomings of GDP Fails to account: Dont U Call Cara Extremely Nonfat *nonmarket and illegal transaction *changes in leisure and product quantity *composition and distribution of output *environmental effects of production *underground economy *doesnt account total happiness / well-being