1.

TEN PRINCIPLES OF ECONOMICS

 Scarcity refers to the limited nature of society’s resources.
 Economics is the study of how society manages its scarce resources
 Ten principle of economics:
+ Principle #1: People Face Tradeoffs: All decisions involve trade offs; Society
faces an important tradeoff: efficiency vs. equality
+ Principle #2: The Cost of Something Is What You Give Up to Get It. The
opportunity cost of any item is whatever must be given up to obtain it. The
accounting cost of an item is the total monetary value of expenditures for an item.
Opportunity costs are different from accounting costs.
+Principle #3: Rational People Think at the Margin: A person is rational if he
systematically and purposefully does the best she can achieve his objectives. Many
decisions are not “all or nothing,” but involve marginal changes – incremental
adjustments to an existing plan.
+Principle #4: People respond to incentives. Incentive is something that induces
a person to act, i.e. the prospect of a reward or punishment.
+Principle #5: Trade Can Make Everyone Better Off. Countries also benefit
from trade & specialization:
+Principle #6: Markets Are Usually A Good Way to Organize Economic
Activity. Each of these households and firms acts as if led by AN INVISIBLE
HAND to promote general economic wellbeing. The invisible hand works through
the price system.
+Principle #7: Governments Can Sometimes Improve Market Outcomes.
Important role for govt: enforce property rights. Government may alter market
outcome to promote efficiency and equity.
Principle #8: A country’s standard of living depends on its ability to produce
goods & services. The most important determinant of living standards:
productivity, the amount of goods and services produced per unit of labor.
Principle #9: Prices rise when the government prints too much money
(Inflation)
Principle #10: Society faces a short-run tradeoff between inflation and
unemployment
2. THINKING LIKE AN ECONOMISTS
 Economists play two roles: Scientists: try to explain the world, Policy advisors:
try to improve it. In the first, economists employ the scientific method, the
dispassionate development and testing of theories about how the world works.
 Assumption simplify the complex world, make it easier to understand. Model,
which is a highly representation of more complicated reality, is used by
economists to study economic issues.
 Factors of production: the resources the economy uses to produce goods &
services (Input) such as labor, land, capital,…
 Household: own the factors of production, sell/rent them to for income; buy and
consume goods and services
 Firms: buy/hire factors of production, use them to produce goods and services;
sell goods and services.
 The PPF (production possibilities frontier) a graph that shows the combinations of
two goods the economy can possibly produce given the available resources and the
available technology.
 The opportunity cost of an item is what must be given up to obtain that item.
 Cách tính opportunity cost: sản xuất 1 sản phẩm cần tương đương với bao nhiêu
sản phẩm còn lại
 Cách xác định comparative advantage: tính opportunity cost của từng người, sau
đó so sánh. Nếu opportunity cost của ai thấp hơn -> comparative advantage thuộc
về người đó
 Microeconomics is the study of how households and firms make decisions and
how they interact in markets.
 Macroeconomics is the study of economy-wide phenomena, including inflation,
unemployment, and economic growth.
Chap 3:
 Absolute advantage: the ability to produce a good using fewer inputs than
another producer. If each country has an absolute advantage in one good and
specializes in that good, then both countries can gain from trade.
 Comparative advantage: the ability to produce a good at a lower opportunity
cost than another producer
 When people – or countries – specialize in the goods in which they have a
comparative advantage, the economic “pie” grows and trade can make everyone
better off.
Chap 4:
 A competitive market is one with many buyers and sellers, each has a negligible
effect on price. In a perfectly competitive market: All goods exactly the same and
Buyers & sellers so numerous that no one can affect market price – each is a
“price taker”
 Not all goods are sold in perfectly competitive markets. In these imperfectly
competitive or uncompetitive markets, some agents have market power. (đổ thị
dưới)
 The quantity demanded of any good is the amount of the good that buyers are
willing and able to purchase. The demand curve traces out the quantity of a good
that is demanded (by consumers) a given price. Price is the primary determined of
demand. Think of the demand curve as tracing out consumers’ willingness-to-pay
 Law of demand: the claim that the quantity demanded of a good falls when the
price of the good rises, other things equal (inverse relationship)
 Demand for a normal good is positively related to income. Increase in income
causes increase in quantity demanded at each price, shifts D curve to the right.
 Demand for an inferior good is negatively related to income. An increase in
income shifts D curves for inferior goods to the left.
 Two goods are substitutes if an increase in the price of one causes an increase in
demand for the other.
 Two goods are complements if an increase in the price of one causes a fall in
demand for the other.
 The quantity supplied of any good is the amount that sellers are willing and able
to sell.
  Law of supply: the claim that the quantity supplied of a good rises when the price
of the good rises, other things equal (tỉ lệ thuận)
 Những yếu tố ảnh hưởng đến supply: input prices, technology, number of sellers,
expectation
 To determine the effects of any event,
+ Decide whether event shifts S curve, D curve, or both.
+ Decide in which direction curve shifts.
+ Use supply-demand diagram to see how the shift changes eq’m P and Q.

Chap 5: ELASTICITY AND ITS APPLICATION

 Definition of elasticity: Elasticity is a numerical measure of the responsiveness of
Q or Q to one of its determinants.
d s

 Price elasticity of demand measures how much Q responds to a change in P.

d

 Price elasticity of supply measures how much Q responds to a change in P.

s

 We use midpoint method to calculate the elasticity

  In PRICE ELASTICITY OF DEMAND
+ Price elasticity is higher when close substitutes are available.
+ Price elasticity is higher for narrowly defined goods than broadly defined
ones.
+ Price elasticity is higher for luxuries than for necessities.
+ Price elasticity is higher in the long run than the short run.
 Rule of thumb: The flatter the curve, the bigger the elasticity. The steeper
the curve, the smaller the elasticity.

Perfectly inelastic demand

Perfectly elastic demand

 The slope of a linear demand curve is constant, but its elasticity is not.
 Revenue = P x Q
+ When D is elastic, a price increase causes revenue to fall.
+ When D is inelastic, a price increase causes revenue to rise.
 APPLICATION: Does Drug Interdiction Increase or Decrease Drug-Related
Crime?
+ Interdiction result in an increase in total spending on drugs, and in drug-related
crime
+ Education result in a decrease in total spending on drugs, and in drug-related
crime.
“Perfectly inelastic” in supply

“Perfectlyelastic”insupply
  The more easily sellers can change the quantity they produce, the greater the price
elasticity of supply.
 For many goods, price elasticity of supply is greater in the long run than in the
short run, because firms can build new factories, or new firms may be able to enter
the market.
 OTHER ELASTICITY:
 + Income elasticity of demand: measures the response of Q to a change in
d

consumer income
 + Cross-price elasticity of demand: measures the response of demand for one
good to changes in the price of another good
Chap 6:
 Price controls
 Price ceiling: a legal maximum on the price of a good or service
Example: rent control
 Price floor: a legal minimum on the price of a good or service Example:
minimum wage
 Taxes: The govt can make buyers or sellers pay a specific amount on each unit
bought/sold.
 There are two possible outcomes of a price ceiling
+ Ceiling is not binding: Ceiling price has no effect on the price or quantity sold.
A price ceiling
above the eq’m price is not binding
+ Ceiling is binding: Ceiling price artificially lowers the market price. The ceiling
is a binding constraint
on the price, causes a shortage.

 Results in an excess demand or SHORTAGE

 As with PRICE CEILING, there are two possible outcomes of a PRICE FLOOR
:
 Floor is not binding: Floor has no effect on the price or quantity sold. The
price floor below the equibilirium price is not binding
 Floor is binding: Floor artificially raises the market price. The floor is a
binding constraint on a wage, causes a surplus. Ex: A minimum wages law
do not affect highly skilled workers. They do affect do teen workers or low
skills labor.
Results in an excess supply or SURPLUS
 Often implemented to help the poor, but often hurt those they are intended to help.
 Rent controls create long-run shortages in quality housing and provide
disincentives for building maintenance
 Minimum wage laws create higher rates of unemployment for teenage and low-
skilled workers
 Ở cả cung và cầu, bên nào ít co dãn hơn (less elasticity) sẽ chịu nhiều thuế hơn.