CHAPTER 1
1. Opportunity cost: value of the next best alternative
a. Ex: Make 25K each year for five years during college, by the time you graduate it
is 125K
i. You give it up and this is considered the opportunity cost
2. To repeal laws of supply and demand
a. Price ceilings
i. Cannot go above a certain price
ii. If the market goes in it by itself, it might hit an equilibrium that is up in a
higher price but is artificially lower
iii. It keeps the price lower for consumers who can get the goods but for
suppliers, if the price is very low they are not willing to supply the good
1. Less of that item
b. Price floors
i. The lowest price that can be legally charged
1. Lower price floors are ineffective
2. Suppliers might charge something that is more than what it really
is
3. Allows suppliers to charge something higher but places a
disadvantage for consumers
a. Less likely to buy the item as it too high
3. Comparative advantage
i. If you can produce something with a lower opportunity cost, you should
specialize in that production
1. Meaning: if you are able to produce a good or service for a lower
opportunity cost, it gives companies the ability to sell goods and
services at prices that are lower than competitors
a. They are able to gain stronger sales margins and greater
profitability
b. Ex: if there is a movie star that sells many pictures (making a profit) and is also a
greater barber
i. Movie: 20 M
ii. Barber: 500K
1. If they decide to only focus on being a barber, they lose the
opportunity cost of 19.5 K because they only focused on one thign
and not the other
2.
4. Trade = win-win situation
a. Voluntary trade
b. Voluntary exchange is mutually beneficial
c. Laws that prevent exchanges
5. Marginal analysis
a. The marginal cost of buying coffee for $3.00 for instance
b. The marginal benefit of the coffee is greater than $3.00
6. Externalities — a shortcoming of the market cured by market methods
a. Social costs (or benefits) that affect parties external to the economic transactions
that cause them
i. Ex: pollution being an externallity i.e. someone living near a factory and
being harmed
7. Trade-off between efficiency and equality
a. To make something efficient, not everyone will have an equal share (some have
bigger shares than others)
b. To make something equal, everyone gets the same share but it is not as efficient
8. Government policies
a. Fiscal policy: control of taxes and government spending
i. Using tax to get resources or cutting taxes to promote economic growth
ii. And taking the money to spend it in ways that can benefit the citizens
b. Monetary policy: control of money and interest rates
i. The central bank used its ability to control interest rates and the amount of
money in the economy
1. In the attempt to expand the economy or contract the economy
(depending on what the goals might be)
9. The short-run trade-off between inflation and unemployment
a. Inverse relationship
i. Low unemployment = high inflation (rise in prices)
1. To get people to work, money is put forward to spread the news of
work and allows businesses to hire more people
ii. High unemployment = low inflation
1. People not working thus no pressure on price change or anything
of that sort
10. Productivity growth
a. A small increase in labor productivity → higher living standard
b. The slowdown in labor productivity → lower living standard
- People living in urban or suburban areas not starving and having some type of
communication device whereas people who do not live in these areas and are not
sure when their next meal may be
- What makes the economy go forth is the ability of being productive with
the items we have i.e. access to certain gadgets
CHAPTER 2
●GDP (gross domestic product)
○The measure of the size of the economy
○Total amount a country produces in a year
■… how it affects the economy in the U.S. whereas GNP is how it affects
nationally
●Real GDP
○Adjust for changes in purchasing power of money (for inflation)
●An economy is a machine that turns inputs into outputs
○Inputs or factors of production: labor, machinery, buildings, natural resources
used to make outputs
■Used by firms or economy
○Outputs: goods and services that consumers and others want to acquire
■Produced by firms or economy
FACTORS OF
PRODUCTION
PAYMENT
% OF GDP
●Land
●Labor
●Capital
●Entrep.
●Rent
●Wage
●Interest
●Profits
●1%
●60-70%
●20%
●10-20%
●Free market (also known as private-enterprise)
○Consumers and businesses voluntarily buy and sell hings
○Mixture of private and public ownership (have their own companies)
—-------------------------------------
●“Closed” economy
○Exports and imports a small share of GDP, do not trade as much
○The U.S. is a closed economy, most of the things that are imported and
exported are domestic items that is already provided in the U.S.
■Home
■Utility
■Education
■Transportation
■Food
■Health care
●“Open” economy
○Exports and imports a large share of GDP
○The currency from exporting and importing can shift, leaves an impact
●When an economy is growing, the real GDP increases over time (this is the case
for the united states)
○When inflation occurs, you do not get it back
- When technology become better, the purchasing power increases (becomes more
productive)
- There are bumps along the way when an economy grows, economic fluctuations,
unemployment and recession as well as business cycles
- Recesions occur when there is not a lot of outputs (i.e. good and services)
- → no goods and services because no one is currently working or being
hired (unemployment)
- Boom periods (business or market becomes active) the recession period goes
down
- Industrial Revolution: families would still have a lot of kids and instead of working on
farms, men would go to factories and once the kids grew up they would join
- Women at the time were not working until the 1960s
- The american workforce consists mostly of services now
- The shift from goods to services due to the information age, education and
experience
- There is a higher return on services compared to goods
- Wealth increases = services increase
- With goods, it is capital and capital can move anywhere
- More labor is needed to create goods and leads to capitals looking for
cheaper labor unfortunately
* important to note: as the economy progresses, there is structural unemployment (where certain
skills are not needed)
- 8% of companies fail every year
- Competition = effective companies
- For the U.S. , compensation is in the middle
CONSUMER SPENDING
NON-CONSUMPTION SPENDING
- ⅔ on services and ⅓ on goods for
GDP
- Housing
- Government services
- Business services
- Consumer purchases of new house
(sells for higher than what they paid
for due to inflation)
- THE CIRCULAR DIAGRAM DEPICTS:
- Markets
- “Places” where goods and services are exchanged
- Firms
- Sell goods and services in output markets and buy resources in input
markets
- Consumers
- Buy goods and services in output markets (expenditures) and sell the
resources in inout markets (receive income)
- Role of government:
- The government as a referee (support/help solve issues)
- The government as business regulator (promote competition through antitrust
laws)
- Government expenditures
- Taxes in America
- The government as a redistributor (take money from those who have access and
give it to those who do not have enough)
- Transfer payments
- Progressive taxation (the more income you make, the more taxes placed on you)
CHAPTER 3
●Principle of opportunity cost
○Any decision, the next best alternative that has been forgone
■The value if anything that is equal to/greater than the next best alternative
■Something you have given up
○If the market functions well, good that have a high (low) opportunity cost have a
high (low) monetary cost
■Not always tru tho, gas prices in U.S. is surprisingly lower compared to
other countries
●Optimal decision making
○Decision that best serve the objective of the decision maker
○Implicit and explicit costs
■Explicit is the money cost, how much you give
■Implicit is watching football on a saturday and helping your sister with the
garage on wednesday but if she asks on saturday, your cost is losing the
chance to watch football
○Marginal analysis: marginal benefit must be greater than marginal cost
●Production possibilities frontier
○Always bowed out, as one is increasing the other decreasing
○With technology progressing over time, the PPF will become more bowed out
■Bowed out also shows resources that are becoming specialized
○When not specialized, it is straight and not specialized at all :(
●REASONS TO INEFFICIENCY
○Unemployment
○Inputs assigned to wrong tasks (wrong tools, wrong perons assigned)
○Goods produced at the wrong scale
○Favoritism
○Restrictive labor practices
●Absolute advantage
○Who produces more of something using the same amount of resources
●Comparative advantage
○Who produces the less of something by using the opportunity cost, TV to
computer which means computer divided by TV
●Market mechanism
○Division of labor and comparative advantage increases productivity
○Need a system of exchange to improve standard of living
○Can trade goods for goods, by money makes exncage work better
○Market mechanism decides how much of each good to produce
■The role of prices and the “how much” task
●Market system allows you to get it if you have money but if you do not have the
resources, you cannot be apart of it
○Resources allocations decisions are left to the decision makers who make their
own best interest
○Goods → willing and being able to pay
●Free markets may not be able to achieve all of societies goals
○Low unemployment, environment protection and income inequality
CHAPTER 4
●Quantity demand increase, price goes down and if quantity demand decrease, the price
goes up
○Increase of quantity demand → shift to right
○Decrease of quantity demand → shifts to left
●Causes of demand curve to shift
○Consumer income: normal and inferior goods
■Income increase, demand increases but demand for inferior goods
decrease (like eating instant ramen)
○Population: size and composition
■Population increase, demand increase
○Consumer preferences (tastes)
■If they are in favor of something, the demand increases and there is an
outward shift
○Prices of related goods
■Substitutes
●Ex: when the price of cola goes up, the demand of pepsi goes up
●If the price of cola goes down, the demand of pepsi goes down
■Complements
●Ex: If the price of tortilla chips go up, demand of salsa goes down
●Ex: if the price of tortilla goes down, demand of salsa goes up
○Changes in expectations about the future
■Income
■Prices
●Quantity supplied increases, price increases and if quantity supplied decreases, the price
decreases
○Quantity of supplies increases, shift to the right
○Quantity of supplies decrease, shift to the left
●Causes of supply curve to shift
○Industry size
■Size increases, supply increases
■Size decreases, supply decreases
○Technology progress
■Technology increases, supply increases
■Technology decreases, supply decrease
○Prices of inputs
■Price of inputs increase (labor, land, etc..), the supply decreases
■Price of inputs decrease, supply increases
○Prices of related outputs: multiproduct industries
■Goods that produced in the same process
●Price of corn oil increases, the supply of ethanol increases
●Price of ethanol decreases, the supply of corn oil decreases
■Goods that use the same inputs to produce
●The price of SUV increases, the supply of cars decrease
●The price of SUV decreases, the supply of cars increase
●Shortage
○More demand but less supplied, price tend to increase
○Demand - supplied =
●Surplus
○Less of demand but a lot supplied, price tend to decrease
○Supplied - demand =
●Equillibirum
○The quantity demand equals to quantity supplied
○No inherent forces that produce change
○Equilibrium will occur as a result of “outside events”
●EFFECTS OF DEMAND SHIFTS ON EQUILIBRIUM
○Demand shifts outward (right) (more of the demand)
■Equilibrium price rises, quantity rises
○Demand shifts inward (left) (less of the demand)
■Equilibrium price falls, quantity falls
●EFFECTS OF SUPPLY SHIFTS ON EQUILLIBRIUM
○Supply shift outward (right) (more of the supply)
■Equilibrium price falls, quantity rise
○Supply shift inward (left) (less of the supply)
■Equilibrium price rises, quantity falls
- When government is not satisfied by the market income, they impose price floors and
price ceilings
CONSEQUENCES OF PRICE CEILINGS:
●Shortage develops : more demand and less supply
●Illegal black markets, indidvudals are able to buy it at a lower price and then sell it for
higher in black markets
●Selling of illegal drugs
●Decrease investment
●Agricultural price controls in zimbabwe
●Consumer can benefit
CONSEQUENCES OF PRICE FLOORS
●Unselleable items
●Taxpayers have to pay twice, taxes and higher prices
●Surplus have to be shipped to poor foreign countries
●Producer can benefit
OTHER PROBLEMS WITH PRICE CONTROLS
●Favortism and corruption
○Who gets to buy/sell the avaliable limited quantity
●Unenforceabiliy
○Too many supplier and attempts to evade increase costs and prices
●Auxiliary restrictions → additional restrictions for price controls
●Limited of transaction volume
●Misallocation of resources → ex: feeding aniamls the wrong food
