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Economics studies the choices that people, businesses and governments make given that they have scare resources. Why Do People INteract?

Extracts from this document...

Introduction

Economics studies the choices that people, businesses and governments make given that they have scare resources. ________________________________________________ WHY DO PEOPLE INTERACT? Marginal Rate of Transformation Opportunity Cost COMPARATIVE ADVANTAGE ABSOLUTE ADVANTAGE THE THEORY OF COMPARATIVE ADVANTAGE: Argues that specialization (in the good in which an individual or country has a comparative advantage) and trade will benefit all trading parties, even those that may be absolutely more efficient producers. AND THIS IS WHY PEOPLE TRADE OR INTERACT THE ROLE OF MONEY _______________________________________________________ THE STRUCTURE OF THE ECONOMY SUPPLY AND DEMAND The price of an item is the opportunity cost of that item. DEMAND SUPPLY A Change in Demand Change in the entire relationship between the quantity demanded and the price of a good. Factors that lead to a change in demand 1. Price of other goods a. Substitutes b. Compliments 2. Income and wealth a. Normal goods b. Inferior goods 3. Tastes and preferences 4. Expectations about future a. Future price increase b. Future increase in income 5. Number of households (or population) ...read more.

Middle

negative if compliments Price elasticity of supply = * always positive EFFICIENCY Efficiency in a Competitive Market Impediments to Efficiency * Price ceilings and price floors * Taxes, subsidies and quotas * Monopoly * Public Goods * Externalities THE TRADEOFF BETWEEN EQUITY AND EFFICIENCY Price Ceilings Rent Control Price Floors Minimum Wages TAXES * The effect of taxes on the market equilibrium. . Who pays the sales tax? * The higher the elasticity of demand relative to the elasticity of supply, the more producers pay. * The higher the elasticity of supply relative to the elasticity of demand, the more consumers pay. Perfectly Elastic Demand: Producers pay the sales tax CONSUMER CHOICE How do consumers decide what to buy? 1. preferences 2. income 3. prices Budget Line or Budget Constraint p1q1+p2q2=M Preferences and Indifference Curves Predicting Consumer Behavior MRS=p1/p2 Change in Income Change in Price * The substitution effect * The income effect Deriving Demand from Utility Maximization The Labor Market FIRMS AND OUTPUT MARKETS The Short Run and the Long Run * Capital - Fixed in the short run * Labor - Variable in the short run Costs in ...read more.

Conclusion

Market power 2. Identify and separate different buyer types 3. Sell a product that cannot be resold Two Surprising Things Price Discrimination * It's profitable for firms to price discriminate. * Price discrimination may improve efficiency. Perfect Price Discrimination NATURAL MONOPOLY Natural monopolies typically arise in markets in which there are huge economies of scale. MONOPOLISTIC COMPETITION Key Features 1. A large number of firms that compete 2. Each firm produces a differentiated product 3. Firms are free to enter and exit the market. Good and Bad: Innovation vs. Wasteful Marketing OLIGOPOLY Game Theory Key Features of a Game 1. Rules 2. Strategies 3. Payoffs Nash Equilibrium Both players are simultaneously taking the best possible action given the action of the other. ________________________________________________ COURNOT MODEL OF OLIGOPOLY Collusive Outcome Nash Equilibrium Outcome * Best response functions * Collusion difficult to sustain Efficient Outcome ________________________________________________________________ PUBLIC GOODS * Non-Rival * Non-Excludable EXTERNALITIES * Production/Consumption * Positive/Negative THEMES 1. People and firms make decisions at the margin 2. Perfect Competition leads to efficient outcomes 3. Exceptions to efficiency 4. Optimality of government intervention 5. Trade-off Between Efficiency and Equity 6. Game theory vs. standard economic analysis 7. Economics is a way of analyzing the behavior of individuals and firms THE END ...read more.

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