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January 9, 2025
Economics: A social science concerned with the use of scarce (limited) resources in the production and distribution of goods and services to satisfy the unlimited human wants ● One sentence definition: choice under constraint ● One word definition: scarcity
3 Types of Resources:
- Labor (L): skills, abilities, and willingness to work
- Capital (K): goods that are produced in order to produce other goods a. C is for cost
- Land (T): resources used for capital
Positive Economics: descriptive, describes the facts as they are ● Concerned with “what is”
Normative Economics: prescriptive, tells us what the world should be ● Concerned with what “should be”
Microeconomics: the branch of economics that is concerned with individual entities such as markets, individuals, and firms
Macroeconomics: concerned with the overall performance of the economy
Important Names: Adam Smith (1723-1790): the father of economics ● Major work: “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776) ● Theories/Ideas: ‘the invisible hand’, ‘laissez-faire’, ‘specialization’ ○ The invisible hand: each of us has the incentive to be happy and are motivated by selfish desires (the market can resolve any issues) ○ Laissez-faire: “leave us alone” (refers to the government) against government intervention because he believes the market can solve itself ○ Specialization
John Maynard Keynes (1883-1946): ● Major work: “The General Theory of Employment, Interest, and Money” (1936) ● Theories/Ideas: ‘slumps are due to lack of demand’, ‘government should interfere’ ○ “In the long run we are all dead”
Friedrich August von Hayek (1899-1992): ● Major work: “The Political Order of Free People” (1979) ● Theories/Ideas: ‘criticized socialism’, ‘Nobel Prize winner (1974)’ ○ Predicted the fall of communism
The 3 Main Economic Questions:
- What and how much to produce?
- For whom to produce?
- How to produce?
January 14, 2025
The Scientific Method in Economics: ● Observation ● Assumption ● Modeling ● Prediction ● Testing
Some Common Fallacies: ● The fallacy of composition ● The “post hoc” fallacy ● The “ceteris paribus” assumption
The Fallacy of Composition: drawing general conclusions from individual events ● The Paradox of Thrift: during an economic recession, if everyone starts saving, the aggregate savings will reduce
Market Equilibrium: the balance between all the buyers (the demand) and all the sellers (the supply) in a market
The Circular Flow Diagram:
The Market System Will Work If:
- Rational economic agents (consumers and firms);
- Perfectly competitive markets; a. Perfectly competitive if no individual “buyer” or “seller” is capable of affecting the prices in the economy
- No negative externalities; a. Negative externality occurs when agents who are not in a specific market are negatively affected by the actions of the agents in the market
- Fair and just distribution;
- Stable and growing economy;
January 16, 2025
The Role of the Government: ● Restore and Promote Efficiency
○ Decrease/eliminate negative externalities ● Restore and Promote Equality ○ Progressive taxation: a tax that takes a larger percentage of income from high-income groups than from low-income groups ■ Equality vs. equity ○ Transfer payments (unemployment benefits): a payment by the government to an economic agent or individual without getting anything in return ○ Minimum wages ● Restore and Promote Stability and Growth ○ Monetary policy (money, supply, interest rate) ■ Print more money/increase money supply or manipulate interest rates ○ Fiscal policy (taxation, government spending)
January 21, 2025
Production Possibility Frontier (PPF): shows all the possible combinations of goods or services that can be produced by a country with a given state of technology and limited amount of resources, which are fully and efficiently employed ● PPC (production possibility curve)
Roses (millions) Guns (Thousands) 0 15 1 14 2 12 3 9 4 5 5 0
Demand Curve: a graphical representation of the demand schedule
Demand ≠ quantity demanded
When price of the product falls, the quantity demanded of the product will increase
The Law of Demand: The Law of Downward-sloping Demand: people will purchase more of a good at a lower price, ceteris paribus ● The substitution effect ● The income effect
Movements Along the Demand Curve: Movements along the demand curve are known as changes in the quantity demanded
When we observed movements ‘along’ the demand curve, the curve itself does not move, i.e., the demand does not change
The only factor that affects the quantity demanded, i.e., that causes movements ‘along’ the demand curve is the price of the good/service in question
Shifts of the Demand Curve: Shifts ‘of’ the demand curve are known as changes in demand
● When demand increases, we move the demand curve to the right ● When demand decreases, we move the demand curve to the left
Factors that affect the demand, i.e., that cause shifts of the demand curve include: ● Market size: individual vs. market demand ● Income ● Tastes and preferences ● Prices of related goods (complements vs substitutes) ● Special factors (e.g. weather) ● New inventions
● Expectations
January 28, 2025
Supply Schedule: the relationship that exists between the price of a good and the quantity of the good that is offered for sale, at a given time and keeping all other things constant (ceteris paribus)
The Supply Curve: a graphical presentation of the supply schedule
Movements along the supply curve are known as changes in the quantity supplied
When we observe movements ‘along’ the supply curve, the curve itself does not move, i.e., the supply (schedule) does not change
The only factor that affects the quantity supplied, i.e., that causes movements ‘along’ the supply curve is the price of the good/service in question.
Factors that affect the supply (schedule), i.e., that cause shifts of the supply curve include: ● Production costs ● Government policy ○ Taxes and subsidies ● Prices of related costs ○ On the supply side, goods are related when they can be produced with the same technology ● Special factors ○ Most special factor is weather ● Innovation and other production options ● Expectations
