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Microeconomics 8/ Section 2: The cost- benefit Principle Cost- benefit principle: costs and benefits are the incentives that shape decisions o Before you make your decisions Evaluate the full set (financial and non-financial aspect) of your decisions Pursue that choice only if the benefits are at least as great as the costs o Challenge: how to compare the costs and benefits Ex: granola bar scenario Solution: convert costs and benefits into dollars o Willingness to pay: convert non-financial into their money equivalent Very for a given person from moment to moment Or to avoid a cost (ex: hulu ads, spotify premium) Do not confuse willingness to pay and wanting to pay The reason for converting everything into dollars is so that everyone can compare on a common term Consider generosity (there’s room for generosity) Economic Surplus: Total Benefits – Total Cost= economic surplus o Measures how much a decision has improved your well-being o Making good decisions is all about maximizing your economic surplus Framing effects: sellers cloud your cost-benefit analysis o Ex: when an items price tag shows both the original price and the discounted price o Ex: a restaurant has one outrageously priced item on the menu making everything else seem cheap o Focus on the value for you Section 3: Opportunity Cost Opportunity Cost: the true cost o Often give up more than just money (you also gave up time) o Focus on the trade offs o Cost = Opportunity cost o Look at scenario 2 on power point o Opportunity cost within the hour is this or this, not the rest of the options o Not everything you would’ve done in the time, however it’s the things you would’ve actually done during the time o One question could be a single item, however another question could be a laundry list of items Opportunity costs are inescapabale o There will never be an instance where you will never not have an opportunity cost o THERE IS ALWAYS AN OPPORTUNITY COST
o We have unlimited wants but we have limited time, money, attention, willpower, and production resources Opportunity Cost scenario o Full time job vs attending school o Opportunity cost: $60,000 tuition, $70,000 forgone income, no opportunity cost (apartment and food), 3 hours, grand total: $130,000 and the value of 3 hours Sunk Cost: a cost that has already been incurred and cannot be reversed o EX: bought tickets to the football game and couldn’t/ didn’t go o Good decision makers will ignore sunk costs ////////////////////////////////////////////////////////////////////////////////////////// 8/ Section 4: The Marginal Principle Marginal Principle: decisions about quantities are best made incrementally o Break decisions down marginally o Additional = Marginal o Marginal benefit: the extra benefit o Marginal Cost: extra cost o Ex: instead of how many workers should I hire to should I hire one more worker o How much to buy? Should I buy one more? Is marginal benefit > marginal cost? o (Netflix example) o (Pizza example on PowerPoint) o Rational Rule: if something is worth doing, keep doing it until your marginal benefit equals your marginal cost Section 5: The Interdependence Principle Your bet choice depends on… o Your other choices You cant take other classes that are offered at the same time o The choices others make Theres now one less spot available to others o Developments in other market Makes you look good for job o And expectations about the future Maybe applying to Terry Dependence between each of your individual choices o Limited income o Limited time
Analyzing price change o Movement along the demand curve: a movement from one point to another point on the same curve o Change in the quantity demanaded: the change in quantity associated with the movement along the fixed demand curve o Change in price = quantity adjustment = movement o Other factor change = demand change = shift ////////////////////////////////////////////////////////////////////////////////////////// 8/ Section 2: what shifts your demand curve Can shift to the right and to the left o Shifts to the right = increase in demand o Shifts to the left = decrease in demand Six factors that can shift demand curve o Income Normal good: a good for which higher income causes an increase in demand Inferior good: a good for which higher income causes a decrease in demand A girl takes a bus everyday, but once she gets a job she’ll drive a car o Preferences Life-altering event: having a baby increases your demand for daycare Marketing, influencers and fashion cycles Social pressure: rising environmental awareness decreased demand for single-use plastic straws Season/weather: during December, the demand for pre-cut miniature pine trees increases as people decorate for christmas o Prices of related goods Complementary goods: goods that go well together Iphone and iphone cases Cereal and milk Substitute goods: goods that replace each other Coke vs pepsi Pizza hut vs dominos o Expectations Decisions are linked through time Expectations of the future are going to impact your choices of the present
News about a future price change will make you buy more or buy less of a certain product Future availablility: if you expect the product to sell out in the future, youre going to buy all Toilet paper during covid o Congestion and network effects Network effect: use the product because other people use it Instagram and snapchat Congestion effect: less valuable because everyone is using it Traffic jams o The type and number of buyers Changing demographics Different number of buyers o Population growth o International trade Different types of buyers o Baby boomers continure to age ////////////////////////////////////////////////////////////////////////////////////////// 8/ Chapter 3: Supply (Business view) Section 1: Individual Supply o Individual supply curve: a graph plotting the quantity of an item that a business plans to sell at each price o Individual: one business o Supply: selling decisions o Curve: can sometimes be straight lines o Ceteris paribus: holding other things constant The Law of Supply: o As the prices rise, your quantity supplied gets higher o “supply to the sky” Section 2 o BP isn’t choosing their own price, this is because many other gasoline companies provide the same product o Perfect competition Basically trying to get the highest price to where you can sell what you want o Not all markets are perfectly competitive o Marginal benefit: The extra gallon is the amount of money you get for it
Expectations If you expect the price to rise next year then you wait until next year to sell so pull back on the product Type and number of sellers ??? More sellers = supply increases Less sellers = ////////////////////////////////////////////////////////////////////////////////////////// 9/ Chapter 4: Equilibrium (where supply meets demand) 2 types of economy o Centrally Planned Economy: a governing body of various people who call the shots of what is produced and how its produced (soviet Russia) o Market Economy: each individual is making their own decision Markets: buyers and sellers come together to make an exchange o Starbucks o Online: etsy o Don’t have to exchange money The marriage market: what does this person offer me to marry them Equilibrium: all about to finding a steady state o The quantity demanded is equal to the quantity supplied o Everyone who wants to sell can sell and everyone who wants to buy can buy o Buying plans match selling plans Shortage (will push the price up) o Can keep raising your price and sell all your product as long as a shortage persists (keep raising the price until demand is less than supply) Surplus (will push the price down) o Suppliers want to get their inventory out, so they mark down the price until the buyers will begin buying their product again Predicting Market Changes o Demand single shift The market does not automatically jump to the new equilibrium Key word: what do you wanna buy o Supply single shifts Key words: Production, firms, inputs Things that can shift suppliers: Input prices Productivity and technology Prices of related outputs Expectations about the future
The type and number of sellers 3 step framework o Step 1: figure out if youre shifting supply or demand o Step 2: is that sidt and increase or decrease o Step 3: how will quantity change Double shifts o There might be an aspect where you cant tell if the quantity and price goes up or down (ambiguous) (depending on which curve shifts more) o If both curves shift the same direction I can definitely tell you about quantity but price will be ambiguous (both shift to the left, nobody wants it then nobody sells it) (both shift right, everyobody wants it then everyobody gets it) Supply shift = demand shift then price is unchanged Supply shift is less than the demand shift then price falls Supply shift is greater than the demand shift then price rises Opposite direction shifts o Can definitely tell about price o (theres a lot of product but nobody wants to buy it) (theres a shortage of the product but everyone is buying it) Supply shift = demand shift then quantity is unchanged Supply shift is less than demand shift then quantity falls Supply shift is more than demand shift then quantity rises ////////////////////////////////////////////////////////////////////////////////////////// 9/ Utility & Consumer Choice Budget Line o Line the divides the consumption space o What can I afford and not afford o 2 steps Determine whats affordable Out of the affordable option, choose which option is the best ( what brings the most happiness o Shows a consumers consumption possibilities given their income and prices o Equation: Income = (Pricex x Quantityx ) + (Pricey x Quantityy ) o Go up by one on the more expensive item o Just find the endpoints and connect the dots o Everything below the line/ on the line is affordable and everything above the line is not affordable o Change in income moves the entire line
Chapter 5: Elasticity Elasticity is about measuring responsiveness Price elasticity of demand: a measure of how responsive buyers are to changes in price o Price elasticity of demand= % change in quantity demanded/ % change in price Response/trigger o If I cut my price will it lead to a few new sells o Or if I cut my price will it lead to a lot of new sells o How responsive are buyers to prices? o Price elasticity of demand is always negative (the demand slope is always negative) o Relatively inelastic: buyer is not that responsive to changes in price (always has a elasticity measure that falls between 0 and 1) o Relatively elastic: buyer is very responsive to changes in price (big response) o Perfectly inelastic: buyers quantity demanded is totally unresponsive to changes in price (0) o Perfectly elastic: buyers quantity demanded is infinitely responsive to changes in price (unlimited) o Unit elastic: when the elasticity value is equal to 1 Visualizing on graph o Line is steep then its inelastic o Line is flat then its elastic o Elasticity typically changes along a demand curve o Slope and elasticity are NOT the same Slope= change in price / change in quantity Elasticity= percentage change in quantity / percentage change in price Exceptions: perfectly elastic and perfectly inelastic Perfectly elastic is literally where the demand line is FLAT horizontally (if you charge even 1 cent over the price that’s already there, then I will buy nothing) Perfectly inelastic is literally where the demand line is FLAT vertically (the price does not matter, I will keep buying the same quantity) o Determinants of the price elasticity of demand ELASTICITY IS ALL ABOUT SUBSITUTABLILTY More competing products mean greater elasticity (toilet paper) Specific brands tend to have more elastic demand than categories of goods Necessities: a lot less adjusting because the prescription is the prescription Search: search around for options
Time: have the ability to look at prices for the nect couple of weeks vs right now o Preferences impact elasticity Coke and pepsi o Where you are on the demand curve Depends on the price o Along the demand curve: Top half of linear demand curve = elastic Bottom half of linear demand curve= inelastic Mid point is unit elastic Question on quiz Why don’t we use percentage change o When quantity foes fromm 100 to 150 it’s a 50% increase, but when going from 150 to 100 it’s a 33% o Midpoint formula: x 2 – x 1 /(x 2 + x 1 )/2 X 100 or x 2 – x 1 / midpoint X 100 How businesses use demand elasticity o Total Revenue TR = Price x Quantity o Inelastic demand (increase price) Price goes up Quantity goes down JUST A LIL BIT TR increases because price out bids quantity because you still have consumers o Elastic demand (decrease price) Price goes up Quantity goes down MAJORLY TR decreases because consumers are flocking out o Unit Elastic Price goes up Quantity goes down equally TR = unchanged Other demand elasticities o Other factors: Price of another good (cross price eslasticity) Income elasticity of demand o Cross price elasticity Measures of how responsive the demand of one good is to price changes of another % change in quantity demanded / %change in price of another good QUANTITY / PRICE Substitutes = Positive Compliments = negative When one item in the pair gets more expensive, I buy less of both
o Look at the elasticity and then you’ll know what the outcome of the tax split will be Assess the impact of a $0.30 tax place on sellers o Your supply curve will shift a vertical distance equal to the tax o Assess the impact of a $0.30 tax place on buyers o AT THE END IT SHOULD BE EQUAL Quiz questions: o The midpoint is unit elastic o Last I clicker (wine glasses question) o Gives taxes as a pic, laid on a number grid With the pic alone, be able to say the size of the tax (vertical distance equal to the tax) Whos the buyer price and whos the seller price Whats the amount of tax revenue that the government will collect? Chart similar to 8/2 I clicker, select one or multiple that would represent binding price floors or ceilings Give a pic, (price floor or ceiling) asks to tell us how many exchanges takes place after the change in price o Whats the tax, how much of the tax fell on the buyers/sellers, how much did the o government get Four step recipe o Identify which curve is shifting: supply, demand, or both? o Did the tax go up or go down? (we don’t talk about cutting the tax) o Compare the pre-tax and post-tax equilibrium o Who is more inelastic? (whoever took the bigger burden of the tax) Subsidy: a negative tax, a payment made by the government to those who make a specific choice o Subsidies lower the price to buyers and increase the price sellers receive Price Ceiling: a legal maximum that the sellers can charge o The government sets this, its illegal to charge above it o Ceiling is on the bottom, floor is on the top Price Floor: a legal minimum that sellers can charge o The government sets this, it’s illegal to charge below it o Reasons: Raise the price to help the sellers (labor market) Reduce the amount of exchanges of the product in the market Quantity Regulations Mandate: a requirement to buy or sell a minimum amount of a good o Examples: health insurance mandate Quota: a limit on the maximum quantity of a good that can be bought or sold o Examples: legalized marijuana
o Zoning laws: specify the type and quantity that can be built in a given area in the city ////////////////////////////////////////////////////////////////////////////////////////// Chapter 7 8/ Welfare economics: how the public feels at the end of the day How we evaluate Positive Analysis (FACTS) o Describe what is happening, explaining why, or predicting what will happen Normative Analysis (OPINION) o Prescribes what should happen, which involves value judgements o Each person reaches their own conclusion based on their set of values Economic Efficiency o An outcome is more economically efficient if it yields more economic surplus o What gives the most economic surplus o Equity is often ignored by efficiency Measuring Economic Surplus Consumer Surplus: o The economic surplus you get from buying something o Consumer surplus = marginal benefit – price o The gain that you get after the transaction take place o To get the total consumer surplus take the area of the little area 1/2Base x Height Producer Surplus: o The economic surplus you get from selling something o Producer surplus = price – marginal cost Rational rule for buyers: keep buying additional unites until the price equals the marginal benefit Market Efficiency o How much gets bought and sold (efficient quantity) o Want to be at equilibrium with benefit and loss Market failure and deadweight loss o Market failure: when market forces of supply and demand lead to an inefficient outcome Five main sources: Market Power Monopoly’s, oligopoly’s Externalities
Opportunity cost of a task= time this task takes/ time required to produce the alternative ////////////////////////////////////////////////////////////////////////////////////////// Chapter 9: International Trade Terminology o Import: to buy goods or services from foreign sellers o Export: to sell goods or services to foreign buyers Trade costs o Extra costs that are a result of doing business internationally rather than domestically o Shipping costs o Delays Comparative Advantage Abundant inputs o Georgraphy, climate, natural resources, people, strategic investments Special skills o Unique skills, production meths, or expertise can lower your opportunity costs Mass Production o Benefits of mass production (sometimes called economies of scale) Section 2 Instead of putting just supply and demand its world supply and world demand When the world price is below the domestic equilibrium, it leads to imports SAQ 2 Imported= quantity demanded – quantity supplied after the world price is revealed Exports When world price is above the domestic equilibrium, it leads to exports SAQ ////////////////////////////////////////////////////////////////////////////////////////// Chapter 10: Externalities 10/ Identifying an externality o Externality is a side effect of an activity that affects bystanders whose interests are not taken into account o Leads to market failures Negative and Positive externalities o Negative: a side effect that harms bystanders Taking up two parking spots Health problems from secondhand smoke Distracting others by scrolling on Instagram during class o Positive: a side effect that benefits bystanders
When you exercise your health insurer benefits too Planting a garden anyone walking by can enjoy When you prepare before study group, your friends benefit from your insights Choices with bad side effects o Emissions Positives externality: o Flu vaccine o Flu shot Negative externality =. Overproduction Positive externality = underproduction Both generate deadweight loss Private interest: accounting for my own stuff Social interest: accounting all costs and benefits of everyone Not all choices have an externality Negative externality costs o Marginal Private cost: the extra costs paid by the seller from producing one extra unit the oil producers supply curve o Marginal external cost: the extra cost imposed on bystanders o Marginal Social Cost: all marginal costs, no matter who pays them How to tell if there is a positive and negative externality on a graph o Positive externality = cost is lower o Negative externality = cost is higher Positive externality benefits o Marginal private benefit: the extra enjoyment by the buyer o Marginal External Benefit: the extra benefit accruing to bystanders o Marginal Social Benefit: all marginal benefits, no matter who has them The externality problem o Social optimal quantity: the quantity that is most efficient for society as a whole Where the two social curves intersect o Recipe: Find equilibrium quantity What externality What is socially optimal Where are we Solving externality Problems o Solutions: should make the person who is creating the externality realize that they are producing an externality Private bargaining (the coase theorem) Corrective taxes and subsidies Cap and trade (quotas) Laws, rules, regulations
o Public Goods- Free riders: people who don’t pull their weight or don’t pay their fair share and let others carry them or pay for netflx for them o Common resource- Tragedy of the commons: people use too much of a common resource Free Riders o When someone enjoys the benefits of a good without bearing the costs because the good is nonexcludable o If no one will pay for the good, no business will produce it o Which results in underproduction o Government can directly provide the public good using tax money Parks, education, military o Government can purchase public goods from businesses Tragedy of the Commons o Commonly held resources are subject to nonexclusion but rival in consumption o The tragedy is that these resources tend to be overused and exploited individuals race to “get theirs” before its used up o the name for this outcome dates to when most towns had a central grassy area is called “the commons” o reolutions: regulation of the resource, assign ownership rights for common resource problems Quiz questions o Free riding o Chapter 12 Chapter 12: wage, workers, and management Labor market o Demand curve will be the firm (we usually think this would be supply) o Supply curve will be the customers (we usually think this is the demand curve) Understand why wages vary on the demand side o Your productivity If youre highly productive youll get more wages but if youre not youll get less wages Human capital: the accumulated knowledge and skills that make a worker more productive Education! Signal: an action taken to credibly convey information that is hard for someone else to verify o How to make sure youre actually working Closely monitor your employees Pay workers an efficiency wage An above equilibrium wage paid to encourage greater worker productivity
Also reduces worker turnover The Market for Superstars o Why is one superstar making more than another? People like the best Winner take all dynamic in some fields Technology extends their reach You can televise the basketball games to millions of people aside from those in the stadium Understand why wages vary on the supply side o Compensating differential: the differences in wages required to offset the desirable or undesirable aspect of a job o We are making different wages because we are working different jobs o Wage premium: job pays more o Wage penalty: job pay less o The market as a whole views the attribute of a job (not how you view it) Regulation and institutions also shape wages o Government regulations Minimum wage Required overtime pay Minimum training or education Safety standards Information disclosure o Licensing Laws Government licensing laws make it illegal to work in certain occupations without first meeting traingin or educations requirements Medicine Law Cosmetology Interior decorator A manure applicator It is difficult to get a license making the labor supply to decrease which makes the wage go up o Minimum Wage Creates unemployment Unemployment is the difference of quantity of workers of hired minus the quantity of workers who want jobs Minimum wage and how businesses feel very much depends on elasticity If businesses are elastic then minimum wage would be really bad If businesses are inelastic then minimum wage would be great o Unions Push wages up Wages will be 10-20% higher o Monopsony
