A market
A competitive market
In a perfectly competitive marke
The quantity demanded
Law of demand
What Economics Is All About
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The Economist as Scientist
Assumptions & Models
Assumptions & Models
The Circular-Flow Diagram:
§Two types of “actors”:
§Two markets:
Factors of production
Production Possibilities Frontier
Microeconomic
Macroeconomics
As scientists
As policy advisors
Elasticity
Elasticity
§ Price controls
§ Price controls
Taxes
allocation of resources
Welfare economics
Willingness to Pay (WTP)
Important note:
Such market failures occur
when:
is a group of buyers and sellers of a particular product.
is one with many buyers and sellers, each has a negligible effect on price
All goods exactly the same
Buyers & sellers so numerous that no one can affect market price – each is a “price taker”
of any good is the amount of the good that buyers are willing and able to purchase.
the claim
goods, that the the
protecting quantity demanded
environment, ofother
and a good falls when the price of the good rises, other things equal
needs
Principle #1: People Face Tradeoffs
Principle #2: The Cost of Something Is What You Give Up to Get It
Principle #3: Rational People Think at the Margin
Principle #4: People Respond to Incentives
Principle #5: Trade Can Make Everyone Better Off
Principle #6: Markets Are Usually A Good Way to Organize Economic Activity
Principle #7: Governments Can Sometimes Improve Market Outcomes
Principle #8: A country’s standard of living depends on its ability to produce goods & services.
Principle #9: Prices rise when the government prints too much money.
Principle
testing of#10: Society
theories faces
about howa short-run
the world tradeoff
works. between inflation and unemployment
Assumptions simplify the complex world, make it easier to understand.
models to study economic issues.
§a visual model of the economy, shows how dollars flow through markets among households and firms
firms
the market for “factors of production”
capital (buildings & machines used in production)
a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the a
Microeconomics is the
unemployment, and study ofgrowth.
economic how households and firms make decisions and how they interact in markets
economists make positive statements, which attempt to describe the world as it is.
economists make normative statements, which attempt to prescribe how the world should be.
Positive statements can be confirmed or refuted, normative statements cannot.
Basic idea: Elasticity measures how much one variable responds to changes in another
variable.
One type of elasticity measures how much demand for your websites will fall if you raise
your price.
Elasticity is a numerical measure of the responsiveness of Qd or Qs to one of its determinants.
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
The govt can make buyers or sellers pay a specific amount on each unit bought/sold.
§A tax on a good places a wedge between the price buyers pay and the price sellers receive, and causes the eq’m quantity to f
§The incidence of a tax is the division of the burden of the tax between buyers and sellers, and does not depend on whether t
§The incidence of the tax depends on the price elasticities of supply and demand.
how much of each good is produced
which producers produce it
which consumers consume it
studies how the allocation of resources affects economic well-being.
A buyer’s willingness to pay for a good is the maximum amount the buyer will pay for that good.
We derived these lessons assuming perfectly competitive markets.
a buyer or seller has market power – the ability to affect the market price.
transactions have side effects, called externalities, that affect bystanders. (example:
pollution)
To measure of society’s well-being, we use total surplus, the sum of consumer and
producer surplus.
§Efficiency means that total surplus is maximized, that the goods are produced by sellers with lowest cost, and that they are c
§Under perfect competition, the market outcome is efficient. Altering it would reduce total surplus.
able resources and the available technolog
es the eq’m quantity to fall, whether the tax is imposed on buyers or sellers.
ot depend on whether the tax is imposed on buyers or sellers.
cost, and that they are consumed by buyers who most value them.
