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WHAT IS ECONOMICS?

WHAT IS ECONOMICS?

Definition.

Economics – it is the study of how individuals, institutions and the society choose to deal with the condition of the society.

Philosophy has studied the scarcity and choice and this was facilitated by Adam Smith whom is referred to as the father of economics

Economists -this are the people who study economics and they work for universities, financial institutions major cooperatives and the government.

Microeconomics.

It focuses its attention on the decision making of individuals and the business at large and it is also concerned with market for goods, services and resources.

Markets are central in studying microeconomics as wherever and whenever there are buyers and sellers come together to exchange goods and services and market is created, a market is of a particular interest to an economist.

Macroeconomics.

This is the study of how the entire nation deals with scarcity and it also analyzes the system nations create and allow for the allocation goods and services.

Scarcity.

Scarcity is the universal conditions that exists because there is not enough time, money or stuff to satisfy everyone’s needs or wants.

Resources are refereed to as the factors of production.

Factors of production.

  • Land – includes of all the natural resources and not just some random piece of property. Land is divided into two namely renewable and nonrenewable. Renewable resources are those that are easily replenished like trees while non-renewable resources are that are not easily replenished like coal and oil.

Land is paid in wages

  • Labor- refers to the people with the skills and ability. It can be divided into three namely skilled, unskilled and the professionals.
  • Capital- all the tools, factories an equipment’s used in the production process. Capital is paid in interest and it is the product of investment.

Allocation.

It is described as getting of the right resources to the right people who deserve them.

Allocative efficiency is when the marginal benefit from the marginal costs.

Division and specialization of labor.

Division of labor means that the way a good or a service is produced into a number of tasks that are performed by different workers instead of the whole task been done by one person

Trade and market.

Instead of a consumer trying to acquire all the knowledge and skills involved in producing all of the goods and services that he wishes to consume, the market allows him to learn a specialized set of skills and then use the pay you receive to buy the goods and services you need or want.

Importance of studying economics.

Virtually, all the world major problems in the world today are from global warming, has an economic dimension and hence this makes economics to be essential.

Basic understanding of economics makes one a well-rounded thinker as one will be find new ways of thinking about current events and about personal and discussions as well as current event and policies


Revision.

Who was the founder of economics?
Adam Smith

What does the idea of the “invisible hand” mean?
in pursuing your own self-interest, you may benefit others

Opportunity Costs
Opportunity costs don’t always deal with money, often they deal with the loss of things or time
Ex: going to college full time: you are gaining an education, but you are losing money by paying for school, but also losing time to work to make more money because you are in school; the PenDot example

Economics
concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human material wants

Efficiency
lowest cost

Resources (3)
Land, Labor, and Capital

Land
Most important natural resource

Goods Market
These are items that the household buys
Ex: food, clothes, computers, haircuts, etc.

Labor Market
The Labor Market flows from the households; this is the other side of the Goods Market where the household is buying the product. The Labor Market is how the Goods Market is able to survive

Financial (Capital) Market
This is when the household is investing money, either by directly buying shares of a stock or indirectly through a savings account at the bank. The households are paid for their investments through interest or dividends. This makes the household the Supplier and the firms the Demanders

What was the name of Adam Smith’s famous book and what year was it written? What was the book about?
He wrote “The Wealth of Nations” in 1776. The book was about the value in exchange vs. the value in use. He uses the example of diamonds and water

Exchange Value
Tied to how scarce the product is and how many people want it

The Quantity of Good is on which axis of the graph?
horizontal axis (x)

The Price of the good is on which axis of the graph?
vertical axis (y)

Substitution Effect
As the price of goods start to go up, people substitute that good for something similar, but cheaper
Ex: orange juice; if the price of orange juice rises too high, people will substitute it for apple juice or vitamin C pills

Which direction does the demand curve slope and why?
It slopes downward because as the price gets lower and lower (vertically) , the demand gets higher and higher (horizontally)

Income Effect
As the prices of goods rise, but your income stays the same, the consumer will have less buying power

Quantity Demanded
refers to a specific amount of a good that is desired at each given price. Quantity Demanded is a point on a graph

Demand
refers to the relationship between Price and Quantity Demanded. Demand is a curve on the graph.

What makes Demand rise and fall?
The income of a community rises, a population boom, popularity of an item, substitutions for goods

Supply
refers to the relationship between the Quantity of a good Supplied and the Price of a good; how much is Produced at every price. Supply is a curve on the graph

Quantity Supplied
refers to the specific amount produced at a given price. Quantity Supplied is a point on the graph

What makes Supply rise and fall?
new technology, affects from the weather, change in Input Prices

Equilibrium
this occurs when the Quantity Supplied is at the same point on the graph as Quantity Demanded. Also said to be the point at which Price and Quantity are efficient in the specific economic sense that nothing is being wasted

Shift in the Curve means what?
there was a change in demand or supply, must be a curve change so it can’t be just a change in Quantity Demanded or Quantity Supplied

Price Ceiling
the maximum price for a produce, this occurs when politicians enact a law to keep the price of a good low
Ex: Rent-Control Laws

Shortage
Quantity Demanded will rise, but Quantity Supplied will fall
Ex: the Ford Fusion; some many people wanted the car that they sold out before they could make enough to replace those inventories

Price Floor
the minimum price for a product; this occurs when those who supply the good are a politically powerful force and can get the government to set this price
Ex: farmers that grow certain crops

Surplus
Quantity Supplied exceeds the Quantity Demanded; this is when inventories start to stack up
Ex: Blackberries

Elasticity
refers to the relationship between taxes and the Quantity Demanded; how Quantities respond to changes in Price

Elasticity of Demand
defined as the percentage change in Quantity Demanded divided by the percentage change in Price

Elasticity of Supply
defined as the percentage change in Quantity Supplied divided by the percentage change in Price

Inelastic Demand
the percentage change in Quantity Demanded is smaller than the percentage change in Price; goods with Inelastic Demand have an Elasticity of less than 1
Ex: when there isn’t a less expensive substitute; insulin for Diabetic patients or cigarettes for older addicted smokers

Elastic Demand
the percentage change in Quantity Demanded is greater than the percentage change in Price; good with Elastic Demand have an Elasticity of greater than 1
Ex: being able to substitute to a less expensive good; orange juice or teen smokers

Unitary Elasticity of Demand
when the percentage change in the Quantity of a good Demanded is exactly equal to the percentage rise in its Price; good with Unitary Elasticity of Demand have an Elasticity equal to 1

Inelastic Supply
a given percentage change in Price will bring a smaller percentage change in the Quantity Supplied; good with Inelastic Supply have a Elasticity of less than 1
Ex: Pablo Picasso paintings (no matter how high the prices go, we won’t be getting anymore of them)

Elastic Supply
a given percentage change in price will bring a larger percentage change in the Quantity Supplied; good with Elastic Supply have an Elasticity of greater than 1
Ex: this occurs in firms where it is very easy to ramp up production very quickly when they are running below capacity

Unitary Elasticity of Supply
a given percentage change in Price would cause an equal percentage change in the Quantity Supplied; goods with Unitary Elasticity of Supply have an Elasticity equal to 1

Why is Elasticity calculated by using percentage changes in Price and Quantity?
this is a great advantage when the U.S. is making trades with countries all over the world that use different units or different currencies

Does raising prices bring in more revenue when the Demand is Elastic or Inelastic?
Inelastic

Supply and Demand are often 1 in the short run and 2 in the long run. (fill in the blank with either Elastic or Inelastic)
Blank one: Inelastic
Blank two: Elastic

Elasticity increases the cost of production for Producers (or) Consumers?
Producers
Ex: if the Price of coffee goes up, a coffee shop can’t afford to sell the coffee at the same low Price, but now they are losing customers because their Prices went up and their customers can make less expensive substitutions

Inelasticity increases the cost of production for Producers (or) Consumers?
Consumers
Ex: when the tax on cigarettes went up, the consumers had to pay more in order to get their smokes, but because it is an addiction for most people they are willing to pay for cigarettes at almost any Price because there is no less expensive substitutions

3 Basic Questions of Economics
What should be produced?
How should it be produced?
Who should receive what is produced?

What?
Capitalist Society: the Producers and Consumers decide what should be produced?
Ex: House, Cars, etc
Communist Society: the Government makes all the decisions

How?
Producers are the only factor in this question

Who?
Political Science, this question can’t be answered in terms of Economic Efficiency

Who created the Second Order Effect and what is it?
Frederic Bastiat is associated with this effect and he was describing that a good Economists is able to see both the SEEN and UNSEEN effects

CBO
states for: Congressional Budget Office
neutral in terms of political influence, teases out unforeseen consequences, does economic analysis

Positive Economics
Always answers the What? and How? questions; the CBO always answers in a positive economic way

Normative Economics
Always answers the Who? question, very close to Political Science

Two types of Cost
Private and Public

Private Costs
these are the costs of the producer: land/resources, labor, and capital

Public Costs
these are born by a 3rd party process of making something (the public); costs not involved with land, labor, or capital
Ex: air pollution control, fixing of pot holes

Social Costs
Private Costs + Public Costs = Total Cost Overall

Wants are 1, while resources are 2
blank one: unlimited
bland two: scarce

Margin
incremental changes

Marginal Benefit VS. Marginal Cost
M.B.: benefit from pursuing an incremental increase in activity
M.C.: cost of pursuing an incremental increase in activity
Ex (for both): Saudi’s is trying to raise their prices so the U.S. can’t compete anymore and goes out of business; which test should I study for more, Econ or Ochem?

Macroeconomics VS. Microeconomics
Macro: deals with the entire economy as a whole (Janet Yellen and Jake Lew: secretary of the treasury)
Ex: growth of unemployment
Micro: deals with specific products or sectors of the economy, examines markets and organized system of exchange
Ex: Oil production, Labor Markets

Market
organized system of exchange

Ceteris Paribus
means: other things equal; dealing with only things that are relevant


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