Download I. The Basic Economic Concepts

I. The Basic Economic Concepts
7 Major Economics Concepts for all time
Opportunity cost,
The market always strike back: supply & demand,
MB=MC: extra costs and extra benefits as a way of thinking, (extra = marginal)
comparative advantage,
trade as a win-win situation,
market failure,
efficiency and equality
Graphs, slopes and simple algebra for Economics.
An overview of the American Economy:
An Overview of US mixed market economy,
Organization of the American economy:
the private sector from corporations to not-for-profits.
Circular flow of money, goods and services, taxes, etc.
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Why Economic reasoning today is key to understanding almost all social and political issues.
Key Economic principles and vocabulary definitions:
Key assumptions underlying traditional Microeconomic theory.
Producers of goods and services maximize economic profit.
Sellers of resources maximize their utility (price, leisure, etc.)
Consumers allocate their resources: time, and income, wealth to maximize their wellbeing overtime
Key principle of resource allocation: Marginal cost = marginal benefit and the principles of optimal choice.
Markets versus central planning,
Property rights
Economic institutions,
Information costs,
Transaction costs.
Characteristics of goods and services: private good (mutually exclusive users) versus public goods (little extra
cost per user) and how they affect the world economy today. Downloading music? Can you download a car?
Scarce Resources, production functions and the concept of marginal product.
Total and marginal productivity of an input
pp. 127Law of diminishing marginal return
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Basis of Mathusian theory of population
Practical application of how many workers to hire: MPP = wage in kind => later => MPP*price = MRP = wage
Production possibility frontiers illustrating the concept of Opportunity Costs
increasing relative opportunity costs.
Inflation if you try to be outside the PPF
Zero opportunity cost to produce more if inside the PPF (like in today’s US economy)
Shifts caused by losses and gains of resources
Shifts caused by technological progress.
Comparative Advantage and foreign trade
Supply and Demand: the heart of microeconomics: Economic rationality? Is it realistic?
An Introduction to Supply and Demand: The meaning of a demand curve and a supply curve: interdependence of
markets (ethanol caused inflation), law of demand, law of supply, market equilibrium and it meaning (clearing the
market with price). Markets are not always fair but are very efficient in allocating goods and resources.
A Simple Algebraic Model of Supply and Demand for One Market
Shifts in the curves versus movement along curves.
A simple algebraic model of one market
Applications of the Concepts of Supply and Demand
Price & non-price rationing,
Price supports, & price ceilings.
Excise taxes and tariffs: the cigarette and alcohol taxes and public health, price discrimination.
Who pays the taxes.
Using the Market to Solve Social Problems
Excise tax to curb smoking and pollution
Market in C)2 emission rights
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From the Theory of consumer behavior and optimal choice to the market demand curve
Consumer well-being, total and diminishing marginal utility, and optimal choice.
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Demand curve,
consumer surplus,
paradox of value.
The key assumption of the consumer’s ability to make rational choices – fundamental to economic theory.
Optimal choice of goods per $ and time.
Appendix,
Theory versus reality. Can consumers make rational choices?
Chap 5
Why not? Tastes changes with time. Advertising. Peer pressure. Wrong information. Difficult paradigm.
Indifference Curves, Budget Constraints and Maximizing Utility.
Visualizing economic functions in 3-D, the contour map.
A graphical analysis of utility maximization. Learn it now, it is used later!
How to choose the ratio of the amount of goods you can purchase with your budget to maximize your utility.
The slope of the indifference curve is the ratio of the marginal utilities which represents your willingness to give
up Y to have more X without being better or worse off. .
The slope of the prices of the two goods represents the opportunity cost of having more X in terms of Y.
How indifference curve analysis helps us understand the income and substitution effects, and the work leisure
choice.
Income and substitution effects,
Advertising
work-leisure choice: backward bending supply curve of labor
The Concept of Elasticity as Reactions to Price Changes.
A key concept in marketing and public policy.
Arc Elasticity of demand,
Point Elasticity of demand
Income elasticity of demand: normal versus inferior goods
Price elasticity of supply
Cross-elasticity of demand and substitutes and complements
Does advertising work – and its impact on consumer surplus?
Are consumers rational?
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Profit-Maximization: Step 1 Cost-Minimization of Production
Graphical analysis of the Cost of Production.
Concepts of Total costs, Average costs, Marginal Product costs and seeing them on a graph.
Average total costs
Average variable costs
Average fixed costs
Marginal cost
Graphical relationship between total cost curves and average cost curves.
Production Function, Marginal Product,
Minimizing costs and least-cost conditions
Economies of scale to a technology (internal economies of scale)
Equal marginal product of a resource for the last dollar spent on the resource: MPPa/Pa = MPPb/Pb
Geometry of cost-minimization and profit-maximization (isoquants). Why capital replaces labor?
Define isoquant and iso-cost.
Goal of minimizing costs while producing for any given level of output.
Slope of the isoquant is the ratio of the marginal products
Slope of the iso-cost is the ratio of the prices of the inputs
Showing the impact of a price increase on input choice
The expansion path of a firm with constant prices
Long-run: all inputs are variable (illustrate on board)
Short-run: at least one input such as capital is fixed so the expansion path moves along the horizontal line for that
quantity of capital
The change in costs of moving along the expansion path by one unit is the long runmarginal cost
Increasing returns to scale
Show with isoquants
Give examples
Impact of economies of scale on costs
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Profit Maximization: Step 2 Choosing the Profit-Maximizing Rate of Output
Profit Maximization is when Marginal Costs has Risen to Marginal Revenue and is Greater than Marginal Revenue
for the next Unit Sold.
What is Profit?
Important social role of profit maximization: desired output at the least cost:
Normal profit is a cost.
Economic Profit, Accounting Profit and Optimal Decision Making:
Price and Marginal Revenue in
A. Perfect competition
B. Imperfect competition
Supply curve of the individual firm in perfect competition
Variable, Fixed and Total Costs,
Marginal cost and Profit Maximization in the short run and long run
Maximizing Profits in the Long Run:
Costs and output decisions in the long run
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The Model of Perfect competition to Help us understand “Efficient Markets” where MB=MC
Perfect Competition:
Price taker where marginal cost equals price, above the shut down point
The industry supply curve is the sum of the supply curve of every firm in the industry plus potential entrants to
the industry.
Efficient because the marginal costs of producing the last unit sold by the first firm is equal to the marginal
cost of producing the last unit by the second firm, etc. because they are all looking at the same price.
Using Prices to Improve Resource Allocation
The concept of external cost and external benefit.
Why the price should equal social marginal cost
Calculating social marginal cost
Using taxes and subsidies to adjust prices
Externalities
Chinese goods are costly to the world in spite of cheap monetary prices: pollution, human costs.
Public Goods, the Failure of the Market to Produce Public Type Goods
Definition of public type goods
Demand for public type goods
Privatization of a public type good
The resulting deadweight loss
Estimating the demand of a public type good
The problem of financing a public good
The concept of free riders
Public (social) goods
Imperfect information
Un-owned resources (common property) fisheries and the strawberry patch.
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Imperfect competition, other reasons for market failures & the role of government
Monopoly:
Natural monopolies (water companies)
Innovative monopolies (Microsoft?)
Predatory monopolies (Microsoft?)
Deadweight loss, too little production the real cost of monopolies
Regulating natural monopolies
Monopoly: Costs and benefits. The dilemma of pricing public goods and polluting goods.
Monopolistic competition & oligopolies prevail in your every day life.
Few firms have complete control over their prices. Even monopolies. Here today. Gone tomorrow.
The Role of Government in the Market to Improve Social Welfare
Anti-trust regulation and regulation
product safety, effectiveness, and reliability
Reducing transaction costs and improving imperfect information
Saving the consumer from himself.
Consumer’s incompetence
Not saving for retirement
Not understanding risk
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lecture
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Providing a social safety net
Efficiency today versus productivity tomorrow
The politics of the pharmaceutical and oil industries
The Price System Revisited: Efficient resource allocation, rationing, equity, growth MB=MC
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Distribution of Income and Prices of Productive Factors
Pricing of Scarce Resources.
Prices as a rationing mechanism
The concept of economic rent is the difference between the price paid and the minimum price they would accept.
Land
Baseball players
Allocates unique inputs to the highest bidder
The shift of land from wheat to corn because of the ethanol initiative
The demand for labor and capital and any owned input is derived from the demand for the goods and
services they produce and the price you are willing to pay.
The supply of capital depends on domestic savings and foreign investment,
The supply of labor depends on the desire and productivity of people who want to work and your
willingness to pay for their products
The supply of public goods depends on the wages and costs of the inputs necessary to attract the resources to
produce these public goods and the publics’ willingness to pay the taxes to finance their services.
Model of Derived Demand for a Factor of Production
Rule: MPP x P = MRP marginal revenue product = wage of the input .
Tax System can redistribute income
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