Chapter 1 The Big Ideas in Economics
Think of why some goods should be allocated by money while some not. Why demand curve is downward sloping?
Two effects: 1.Substitution effect (dominent) 2.Income effect (small) The demand&supply curve can be read horizontally or vertically. You should be familiar with both ways of reading.
Chapter 3 Supply&Demand
1.A normal good: a good for which demand increases when income increases. An inferior good: a good for which demand decreases when income increases.
Five main reasons why the demand curve shifts:
1.An individual’s income changes
2.A change in tastes
3.The number of consumer changes
4.Change in expectations
5.Changes in the price of complements and subsititutes
Five main reasons why the supply curve shifts:
1.Changes in the price of the complements and subsititutes
2.Changes in expectation
3.The number of producers changes
4.Changes in technology
5.Changes in input prices
Chapter 5 Elasticity and Its Applications
The fundamental determinant of the elasticity of demand is how easy it is to substitute one good for another.
short run (less time)
long run (more time)
categories of product
small part of budget
large part of budget
The fundamental determinant of the elasticity of supply is how quickly per unit cost increase with an increase in production.
Difficult to increase production at constant unit of cost (e.g: some raw materials) Easy to incease production at constant unit cost (e.g: some manufactured goods) Large share of market for inputs
Small share of market for inputs
The central planning approach failed because of problems of information and incenives.
The market price tells us the value of the good in its next highest-valued use.
Calculating formula: Elasticity of demand/supply=E(d)/E(s)= %△Q(demanded)/(supplied)/%△Price
Absolute Value of Elasticity
How revenue changes with price
Revenue&price move oppositely
A private cost: a cost paid by the consumer or the producer. An external cost: a cost paid by people other than the consumer or the producer trading in the market. An external benefit: a benefit received by people other than the consumers or producers trading in the market.
The social cost is the cost to everyone: the private cost+the external cost
Externalities are external costs(negative externalities)or external benefits (positive externalities) that fall on bystanders.
Social surplus is consumer surplus + producer surplus + everyone else’s surplus The efficient quantity is the quantity that maximizes social surplus
A Pigouvian tax is a tax on a good with external costs
A Pigouvian subsidy is a subsidy on a good with external benefits.
Transaction costs are all the costs necessary to reach an agreement. The Coase theorem posits that if transaction costs are low and property rights are clearly defined, private bargains will ensure that the market equilibrium is efficient even when there are externalities.
Whether the firm is a price taker or a price searcher(whether the market is competitive or not The long run is the time after all exit or entry has occurred. The short run is the period before exit or entry can occur.
An industry is competitive when firms don’t have much...
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