01:220:200 Study Guide - Marginal Revenue Productivity Theory Of Wages, Tax Rate, Demand Curve
Class Notes 1/22/2009 4:17:00 PM
Huge economic principle that confronts every society: unlimited wants
and limited resources.
Every society has an economic system, differences reflect society.
Economics—the study of the allocation and distribution of society’s scarce
resources in an attempt to meet its unlimited wants.
Every Economic Society has 3 questions to answer:
A. What? What goods will be produced by our resources?
B. How? How should we produce the goods? A lot of little labor with
C. For Whom? Who gets the goods? The US price mechanism
o In macroeconomics the correct combination of goods has been
predetermined. Goal: make sure you produce greatest volume.
o In microeconomics you assume the greatest level of production will occur.
Must go into inner workings of economy. Study individual components of
o A) Material—those to which one can claim capital
One. Capital—equipment. Goods used to produce other goods.
Two. Land—raw materials on land
B) Human—sum total of mental and physics capabilities of a population
Three. Labor—provides services for a fee. A laborer.
Four. Entrepreneurship: 1) gets new idea 2)undertake all the risk
3)personally directs all ―factors of production‖ 4)if successful-profit.
The Deal with theory in economics: attempt to explain reality in simplest
way possible so we can predict recurrence of an event.
Fallacy Composition—commit it when you wrongly assume what is true for
the individual part is true for the system.
Fallacy of Division—commit it when you assume what is true for the entire
system is true for the individual part. If you try to spend 10% more to help
the economy it will do nothing.
Fallacy of False Cause—wrongly assume event A causes event B merely
because it precedes it.
Scarcity is a relative topic, not always the same as limited.
Law of Scarcity–economic resources are scarce because there are never
enough goods to produce all of the goods wanted at a point in time.
All costs are opportunity costs.
The opportunity cost involved in undertaking any taken action is the next
best alternative action you could have taken.
Money is the most liquid of all assets. Spending money giving up =
satisfaction of having money.
Capitalism—an economic system where the factors of production are
privately owned and operated for personal gain in a fairly competitive
Competition guarantees continuing survival of capitalism.
Production Possibility Frontier—shows the maximum productive
possibilities of your economy at any given point in time.
Construction of PPF depends on:
1. 2 goods.
2. Given amount of factors.
3. Technology—application of scientific principles in the production
4. Full employment of resources.
Not all factors of production are equally efficient.
Law of Increasing Costs—as you increase your production of one good by
equal increments you must sacrifice greater amounts of alternative.
Slope is ∆y/∆x the marginal rate of transformation. MRT.
Marketplace—buyers and sellers come together, market is said to exist when
supply and demand come together. No defined location.
Pw=f(price, price of substitute good, price of complimentary good,
income(y), taste, expectations)
Law of Demand—certeris paribus. All other things remaining equal. Inverse
relationship between quantity of goods demanded and price.
A change in quantity demanded is used in the movement for the demand
curve. A change in any one of the variables other than the price of the good
itself will cause the demand curve to shift.
A normal good is where demand of the good moves in the same direction of
An inferior good is one where demand of the good moves opposite to the
direction of the income.
Market exists when supply and demand come together. A system is said to
be in a state of equilibrium when there is no net change.
An increase in the factors of production:
1. if cost production then price supply
2. labor wages supply cost production
3. wage same= 2x supply cost production
4. wage same= supply cost production
Stable equilibrium—if you remove external force which moved it, system
will return to original position.
Unstable equilibrium—even when you remove external force it does not
Elasticity and Utility
1. supply constant, demand decreases.
2. supply constant, demand increases.
3. demand constant, supply increases.
4. demand constant, supply decreases.
Elasticity: %∆q / %∆p
If |E|>1 the demand is relatively elastic
If |E|<1 the demand is relatively inelastic
If |E=1 demand is unitary.
If |E|=0the demand is perfectly inelastic
If |E|=∞ the demand perfectly elastic