hayley econ 1 notes.rtf

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University of California - Santa Barbara
J Sonstelie

ECON1 READING NOTES WEEK 1 READING absolute advantage- when one nation can produce a product at lower cost than other comparative advantage- the goods in which a nation has the greatest productivity advantage (or smallest disadvantage); the goods the nation can produce at lower cost when in terms of opp.cost econ is all about choice, main 3 markets correspond to following questions: 1. which goods to consume (the market for goods) ⁃ step 1, consider the possibilities (via budget constraint) ⁃ budget constraint- (AKA opportunity set) change in price causes slope to change so that it is steeper/flatter.. change in income causes budg. constraint to shift, but parallel ⁃ points outside budg.constraint are desirable but unobtainable ⁃ points inside budg.constraint are stupid and undesirable ⁃ step 2, think about the choice based on preference utility- the level of satisfaction received from choices made… from Jeremy Bentham (1748-1832) utilitarianism -principle happiness trade off determined by price of the goods 2. how many hours a week to work (labor) can use a budget constraint for leisure vs. labor too (hours FOR BOTH on x, income on y) trade off determined by the wage 3. how much to borrow or save (financial capital) why $100 doesn't have same value in future? 1. risk of not being repaid (risk premium= payment to make up for risk) 2. inflation: the rise in the overall level of prices 3. time value of money interest rate equals the above three combined compound interest= (amt at present)x(1+interest rate)^#yrs=amt at future time. example after ten years= ($500)(1+.06)^10=$895 trade off is the interest rate received or rate of return 3 Implications of Budget Constraints ▪ OPPORTUNITY COST: whatever must be given up in order to obtain other ▪ MARGINAL ANALYSIS: comparing the benefits/costs of choosing more/less of a good ⁃ law of diminishing marginal utility: as one receives more of a good, the unit of utility for the good declines ▪ SUNK COSTS: costs that were incurred in the past and cannot be recovered and then should not affect current decisions Production Possibilities Frontier: (typically curved outward) diagram showing the combos of output for an economy to produce.. a budg.constraint for the economy as a whole. example: consumption vs. real investment ▪ Law of diminishing returns: as more increments of resources are added to the production of a good, the marginal benefit from the good declines ▪ efficiency: when it is impossible to get more of something without decreasing the quantity produced of another thing ▪ allocative efficiency: the mix of goods being produced is the allocation that society most desires Confronting Objections to the Economic Approach 1. "People, firms and society don't act like this" EX. Calculating physics of ball before throwing it- no people do not do that, but it would not be incorrect or misleading if you did the calculations 2. "People, firms and society shouldn't do this" • positive statements: describes the world as is • normative statements: describes how the world should be 1.econ is not a form of moral instruction 2.self-interested behavior and profit seeking can be labeled as personal choice/free 3.self-interested behavior can lead to positive social results Adam Smith's invisible hand; suggests greater good can result from selfish acts DISCUSSION OF EXPERIMENT point at which supply=demand is the competitive equilibrium price #of units bought/sold at this point is competitive equilibrium quantity WEEK 2 READING Market outcome efficiency: sum of profits is large as possible Market outcome inefficient: other possible arrangements of trades will result in a higher total profits Market efficiency of experimental market outcome= % of highest possible amt. of profits that could be achieved Total amt. of profits= buyer values-seller costs Cost and Industry Structure PROFIT= total revenue - total cost ▪ perfect competition: everyone has a competitor that sells identical products ▪ monopoly: a firm that faces no competitors ⁃ monopolistic competition: many firms competing to sell similar but differentiated products ▪ oligopoly: small # of firms selling similar products but no other competition The Structure of Costs in the Short Run • Fixed costs: expenditures that must be made before production starts and that do not change regardless of the level of production. (=sunk costs) EX: machinery, physical space, research costs, or even advertising cost. • Variable costs: costs of production that increase with the quantity produced.. EX: labor and physical input (like cotton to make shirts) • diminishing marginal returns: when the marginal gain in output diminishes as each additional unit of input is added (bad) COSTS average cost: total cost divided by quantity of output average variable cost: variable cost divided by the quantity of output marginal cost: additional cost of producing one more unit • calculated by taking change in total cost and dividing it by the change in quantity • marginal cost line intersects the average cost line exactly at the bottom of the average cost curve WEEK 3 READING “Household Decision Making” utility: level of satisfaction/pleasure that people get from choices made marginal utility: additional utility by adding one more unit of consumption diminishing marginal utility: common pattern that each good consumed provides less of an addition to utility then the previous unit rule to maximize utility: price1/price2 = mu1/mu2 … mu meaning marginal utility change in income: budget constraint stays parallel, moves to the right (up) higher prices = person chooses to consume less of the higher priced thing two reasons for this: 1. substitution effect: when prices changes, consumer chooses more of the lower price and less of the higher prices items. Always happens simultaneously with income effect 2. income effect:: higher price means buying power of income has been reduced, even though actual income hasn’t reduced. 1 and 2 act together always giffen good: theoretical but unrealistic possibility; higher prices means higher demand, lower price means lower demand WEEK 4 READING “Elasticity” elasticity: measures how much a percentage change in price will lead to a percentage change in quantity demanded or supplied elasticity of demand: % of change in quantity divided by % change in price elasticity is not the slope of the demand curve! Elasticity = (change in quantity)/[(sum of two quantities/2)]/ (change in price)/[(sum of prices/2)] elastic: elasticity calculated from the appropriate formula has an absolute value greater than 1 infinite elasticity: extremely elastic situation; quantity changes by an infinite amt in response to any change in price inelastic: elasticity calculated has absolute value less then 1 zero elasticity: the highly inelastic case; no matter the % change in price, zero changes in quantity occur constant unitary demand curve is a curved line constant unitary supply curve is a straight line reaching up from origin Wonderful World of Adam Smith Wealth of Nations- 900 page book of living picture of England in 1770s, of apprentices and journeymen and rising capitalists etc etc. … democratic and hence radical philosophy of wealth  invisible hand- the private interests and passions of men are led in the direction which is most agreeable to the interest of the whole society  let the market alone: doctrine of laissez faire  things government should do in society
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