Introduction
- What is Economics?
Economics is the study of how people make choices to allocate limited resources to meet their needs and wants. - Not a Perfect Model
Economic models simplify real-world scenarios, which helps us understand trends, but they aren’t perfect and don’t capture every detail. - Microeconomics vs. Macroeconomics
Microeconomics focuses on individual and business decisions, while macroeconomics looks at the economy as a whole, like national income and growth.
1. Maximizing Utility
- Decreasing Marginal Utility
The more you consume something, the less satisfaction you get from each additional unit (e.g., the second slice of pizza is less enjoyable than the first). - Opportunity Costs
Every choice you make means giving up something else—this is the cost of the next best alternative.
2. Evaluating Production Possibilities
- Production Possibilities Frontiers (PPF)
A curve showing the maximum possible output combinations of two goods, given limited resources. - Absolute and Comparative Advantage
Absolute advantage: Who can produce more of something?
Comparative advantage: Who can produce it at a lower opportunity cost?
3. Demand
- Determinants of Demand
Factors like income, preferences, prices of related goods, and expectations that influence how much people want to buy. - Elasticity of Demand
Measures how sensitive demand is to a price change. High elasticity means demand changes a lot with price. - Change in Demand vs. Change in Quantity Demanded
Demand shifts occur when external factors (like income) change. Quantity demanded changes when only the price changes.
4. Supply
- Determinants of Supply
Factors like production costs, technology, and government policies that affect how much producers can offer. - Elasticity of Supply
How much supply changes when price changes. A high elasticity means producers can quickly increase supply. - Change in Supply vs. Change in Quantity Supplied
Supply shifts occur when external factors change. Quantity supplied changes only when price changes.
5. Market Equilibrium
- How Market Equilibrium is Reached
The point where supply equals demand, setting the price and quantity sold in a market. - The Effect of Changes in Supply and Demand
Shifts in either supply or demand disrupt equilibrium, leading to new prices and quantities.
6. Government Intervention
- Price Ceilings and Price Floors
Price ceilings cap prices (e.g., rent control), while price floors set minimum prices (e.g., minimum wage). - Taxes and Subsidies
Taxes increase production costs, reducing supply. Subsidies lower costs, encouraging more production.
7. Costs of Production
- Marginal Cost of Production
The cost of producing one more unit of a good. - Fixed vs. Variable Costs
Fixed costs stay the same (e.g., rent), while variable costs change with production (e.g., materials). - Short Run vs. Long Run
Short run: Some costs are fixed.
Long run: All costs are variable. - Sunk Costs
Costs you can’t recover, so they shouldn’t affect future decisions. - Economic Costs vs. Accounting Costs
Economic costs include opportunity costs; accounting costs only consider actual expenses.
8. Perfect Competition
- Firms Are Price Takers
In a perfectly competitive market, no single firm can influence prices—they must accept the market price. - Making Decisions at the Margin
Firms decide production levels based on the marginal cost and marginal revenue. - Consumer and Producer Surplus
Consumer surplus: Extra value customers get from paying less than they’re willing to.
Producer surplus: Extra revenue producers get from selling above their minimum price.
9. Monopoly
- Market Power
A monopoly can control prices due to lack of competition. - Deadweight Loss with a Monopoly
Monopolies reduce total market efficiency, creating “wasted” potential value. - Monopolies and Government
Governments regulate monopolies to prevent abuse, often through antitrust laws.
10. Oligopoly
- Collusion
Firms in an oligopoly may secretly agree to fix prices or limit production to increase profits. - Cheating the Cartel
One firm may break the agreement to gain a competitive edge, undermining the cartel. - Government Intervention in Oligopolies
Regulations prevent collusion and promote competition in oligopolistic markets.
11. Monopolistic Competition
- Competing via Product Differentiation
Firms compete by making their products stand out (e.g., through branding or features). - Loss of Surplus with Monopolistic Competition
Differentiation leads to inefficiency, as firms don’t produce at the lowest cost.
Conclusion
- The Insights and Limitations of Economics
Economics offers valuable tools for understanding choices and markets, but it doesn’t account for every human behavior or complex social factors.
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