Alexandrea's Econ extra Notes
Definition of Economics
The social science studying how people make decisions in the face of scarcity and the impact of those decisions.
Scarcity
A universal phenomenon where resources (time, labor, income) are finite, implying that people must confront tradeoffs
Microeconomics
Studies individual units (households, firms, specific markets).
Macroeconomics
Studies the economy as a whole (GDP, inflation, unemployment).
Positive
Descriptive, fact-based claims about how the world actually functions.
Normative
Opinion-based claims about how the world should be, often involving value judgments.
The Incentive Principle
People respond to incentives. For example, Mike Ditka’s helmet argument suggests that removing helmets would increase the "cost" of a hit (risk of injury), leading players to change their behavior to be safer.
Capitalism
Questions are answered through individual decision-making in free markets.
Socialism
Questions are answered by a central authority using "legal coercion"
Households
Benefit from consumption; provide factors of production (labor).
Firms
Produce goods/services for households.
Markets for Factors
Households are sellers; firms are buyers
Markets for Goods
Firms are sellers; households are buyers.
Absolute Advantage
Ability to produce more of a good than someone else
Comparative Advantage
Ability to produce a good at a lower opportunity cost than someone else.
Law of Demand:
Inverse relationship between price and quantity demanded (downward sloping).
Law of Supply:
Direct relationship between price and quantity supplied (upward sloping).
Market Equilibrium
The point where the quantity demanded equals the quantity supplied.
Functions of Money
Medium of exchange, store of value, and unit of measure
Positive-Sum
Total gains outweigh total losses; a win-win outcome is possible.
zero-sum
Total gains and losses equal zero.
Negative-Sum
Total losses outweigh total gains.
Consumer Surplus
Buyer's gain (Value - Price).
Producer Surplus
Seller's gain (Price - Cost).
Total Social Surplus
The sum of Consumer and Producer Surplus
Deadweight Loss (DWL):
The loss in Total Social Surplus when the market is not at its efficient level (equilibrium).
The Role of Price
Price does not change the total gains from trade; it only determines how the "pie" is split between the buyer and seller.