3 Important Econ Models
- PPF helps think about trade offs in economies
- Comparative advantage clarifies the principle of gains from trade
- Circular-flow diagram shows how flows of money, goods and services are channeled
Basic Principles
- Choices are necessary bc resources are scarce [time is a resource]
- The opportunity cost of an item is its true cost
- ‘How much’ decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less.
- People respond to incentives, exploiting opportunities to make themselves better off
PPF 3 aspects
- Efficiency in production
- Opportunity cost
- Economic growth
Sources of Economic growth (2)
- Increase in the economy’s factors of production like resources
- Improvements in technology, increase in efficiency
2 Methods to calculate slopes
- Arch method
[Draw a straight line between 2 end points of an arc & calculate slope] - Point method
[Draw a tangent line at a point in curve B and calculate the slope]
Challenges with graphs
- Features of construction
[Scale, increments in axis etc] - Omitted variables
[Apparent relationship between 2 variables due to another omitted variable] - Reverse causality
[Coming to an erroneous conclusion about which variable is dependent and which one is independent]
5 key components of a competitive market
- Demand curve
- Supply curve
- Set of factors affecting these curves
- Market equilibrium (eq price & quantity)
- The way this market eq changes affect supply or demand
5 Factors for Demand curve shifts
- Changes in price of related goods and services
- Changes in income
- Changes in tastes
- changes in expectations of the future
- Changes in the number of consumers
5 Factors for Supply curve shifts
- Changes in input prices
- Changes in the prices of related goods or services (substitutes, complements etc)
- Changes in technology
- Changes in expectations for future prices
- Changes in the number of producers
If increase in demand alone…
eq Price UP
eq Quantity UP
If decrease in demand alone…
eq Price DOWN
eq Quantity DOWN
If increase in supply alone…
eq Price DOWN
eq Quantity UP
If decrease in supply alone…
eq Price UP
eq Quantity DOWN
When the quantity sold changes in the same direction as the price, which curve has likely shifted?
Demand
If quantity sold and price change in opposing directions its likely due to a shift in which curve?
Supply
If a market eq price shows a fully vertical line…
Quantity is the same at every price =
If market eq prices shows a fully horizontal line…
Price is the same at every quantity =
