Three Key Economic Ideas

1.people are rational

2.people respond to economic incentives

3.optimal decisions are made at the margin

• economists assume that consumers and firms use all information as they act to achieve their goals
• weight the benefits and costs of each action and they choose an action only if the benefits outweighs the cots

• economists emphasize that consumers and firms consistently respond to economic incentives

reason is to continue any activity up to the point where the marginal benefit euals the marginal cost-> MB=MC

(Marginal Analysis)

1. what goods and services will be produced
2. How will the goods and services be produced
3. who will receive the goods and seriveces produced

1. decide on the assumptions to use in developing the model
2. formulate a testable hypothesis
3. use economic data to test the hypothesis
4. revise the model if it fails to explain well the economic data
5. retain the revised model to help answer similar ecnonmic questions in the future

• workers
• capital
• natural resources
• entrepenuerial ability

Efficiency [image]

• B,A-efficient because the maximum output is being obtained from the available resources
• D-inefficient because some resources are not being used
• C-unattainable with current resources

If linear,[image]

• income
• proces of related goods
• tastes
• population and demographics
• ecpected future prices

• shifts to the right
• consumers spend more of their higher incomes on the good

• shifts to the left
• consumers spend less of their higher incomes on the good

• shifts to the right
• consumers buys less of the substitutes and more on this good

• shifts to the left
• consumer buys less of the complementary good and less of this good

• Shifts to the right
• consumers are willing to buy a larger quantity of the good at every price

• shifts to the right
• additional consumers result in a greater quantity demanded at every price

• shifts to the right
• consumers buy more of the good today to aviod the higher pirce in the future

• prices of inputs
• technological change
• prices of substitutes in production
• number of firms int he market
• expected future prices

shifts S curve to the left

• the costs of producing the good rise

• shifts S curve to the right
• the costs of producing the good fall

• shifts the S curve to the right
• additional firms result in a greater quantity supplied at every price

• shift in the S curve to the left
• less of the good willbe offered for sale today to take advantage of the higherprice int he future

A Movement Along the Supply curve is a:

Surplus and shortages[image]

• Above equilibrium is a surplus
• Below Equilibriumis a shortage

1st Graph:

Supply has shifted to the right more than demand(s1→s2, d1→d2)→so the equilibrium price has decreased(p1→p2)

and opposite

Q unchanged

P unchanged

Demand Curve Shifts to the Right

and

Supply Curve Unchanged

Q increases

P increase

Demand Curve Shift to the Left

and

Supply Curve Unchanged

Q decreases

P decreases

Demand Curve Unchanged

and

Supply Curve Shifts to the Right

Q increases

P decreases

Demand Curve Shifts to the Right

and

Supply Curve Shifts to the Right

Q increases

P Increases or Decreases

Demand Curve Shifts to the Left

and

 Supply Curve Shifts to the Right

Q increases or decreases

P decreases

Demand Curve Unchanged

and

Supply Curve Shifts to the Left

Q decreases

P increases

Demand Curve Shifts to the Right

and

Supply Curve Shifts to the Left

Q increases or decreases

P increases

Demand Curve Shifts to the Left

and

Supply Curve Shifts to the Left

Q decreases

P increases or decreases