Economics: book notes
Chapters 1,5,6,

Chapter 1:

Opportunity cost – the correct measure of cost.

Attempts to fight market forces often backfire

Nations can gain from trade by exploiting their comparative advantages

Both parties can gain in voluntary exchange

Good decisions typically require marginal analysis, which weighs added costs against added benefits.

Externalities may cause the market mechanism to malfunction, but this defect can often be repaired by market methods.

governments have tools that can mitigate cycles of boom and bust but these tools are imperfect.

there is a trade off between efficiency and equality. Many policies that promote one, damage the other.

In the short run, policy makers face a trade off between inflation and unemployment. Policies that reduce one normally increase the other.

In the long run, productivitiy is almost the only thing that matters for a society’s material well being.

Correlation may not imply causation.

Correlated- two variable are the to be correlated if they tend to go up or down together.

Economic model- a simplified small scale version of an aspect of the economy. Economic models are often expressed in equations by graphs or in words.

Theory- a deliberate simplification of relationships used to explain how those relationships work.

Abstraction- means ignoring many details so as to focus on the most important elements of a problem.

Chapter 5 book notes:

Total monetary utility- a quantity of a good to a consumer is the maximum amount of money that he or she is willing to give up in exchange for it.

Marginal utility- of a commodity to a consumer is the maximum amount of money that he or she is willing to pay for one more unit of that commodity.

The more of a good a consumer had, the less marginal utility an additional unit contributes to overall satisfaction, if all other things remain unchanged.

Law of diminishing marginal utility- asserts that additional units of a commodity are worth less and less to a consumer in money terms. As the individuals consumption increases, the marginal utility of each additional unit declines.

As a rule, as a person acquires more of a commodity, total utility increases and marginal utility from the good decreases, all other things being equal. In particular, when a commodity is very scarce, economists expect it to have a high marginal utility, even though it may provide little total utility because people have so little of the item.

Marginal analysis- a method for calculating optimal choices—the choices that best promote the decision makers objective. It works by testing whether and by how much, a small change in a decision will move things toward or away from the goal.

Rule 1: If marginal net utility is positive, the consumer must be buying too small a quantity to maximize total net utility.

Rule 2: no purchase quantity for which marginal net utility is a negative number can ever be optimal.

Marginal net utility = MU – P + O
If MU = P

It always pays the consumer to buy more of any commodity whose marginal utility exceeds its price and less of any commodity whose marginal utility is less than its price. When possible, the consumer should buy a quantity of each good at which price and marginal utility are exactly equal. That is which MU= P because only these quantities will maximize the net total utility that the consumer gains from purchases given the fact that these decisions must divide available money among all purchases.

Consumers surplus- the difference between the value to the consumer or the quantity of commodity X purchased and the amount on that the market requires the consumer to pay for the quantity of X.

Consumers surplus = total utility (in money terms) – total expenditures

Inferior goods- a commodity whose quantity demanded falls when the purchasers real income rises, all other things remaining equal.

Market demand curve-