Economics - how an economy manages scares resources, human behavior, and a way of thinking Micro vs macro: Micro = includes small groups/ firms/ people and how they work together Macro = Big picture such as GDP, unemployment, economic growth and inflation Positive economics => Factual, without judgement and influence Normative economics => What people should do or what they would like to be seen done Principles: 1. People face tradeoffs - unlimited wants with limited resources (ie. Must be realistic/feasible in terms of $ & time) 2. Cost of things is what you give up to get it - choice of morning sleep or run must sacrifice one, or university cost ff money not earned while studying 3. Rational (behave according to study) people think at margin (small change) - thinking about next thing instead of full picture (ie. 1 more drink instead of 20 for the night) 4. People respond to incentives - study now for future higher earning (incentive), drive on left to avoid accident (incentive) 5. Trade can make everyone better off - specialization (makes everyone do better, therefore everyone can trade between things they don't specialize in) 6. Markets are usually a good way to organize economic activity - people make choices (on 1-4) that coordinate through a market, leading to market having an efficient outcome because price is coordinating mechanism economist like laissez faire society (government doesn't take an active role in society as if centrally commanded so much information needed to know) 7. Governments can sometimes improve market outcomes - market failures or monopolies can be bettered by governments, (ensuring property rights) give assurance in control over resources maintains interest in protecting it Methodology of economics - identify problem, develop a model based on assumptions, collect data and test model Developing model => simplified description of reality (to understand and predict relationships), built on theory, requires simplified assumptions Interaction between supply and demand determine prices and allocation of goods and services, and determine prices Market: group of buyers and sellers interact to buy and sell Quantity demanded: the number of goods buyers are willing to purchase Price: determines quantity demanded Law of demand: as price rises quantity demanded lowers
Demand schedule: table showing relationship between price and quantity demanded Demand curve: graph showing relationship between price and quantity demanded PRICE ($)] Market demand: sum of all individual's demand for a good or service (to graph add all individual together) Change in quantity demanded => change in demand curve led by price of product DEMAND CURVE $100 $75 $50 $25 $0 0 25 50 75 100 QUANTITY (Units) Shifts: income, price of related goods/services, preferences, number of buyers, expectations (what will happen in future) Rightwards shift on graph = increase in demand Left shift on demand curve = decrease in demand Normal good if income rises leading to an increased demand (Petrol) Inferior goods with income rise have reduced demand (instant noodles) Price of good (Px) goes up then demand goes down, if quantity