Microeconomics Discussion Board Questions

Microeconomics discussion board questions3Define substitutes and complements. Give me examples of substitutes and complements that you have encountered and how a change in prices affected your spending. Define inferior and normal goods.Give me examples of inferior and normal goods that you have encountered and how a change in income affected your spending.What is the difference between a shift in the demand curve and moving along the demand curve (hint: think Qd= quantity demand)Answer the above questions in 200 to 700 words total. No replies to other posts are necessary. Answer by midnight November 24th

4Define Utility, Total Utility, and Marginal Utility. Cite examples of consumption of a good that has brought you utility. What is negative utility (think outside the box) Define and cite an example of the law of diminishing marginal utility.

Answer the above in 300 to 700 words total by Dec. 1 at midnight. No responses are necessary to other posts.

5What is the definition of elastic demand? How about inelastic demand?Give me some examples of goods that you purchase for which your own demand is elastic and some examples of goods for which your demand is inelastic.Do you consider yourself to be price sensitive?Access to credit has changed the way we budget. What are the pros and cons of easy access to credit for U.S. consumers and producers?How can your real income increase during a recession? Use the concepts of a budget constraint to describe what is occurring.Answer these questions in 500-1000 words total. No response to others is necessary. This is due Dec. 15th at midnight.

6Give some examples of fixed costs and variable costs. Why do average fixed costs decline across a range of increasing production? Do average variable cost decline, increase, or do both as production increases? Explain.Tell me about perfect competition. Why is it that perfect competition is more of a theoretical market structre than a practical one?Answer these questions in 300-700 words total. No replies to other posts are necessary. This is due Dec. 15 at midnight.7Education is an investment in human capital. Part of the rationalization behind the GI Bill and Tuition Assistance (besides being a benefit that helps attract recruits) is the idea that providing such a benefit invests in the human capital of those who serve in the military. An improvement in human capital should lead to more productive workers.

Describe an example of effective training or education that you have experienced, one in which you learned something or got better at something (this represents an improvement in your own human capital) for either a job you have worked or one which you intend to work. Describe an example of ineffective job training. Describe how ineffective training is expensive for the firm and the employee. What happens in terms of economic concepts when good training takes place (Marginal Product of Labor, marginal revenue product of labor)? What about when bad training takes place? What is the impact of training on costs?

Answer the above in 300 to 700 words total, reply to at least two classmates. Due December 20th at midnight.

NOTES:weeks 1-3These notes come from a separate text, but the terminology should prove insightful and will be used on the discussion boards. Lecture NotesChapter 1 NotesMost people neither like nor understand economics, but dont worry thats where I come in. Over the course of these chapter outlines I will try to provide insight into the practical applications of the field and the terminology that you will encounter in the textbook. Economics as defined as the study of how people choose to allocate scare resources. Resources are scare when they are finite or limited. How we choose to spend our time, money, and energy are economic decisions that we make daily. There are always costs associated with the decisions we make, two such costs brought up in chapter 1 are sunk costs and opportunity costs. Sunk costs are those that have already been incurred or paid for. Consider the following example of a sunk cost: Why would you skip your 8 am class rather than your 9 am class? Well if you wake up at 7, eat breakfast, shower, get ready, and drive into school to attend your 8 am class, you might as well go on to the 9 because you are already up at school and ready to go. The time and effort it took to get you to class are sunk costs for your 9 am class meaning you have already incurred them. Therefore if you are of the persuasion to skip class you will skip the earlier class rather than the later one. Opportunity costs are merely the alternatives that we give up when we make a decision. The time you spend on this course could be spent doing other things. The things you give up in exchange to spend time on this course are the opportunity costs of this course. So if you would rather be watching t.v. than reading these notes, that is the opportunity cost of reading these notes. If you would rather be playing catch, then that if your opportunity cost for reading these notes. Back to aforementioned example of skipping class. The opportunity cost of an 8 am class for most students is an additional hour of sleep.In economics we analyze things in marginal terms. This means is that we look to what will happen at the next increment. Marginal costs means the cost of the next unit, marginal revenue means the revenue of the next unit. It is always important to know the additional profit or loss that will occur as a result of the next sale of product and this why marginalism is valuable. Where there is a profit, there will be competition (and the government will tax you!). If you are able to make money doing something, odds are someone else will attempt to replicate your business activity and attempt to profit from it. For instance, if a town has only one restaurant, and that one restaurant is making a lot of money, then surely someone would want to open up a second restaurant and try to get in on the action so to speak. Why is it that hotels locate close to each other, convenience stores and gas stations open up across the street from each other? Where there exists an opportunity to profit, competition surely will follow. With each additional competitor that opens up a business, the profits are divided up into smaller and smaller parts until eventually no new businesses will open because there is little or no opportunity to profit. This notion of competition driving profits away rapidly is referred to as efficient markets. Macroeconomics is the study of economics on the scale of nations and at very large industrial levels. The big three terms statistics that matter most in macroeconomics are inflation, unemployment, and GDP growth at least in my opinion. Microeconomics is the study of economics at the scale of individual households and firms. The levels of output and consumption by individual firms and consumers are discussed in microeconomics.Positive economics takes a look at the way systems work and describes it without making judgment. For instance if I were to say the current administration is trying to stimulate growth by increasing government spending and go into further detail about how this would lead to growth, that would be the use of positive economics. If I were to say that the government is using an increase in deficit spending to stimulate the economy and go on to tell you that this is a bad thing and that there are better options, then I would be using normative economics. Descriptive economics is the use of data and statistics to describe economic activity, such as levels of output (GDP stats), unemployment and inflation percentages, etc. Very similar is the definition for empirical economics which uses data to test economic theories.y=mx+b is mathematical model. In the model y=mx+b (which is the model for a line), y and x are variables.Ceteris paribus is a latin phrase meaning all else equal. We use the phrase to isolate variables from others by holding some stuff constant. For instance, if we were to wonder what would happen to the economy if inflation went up by 5%, but nothing else changed, we would say ceteris paribus, inflation rises by 5% This would mean that fiscal and monetary policy and all other changeable variables remain the same albeit at a higher level of inflation. The economy is dynamic, ever changing and in order to analyze some variables we have to pull them apart from each other.Efficiency measures output in terms of cost. The most efficient outcome is the one that comes at the lowest cost.An increase in total output of an economy is economic growth, according to the text. Be aware that many people refer to economic growth as any change in output, positive or negative.Too much growth and too low unemployment can be problematic just as low growth and high unemployment can too. Stability is the condition in which the economy has steady growth, full employment (which means we are at the natural rate of unemployment), and low inflation.Chapter 2 takes a look at what we produce, how we produce it, and who consumes it. First off, the production process is something with which we are all familiar on varying levels. A lot of the examples I will use take on my perspective from the family business where we build childrens furniture.Production is the process that turns inputs into outputs, or turns resources into goods and services. At Reynolds Manufacturing we turn sheets of plywood into furniture and this is our production process.Capital is simply things that are used in the production of other goods and services. At the family business this includes: hammers, saws, wrenches, screwdrivers, routers, sanders, etc. In other words any equipment we might use to produce the furniture is capital. For a shipping company, the trucks in the fleet are considered to be capital. For any manufacturer, building and all the space within is considered to be capital. Whatever field you are in has different tools and equipment which serve to help you produce some final good, and these tools are considered to be capital.Factors of Production is just another name for resources. Inputs are the same thing. In the family business, inputs include wood, glue, nails, screws, hardboard, etc. Outputs are what the production process leads to. Up at RMC, output would be the furniture we produce (shelves, tables, chairs, and so on).Opportunity Cost is it just me or was this term in Chapter 1yeah it wasmust be important. Again Opportunity costs are what we are missing out on. To sight another example: Have you ever been listening to the radio and wondered, Hey, what if there is a better song on another station? if you answered yes, then you have evaluated opportunity cost before. So before you crank that soulja boy up, hit the scan button and find out what the opportunity costs of listening to the song might bewho knows you could be missing out on Free Bird.The theory of comparative advantage which reveals the benefits of free trade was thought up by David Ricardo back in 19th century England. Ricardo was evaluated trade between France and Britain and wondering about the advantage each nation had in different types of agricultural production. He came to the conclusion that France could out produce England in pretty much all the different categories of grain and many other agricultural products, but that France could still benefit from trading with England. France had more land and higher quality land (more arable, richer soil, and all that). So how then could France benefit from trade? Well the answer lies in opportunity costs. France was overall better at producing, which meant they had an absolute advantage in agricultural production, however in certain categories Britain had a comparative advantage meaning that they could produce at a lower opportunity cost. Consumer goods are goods meant to be consumed presently while Capital goods are goods produced to be used in later production processes. Investment in economics is different than in finance. In economics investment refers to the use of resources for capital production. When a company builds a new factory, purchases new equipment, buys inputs, these things are investments in economics. An individual that buys stocks and bonds is dealing with investment in the realm of finance. It is important to understand the difference when we start to talk about interest rates in future chapters. The production possibility frontier also referred to as the PPF curve shows a set of choices society makes about what to produce. Given a limited set of resources, society must choose how much to produce of each type of good. The example in text shows that with a fixed amount of resources there is a tradeoff between the production of capital and consumer goods. For each consumer good produced, resources are depleted that could have been used in the production of a capital good and vice versa. Society can produce anywhere inside the curve and along the curve. Producing inside the curve is inefficient, meaning society has more resources to devote to production. Producing along the curve is efficient meaning all resources are being put to full use, and producing beyond the curve is impossible. The slope of the PPF curve is called the marginal rate of transformation (MRT). Economic growthseen this one beforein order for there to be an increase in total output, one of several things must occur. Either technology has to increase productivity or new resources have to be acquired. Population growth falls into the latter category as additional laborers would be considered a new resource. Markets are simply the mechanism through which buyers and sellers engage in exchange. Where there are people looking to sell goods and services, there exists a market.A Command Economy is an economy in which the government controls output, income, and prices. The U.S.S.R. (Soviet Union for those of you too young to know what that stands for) is a great example of a command economy. In the Soviet Union, the government would tell the farmers how much grain to grow and what price to sell it at. The government would also determine how much factories were to pay out in wages to their workers. In free markets, farmers would grow as much as they believed they could sell, and charge the price that enables them to maximize profits. In free markets, workers are paid wages based on how much they can produce and how much money their production brings in for the firm. An economy with no intervening government regulation is called a Laissez-faire economy. Literally this means allow them to do in French. The United States is neither a command economy nor a true laissez-faire economy as we do not control output as in the command economy, but also our markets are not entirely free from regulation as is the case with the laissez-faire economy. The U.S. markets are less regulated than those in Europe which are less regulated than those in say the former Soviet Union. Typically Hong Kong is identified as the markets with the least amount of regulation among all places in the world. Consumer Sovereignty is at the very heart of capitalism and is pivotal for a free market economy such as ours. This is the concept that reveals the fact that the consumer decides what is produced by choosing what to purchase. Consumer demand determines what the suppliers will sell. In a free market it is not the case that if you build it, they will come rather it is the case that if the consumer wants, someone will sell it to them. This is the key different between a free market economy such as ours and a command economy such as that of the old Soviet Union.The ability of individuals to start and run their own private business is free enterprise. How easy it is for a person to start a business in a country is an indicator of how affluent an economy is. In other words in places where is it less difficult for a private citizen to start their own business, the better off that economy is probably doing. There is a direct correlation between the emergence of Chinas economy on the world stage and the ability of the individual Chinese citizen to start a business. As China began to deregulate their economy over the past few decades, and slowly allow more private businesses to start and grow, their economys growth rate accelerated. In the U.S. it is very easy to start a business (although it can be extremely difficult to stay in business and earn a profit, but nonetheless it is much easier to start a business here than in most other countries).Chapter 3Firms are the organizational units that transform inputs into output, or the primary producers of a market economy. I use the words business and firm interchangeably.Households are the consuming units in an economy. In Microeconomics we will spend more time discussing the decisions of households and firms individuals, but in macroeconomics we discuss the aggregate (or total) economy of society as a whole.An entrepreneur is a person who starts a business. Do not be fooled, politicians do not create jobs, entrepreneurs do. Entrepreneurs go out and accomplish their goals, putting their big ideas to work while most people just talk about their ideas. An entrepreneur takes hold of a dream and turns it into a reality. Nothing quite embodies the American dream like the entrepreneur and if you learn nothing else from this class, just keep in mind that business men and women make a difference. They make our lives better by creating jobs, offering products and services, and by driving prices down through competition they raise our standard of living.A product market is the market in which goods and services are exchanged. Use your imagination input, labor, and land markets are just the places where buyers and sellers exchange those particular items (i.e. the land market is where land is bought/sold or rented/leased).The factors of production are generally land, labor, and capital. Labor and capital are given the most attention in this course, although land rounds out the big 3.The amount of a product that a household would buy at a given price if they could buy all that they wanted is quantity demanded. A table showing quantity demanded over various price ranges is called a demand schedule, and a graphic illustration of a demand schedule is a demand curve. The demand curve is downward sloping due to the law of demand which states that there is a negative relationship between the price of a good and the quantity demanded of said good. As price increases, the quantity demanded decreases and as prices decreases, the quantity demanded increases. This should make sense, as a consumer, we want more goods at a lower prices.The amount of a product that a firm is able to offer for sale at a given price is the quantity supplied. A table showing quantity supplied over various price ranges is called a supply schedule, and a graphic illustration of a supply schedule is a supply curve. The supply curve is upward sloping due to the law of supply which states that as price increases quantity supplied will also increase and as price decreases quantity supplied will also decrease. If a firm can raise prices on their goods and increase profits, it is only natural to want to sell more.The relationship between quantity demanded and price is an inverse relationship, meaning that the two variables will move in different directions. On the other hand, the relationship between quantity supplied and price is a direct relationship which is why the two variables move in the same direction.Movement along either the supply or demand curve is a change in the quantity supplied or demanded as a result of a change in price. If there is a change in the relationship between quantity supplied or quantity demanded and price then there will be a shift in the supply or demand curve. In other words if just the price of the good in question changes, we move along the curve, but if there is a change in preference, prices of other goods, market conditions (such as weather for agricultural products), or anything else the curve will shift.Market Demand and Market Supply are simply the aggregate measures of supply or demand for a particular product. This means the market demand is the summation of all the individual demand curves for a given product, and the same could be said for market supply.A lot of people mistakenly think that income and wealth is the same thing, but this is far from the truth. There are plenty of people in America with high levels of income that are in debt which is a negative measure of wealth, and on the flip side there are some lower income earners who have saved up over the years to gather up relatively high levels of wealth. Income is a flow, the amount of money you bring in over a given time period. Wealth is a stock, the total value of what a household owns at a given time.If you ever hear that the progressive income tax system that we have taxes the wealthy, this is only partially correct. Our income tax system taxes the ability to become wealthy as it taxes the flow of money that we bring in. The higher your income, the higher the percentage of it you will be paying in taxes. Uncle Sam discourages us from working harder by forcing us to pay higher taxes with each additional dollar we earn. If the football coach told all of his players that if they would stay and run more laps, they could play less during the game, how many players would run extra laps? Probably none, and in the same way we are told that if we work harder, our marginal tax rate will increase. This discourages increases in productivity. A flat tax meanwhile would mean that all people pay the same percentage of taxes at all levels of earnings (ironically the Russian Federation has had great success with a flat tax and weve yet to give it a try), but I digress.Goods for which demand increases when income increases and for which demand decreases when income decreases are called normal goods. The relationship between demand and income is direct for normal goods meaning that the demand curve will shift outward as income increases and inward as income decreases. Goods for which demand falls when income rises and for which demand rises when income falls are called inferior goods. There is an inverse relationship between demand and income for inferior goods. For example think of steak as a normal good. As your income increases most Americans want to eat more steak. Ramen noodles on the other hand are an inferior good. This staple food of college students is usually forsaken as income rises when the graduate catches hold of their first job.Substitutes are goods that can serve as replacements for each other. The price of Good A and the Demand for Good B will move in the same direction. For example, assume chicken and beef to be substitutes, if the price of chicken increases, the demand for beef will increase. If the price of beef decreases, the demand for chicken will decrease.Complements are goods that are paired up with each other. The price of Good A and the Demand for Good B will move in opposite directions. For example, if the price of peanut butter decreases, then the demand for jelly will increase. If the price of peanut butter increases, then the demand for jelly decreases.Where the supply curve and the demand curve cross, there is a point of equilibrium. At equilibrium quantity supplied (Qs) will equal quantity demanded (Qd). At equilibrium society is producing and consuming the most efficient quantity of the good in question.If quantity demanded (Qd) is greater than quantity supplied (Qs) then there is a shortage.If quantity supplied (Qs) is greater than the quantity demanded (Qd) then there is a surplus.Qd=Qs EquilibriumQd>Qs ShortageQs>Qd SurplusIn a free market economy, what would a firm do if there was a surplus of a particular product? They would lower the price and sell it at a discount to get rid of the excess inventory. On the other hand what if there is a shortage? The firm would raise prices as a means of curbed quantity demanded back to equilibrium. This is how a free market is able to find its way back to equilibrium. In a command economy, there exists permanent shortage and surpluses when the government sets prices and does not allow firms to change prices. In the former Soviet Union, despite having rich natural resources and more grain producing ability than virtually every other country in the world, people were starving while grain was rotting in silos as more was produced than consumed. The reason for this was that the prices for grain were often set too high and the farmers could not lower the prices to get rid of the surplus, as a result people starved and leftover grain rotted each year. Im not saying that we dont have our own problems in our country, but we are much better off with prices serving as the mechanism to clear markets rather than having the government arbitrarily set target outputs and target prices.week 4-6Lecture NotesChapter 4Chapter 4 delves into further detail about supply and demand. Graphically speaking, the consumer and producer surplus graphs really hit home with me as an undergrad taking economics. This is really a chapter that shows how free markets work better than markets that are regulated. The book jumps around a bit in this chapter, but Ill try to keep things paired up better for you.If Qd>Qs, then we have a shortage. If there exists a shortage, there are several ways in which we would attempt to allocate or ration the good in question. Price rationing is the term used to describe market systems attempting to allocated goods markets that are experiencing a shortage by raising prices which leads to a decline in quantity demanded (Prices will rise until Qd=Qs once again). Some of the alternative methods of dealing with a shortage, and might I add, less efficient methods of dealing with a shortage include: queing, favored customers, and ration coupons. Queing makes people wait in long lines to purchase the goods they need. Effectively this raises the opportunity cost of the goods by causing people to spend more time trying to purchase them. Remember opportunity costs are alternatives, and if you are waiting in long lines for a good or service then you are missing out on doing something else. Favored customers is just the good old boy system. This occurs when businesses hold and sell limited goods only to their friends, family, and best customers rather than the general public. The textbook mentions an example of gas station owners holding fuel for friends and family during the oil crisis in the 1970s. Ration coupons are coupons given out that entitle a person to a certain portion of goods and services per month. This doesnt limit the consumers actual demand, but rather limits the degree to which they can satisfy their demand for a given good each month.Price controls almost always sound good to the ignorant, but never accomplish what politicians hope the price controls will. Let me hit you with some knowledge about price controls: They often lead to the opposite of their desired effect, or they can create a different set of problems altogether. For instance, price floors are intended to keep prices above a certain level in order to protect producers. In trade we see this in the form of the government placing tariffs on cheap foreign goods which creates a price floor to protect domestic producers and causes the consumer to lose substantially (more on this later on in the Chapter). In labor markets minimum wage is intended to help the uneducated, underprivileged, and unskilled laborers, but it actually hurts them. Think about it, a firm will not pay its workers more than said workers bring in for the company, otherwise the firm would lose money with each hire it makes. So when a minimum wage is in place, which workers dont get hired? The people who cannot produce enough value to the company to at least equal minimum wage are who dont get hired. The higher minimum wage is, the less unskilled laborers are needed as they have lower levels of productivity. One way workers acquire skills to become more productive is through on the job training, and if never given an opportunity to invest in their own human capital, many are left unemployed. Im not saying that businesses should pay everyone lower wages. The idea is that without a minimum wage people get a chance to get that entry level position, acquire skills, and their wages increase as their productivity does also. Price floors cause problems by creating surplus that cannot be removed via prices since prices cannot move down to get rid of the surplus. With minimum wage this translates into higher unemployment. Historically young workers looking to gain experience are hurt most by this, as statistically every 10% increase in minimum wage leads to an increase in teenage unemployment by 2-3%. Look at the job ads in any newspaper or on any website and most firms are looking for experience. When minimum wage eliminates entry level positions, it also hurts long run chances of job placement for many young workers who will not have the experience to meet many job requirements. I strongly urge the traditional students to get a part-time job throughout college to bulk up your resumes. There are plenty of kids out there with degrees and in this job market, if you are looking to get a career gig, youve got to set yourself apart. Perhaps that will require working a part-time job to gain a work history (maybe even a job that you think you are overqualified for). Ive got an MBA, but there are times when Ive got to sweep the floors out at the family businessdont ever think that any job is beneath you or you may find yourself without one entirely. More on wages and unemployment will be discussed in the next few weeks.Price ceilings are price caps set to restrict firms from raising prices on goods in order to keep them within an affordable range. Intervening authorities use price ceilings as a means of prevent profiteering from occurring where shortages exist. This however, actually causes more of a problem in the form of exacerbating the shortage. If there is a shortage, and firms are prevented from raising prices, the shortage will continue as was the case in the 1970s during the oil crisis. According to Law of Demand, more of a good will be demanded at lower prices, and by keeping prices artificially low, demand will remand high and equilibrium will not be reached.Consumer Surplus is the difference between the maximum amount a person wants to pay for a good and the actual price a person pays for a good. This is the benefit the consumer receives from the good in a dollar amount beyond the market value of the good. Producer Surplus is the difference between what a firm sells a good for and what they would be willing to sell it for. This can be viewed as the profit for the firm on the items sold. Overproduction or underproduction whether due to tariffs, quotas, sales tax, etc. will result in deadweight loss. Deadweight loss is the total loss to the producer and the consumer that comes in the form of goods not produced due to low prices or goods not consumed due to high prices. Tariffs are put into place in order to protect domestic producers and their producer surplus. However, tariffs raise the prices of goods for consumers which reduce their consumer surplus. The beneficiaries of tariffs are the government and domestic producers. Those who lose out because of a tariff are consumers who face higher prices and foreign producers who are effectively priced out of the market due to the high prices placed on their goods.Chapter 5 Chapter 5 focuses on elasticity which is a general concept used to quantify the response in one variable when another variable changes. By measuring elasticity economist are able to determine how changes in the economy will influence the decisions people will make. In doing so, we attempt to measure behavior in a quantitative fashion. The most important elasticity statistic discussed in this chapter is the price elasticity of demand which is the ratio of percentage change in quantity demanded of a good relative to the percentage change in price. This measures the responsiveness of consumer demand relative to changes in price. Another way to think of this is to think of the price elasticity of demand as helping to determine how price sensitive consumers are about a given product. For instance, if the price of good x increases by 10% and the quantity demanded of good x falls by 50%, then we could say that the consumers are quite price sensitive when purchasing good x. However, if the price of good x increases by 10% and the quantity demanded of good x only falls by 5%, we would say that consumers for that product are not price sensitive. There are three basic categories into which elasticity will fall when examining price elasticity of demand: inelastic demand, unitary elasticity, and elastic demand. Inelastic demand is demand that responds somewhat, but not a great deal to changes in price, and has a numerical value of less than 1 (ignore the books numbers). Unitary elasticity is a demand relationship in which the percentage change in quantity of a product demanded is the same as the percentage change in price in absolute value, having a numerical value equal to 1. This means for every percent change in price, there is a percentage change in quantity demand in a 1 to 1 ratio. Elastic demand is a demand relationship in which the percentage change in quantity demanded is larger than the percentage change in price in absolute value, and has a numerical value of greater than 1. Two special types of elasticity are perfectly inelastic demand and perfectly elastic demand. Perfectly inelastic demand is demand in which quantity demanded does not respond at all to a change in price. Graphically perfectly inelastic demand is a straight vertical line. Goods that are perfectly inelastic have no substitute and are effectively priceless to the individual in question. For example, insulin to a diabetic is perfectly inelastic. Perfectly elastic demand is demand in which the quantity demanded drops to zero at the slightest increase in price. Graphically perfectly elastic demand is a straight horizontal line. Realistically no good has perfectly elastic demand, but the closest example I can think of is agricultural products. If there were certain farm products grown only on small farms that had to have the exact same price for each individual unit of produce, and one farmer decided to charge more, then the farmer who raised prices would sell no produce. Even that is a stretch to see happening. The income elasticity of demand measures the responsiveness of demand to changes in income. When the income elasticity of demand is a positive number, the good being examined is a normal good (think back to chapter 3, when income and demand go in the same direction a good is normal). When income elasticity of demand is a negative number, the good being examined is an inferior good. The cross price elasticity of demand is the measure of the response of the quantity of one good demanded to a change in the price of another good. If cross price elasticity of demand is positive, then the goods x and y are substitutes. If cross price elasticity of demand is negative, then goods x and y are complements. From the vantage point of the firm it is important to know the elasticity of supply. This is the measure of change in quantity supplied relative to the change in the price.The last elasticity measure discussed is the elasticity of labor supply which measures the response in labor supplied relative to a change in the price of labor. In other words, elasticity of labor supply measures how many hours people are willing to work at a given wage rate. As wages rise, people will want to work more up to a certain degree. The potential for higher earnings will increase productivity up until the price of leisure becomes greater than the wage rate. This is because free time will become more valuable to you when you have less of it. So in a situation where we could hypothetically work as much or as little as desired, we would always work up to the point at which our wages are equal to the price we place on leisure time. Chapter 6 is all about consumer behavior. Remember that households are the consuming units in an economy and firms are the producing units in an economy.Every household must make three basic economic decisions:1. How much of each product to demand 2. How much labor to supply 3. How much to spend today and how much to save for the future Thinking back to Chapter 3, here are some of the factors that affect the demand for each household:-The price of the product-The income of the household-The households accumulated wealth (remember income does not equal wealth)-The prices of other available goods-Tastes and Preferences-Expectations about future income, wealth, and pricesIn the process of choosing how to allocate its resources, a household is confined by a budget constraint. The limits imposed on household choices by income, wealth, and product prices are called the budget constraint. Within any budget constraint lies numerous choice or opportunity sets which are the set of options defined by the limits of the budget constraint.Setting a budget and understanding personal finance is the single most important concept that you can pick up on in the school of business. Personally, I think everyone should be required to take a personal finance course in high school. There are few naturally occurring thrifty and investment geared people like me these days. Rather most modern Americans are inclined to continually increase their expenditures as their income rises just as discussed in early chapters. Note that the budget constraint does not account for credit, but it can readily be changed to do so. We would simply shift the budget curve to the right to account for an increase in disposable funds as if we were talking about an increase in income. People who include credit in their budgets wind up with better opportunity sets in the short run and worse opportunity sets in the long run.Real income is the set of opportunities to purchase real goods and services available to a household as determined by prices and money. This term shows that its not solely income that decides purchasing power. We also have to account for prices. If prices fall and nominal income is constant, real income rises. If prices rise and real income is constant, real income falls. Real income can move up, down, or even remain the same regardless of what is happening to one variable alone. In other words, prices and nominal income both must be taken into account.Ah, Utility, a good made up term. Utility is the satisfaction that a product yields, it is measured in utils. This term is an invention of economist developed in order to attempt to compare apples to apples so to speak. Is it possible to rate satisfaction? Short answer is yes, but its the technicals that get complicated. Each individual has a unique set of preferences and tastes and so each product or service will yield different levels of satisfaction to different individual. Confused yet?Marginal utility is the additional satisfaction gained by the consumption or use of one more unit of a good or service. (Remember marginalism from chapter 1). Total utility is the total amount of satisfaction obtained from consumption of a good or service. The relationship between the two is such: marginal utility is the slope of total utility. So long as marginal utility is positive total utility will be increasing. When marginal utility is at zero, total utility is at its maximum level. When marginal utility is negative total utility will be decreasing.The law of diminishing marginal utility states that the more of any one good consumed in a given period, the less satisfaction generated by consuming each additional unit of the same good. Let me sum up utility with a good example. Lets say you go to Chic-Fil-A to buy a nugget tray. Everyone knows Chic-Fil-A has the best fast food nuggets. Seriously hold up a Chic-Fil-A nugget and a McDonalds nugget. Which one looks like real chicken and which one looks like sponge from the oceans floor with an unnatural fried crust?So you walk into CFA and get a 100 nugget tray. You take it home to enjoy with your friends while watching the San Antonio Spurs play a playoff game*. While there certainly exists the potential for the first few to get your appetite going and boost marginal utility initially, it is the case that at some point marginal utility will fall meaning that each additional nugget at some point, maybe after the 1st or even the 10th depending on the person, will not be as satisfying as the previous nuggets consumed. Eventually you become full and each additional nugget consumed actually causes dissatisfaction. When you are full, the consumption of nuggets is at its total utility maximum point for you and marginal utility is equal to zero. If you eat any more nuggets beyond the point of being full, marginal utility is negative and total utility will decline. Make sense?Chapter 7Chapter seven knocks out some practical terms which will prove to be useful in the real world. The behavior of the profit-maximizing firm is pivotal in capitalism. And again remember that profits are good; dont let people who are concerned with fairness make you think otherwise. Wages are earned in return for production of some type of good or service which will provide utility to an end consumer. Profits retained by the firm are paid out to shareholders in the form of capital gains or dividends which will get cycled back through the economy in the form of further consumption or investment. Every dollar earned leads to more prosperity for society overall. Each persons investments and savings lead to job creation and tax dollars generated from profits lead to better infrastructure for the nation as a whole. This is not a zero sum game. Keep that in mind. Production is the process by which inputs are transformed into outputs (weve seen this term a couple of timesmight see it on a test someday). The firm is an organization that comes into being when a group of people decide to produce a good or service to meet a perceived demand. The firm that undertakes the production process will most likely have the goal of maximizing profits, which are the difference between total revenue and total costs. Running a non-profit entity can prove difficult as more focus must be place on some sort of organizational mission rather than on earning money (Im all in favor of non-profit organizations, but we will focus on the for profit ones in this course). The profit motive clears up any sort of confusion, as my old accounting professor used to say, youre in business to make money and thats as good a mission statement as you need. Total revenue is the amount received from the sale of the product (q x P). Be wary if your firm focuses too much on revenue figures. It is important to emphasize sales, but profits are more important than revenues. Total costs are the total out of pocket costs and opportunity costs of all factors of production. Most firms hope to earn a normal rate of return in the long run, which is a rate of return on capital that is just sufficient to keep owners and investors satisfied. For relatively risk-free firms, it should be nearly the same as the interest rate on risk-free government bonds. Think of it this way, if ownership of firm finds themselves saying there are better and easier ways to make money, they are probably not making a normal rate of return on the basis of high opportunity cost. This implies that ownership could profit more by using their resources elsewhere. If ownership cannot earn more elsewhere, they are earning at least a normal rate of return or better. According to the text, the short run is the period of time for which two conditions hold: The firm is operating under a fixed scale of production and firms can neither enter nor exit an industry. This means there is no time for expansion for current market players and no time for start-ups. I would say its easiest to state that the short run is any period of time under a year. The long run is the period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and firms can enter or exit the industry. Basically any amount of time longer than a year is the long run in my opinion. The firm needs to be aware of three basic things:1. The market price of output (the price they can sell final goods/services for) 2. The techniques of production that are available 3. The prices of inputs (the cost of putting together the final goods/services) The optimal method of production is that which minimizes cost. The scale of the operation and the marginal product of factors of production determine the optimal method of production. Relating the inputs to the outputs in terms quantitatively is the production technology. There are many techniques to produce a given output, but there are clear cut best methods on a cost basis. A production function shows the total production given a set number of units of inputs. For instance, the total production given a number of employees or certain scale of operation is a production function. Look to page 141 for a graph of a production function. The slope of the production function is the marginal product. Marginal product is also defined as the additional output that can be produced by adding one more unit of a specific input, ceteris paribus. The marginal product of labor determines how much each additional laborer can produce. Over time, eventually adding labors will decrease the total production as laborers run out of space to work in or equipment to use. This is part of the law of diminishing returns. According to the law of diminishing returns, when additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input will decline. This means that given fixed capital, the marginal product of labor will diminish as mention earlier. Vice-versa if you only have a fixed number of employees and you keep growing the company by buying more equipment and larger facilities the marginal product of capital will also diminish as there is a limit to how much space/equipment can be used by each individual. Knowing what each additional unit of an input can produce is important, but it also good to know what each current unit produces. The average product determines the average amount produced by each variable factor of production. Average product is calculated by taking the total product and dividing by the total units of a variable factor. For instance the average product of labor is calculated by taking the total product of labor and dividing by the number of laborers.Chapter 8Chapter 8 looks at short run costs and output decisions. The most important part of the chapter lies in understanding the different types of costs and how to calculate them.Fixed costs are any costs that do not depend upon output, meaning that the costs are constant and incurred regardless of whether the firm produces 0 units or a billion units. In the long run there are no fixed costs and all costs are variable. Variable costs are costs that depend upon the level of production chosen by the firm. Total fixed costs are the summation of all costs that do not change at any level of output for the firm (sometimes called overhead costs) and total variable costs are the summation of all costs that vary with output in the short run. When total variable costs and total fixed costs are added together you get total cost. TFC + TVC = TC Now, this next part is simple. Take any individual total cost and divide by the quantity of units produced and you will come up with an average cost.Average fixed costs are the total fixed costs divided by the number of units of output which measures overhead costs per unit. Average variable costs are the total variable costs divided by the number of units of output. Average total costs are the total costs divided by the number of units of output.TFC/Q = AFC TVC/Q= AVC TC/ Q=ATC AVC+AFC=ATC Perfect competition is one of the four industry structures. In perfect competition there are many firms, each sells a homogenous product (meaning undifferentiated or identical), each firm is a price taker and controls very little market share, and there are no barrier to enter or exit the industry. For the perfectly competitive firm, the marginal cost curve will be the supply curve and the marginal revenue curve will be equal to the market price which is also the demand curve.Perfect Competition: MC=S, D=P=MR Chapter 9Chapter 9 is about long run costs and output decisions. The relationships between costs are similar in the long run with the main difference being that there are no fixed costs in the long run. In Chapter 7 we discussed a normal rate of return. A firm that is earning the normal rate of return is breaking even. It may be the case that the firm is not breaking even in the short run, but will continue to stay in business in order to minimize its losses. So long as a firm is able to cover its variable costs, it will continue to conduct business. If P> or =MC, they will stay in business. Anything below this shut-down point and the firm will close its doors in order to minimize costs. The short-run industry supply curve is the sum of all marginal costs curves of all the firms in a given industry. This can be abbreviated as SRMC.In the long run the firm can increase its scale of operations with the purchase of additional capital equipment and factory expansion. If an increase in a firms scale of production leads to lower costs per unit produced then the firm has economies of scale. If an increase in a firms scale of production leads to higher costs per unit produced then the firm has diseconomies of scale. If an increase in a firms scale of production has no effect on cost per unit produced then the firm has constant return to scale. So if you double production and your costs double, you have constant returns to scale; if you double production and your costs more than double, you have diseconomies of scale; and if you double production and your costs increase by less than twice as much you have economies of scale. Economies of scale are why large companies are able to out price the smaller competitors in a market. Think about this, anytime you buy something in bulk there are quantity discounts, and the same is true for the firm in relation to its suppliers. This is because manufacturers are able to produce at a lower per unit costs often times when producing in large quantities. The long-run average cost curve (LRAC) is the envelope of a series of short run cost curves (look at the graph on page 189). The optimal scale of the plant is the scale of the plant that minimizes average costs. In other words the optimal scale is determined by finding the most cost efficient level of production. Similarly the minim efficient scale (MES) seeks to find the smallest size possible for the firm in order to seek out that lowest point on the LRAC. LR competitive equilibrium is the point where P=SRMC=SRAC=LRAC and profits are zero. This means that competition in the long will eventually drive profits out of an industry and people are left with a normal rate of return. Dont let this confuse you into thinking people are not making money in the competitive long run equilibrium because they still are earning an accounting profit, just not an economic profit. Accounting profits dont take opportunity costs into account. Lecture NotesChapter 10Chapter 10 looks at the input demand markets for land and labor. Some of the chapter is review and parts of it just get a bit more specific than earlier chapters that discussed labor. Derived demand is the demand for resources (inputs) that is dependent on the demand for the outputs those resources can be sued to produce. An example of derived demand is steel. Think about all of the steel used in cars and houses. The demand for steel is dependent upon the demand for the goods that steel is a component of. So when consumers demand cars, houses, or anything with steel in it, the demand for steel is derived from the demand for those final goods. The amount of cars produced by a unit of steel would be the productivity of an input of steel. Productivity of an input is the amount of output produced per unit of that input. Marginal product has been mentioned in some past sections of the text. Marginal product of labor is additional output produced by 1 additional unit of labor. In other words, MPL tells you how much more the next laborer will be able to produce. Marginal revenue product of labor is additional revenue provided by the additional unit 1 unit of labor. This tells you how much each additional workers will earn for the firm. Firms will get rid of workers who have a lower MRPL than their wage rate. This is another reason why minimum wage laws hurt unskilled laborers. Driving wages higher artificially prevents less productive laborers from finding work. Businesses only hire workers that can make the business more money than the cost of hiring said workers. The last worker hired will have MRPL > or = Market Wage Rate.Often times firms will encounter a scenario in which they can either hire more workers or buy better equipment. Which decision do you think the firm will make in the quintessential man vs. machines dilemma? Well, the firm will go with whichever has the highest marginal product to price ratio. In other words if the MPL/ PL is higher than the MPK/PK then the firm will hire more workers, but if MPK/PK is higher than MPL/PL then the firm will buy more capital equipment. If the price of capital goes up, more labor will be used where-as if the price of labor goes up, more capital will be used. This is referred to as factor substitution effect or the tendency of firms to substitute away from a factor whose price has risen and toward a factor whose price has fallen. According to the marginal productivity theory of income distribution, all factors of production end up receiving rewards determined by their productivity as measured by the marginal revenue product at equilibrium. This means that for the profit maximizing firm, the ratio of marginal product of capital to cost of capital will equal the ratio of marginal product of labor to cost of labor will equal the ratio of marginal product of land to cost of land. Land is the third factor that chapter 10 adds in to the mix. Keep in mind that the demand for land determines the price of land since the supply is fixed. As my great-grandfather used to say in reference to land, buy all of the land that you can, they aint making any more of it. The supply for land is a straight vertical line. The introduction of new methods of production or new products intended to increase productivity of existing inputs or to raise marginal products is technological change. Chapter 11Finally, we get to some of the good stuff. Now we will delve more into the junction at which finance meets economics where I like to hang out that is known as the capital markets. Capital is those goods produced y economic systems that are used as inputs to produce other goods and services in the future. There are two basic categories for capital: tangible and intangible. Tangible capital or physical capital is material things used as inputs in the production of future goods and services. The subcategories of physical capital are nonresidential structures, durable equipment, residential structures, and inventories. Physical capital that provides services to the general public such as roads, bridges, police protection, fire services, etc. is called social capital or infrastructure. Nonmaterial things that contribute to the output of future goods and services are called intangible capital. The most common form of intangible capital is human capital which is the skills and other knowledge that workers have or acquire through education and training that yields valuable services to a firm over time. The reason that you are enrolled in college is that you are investing in your own human capital. The more you learn the more valuable you become to your profession (hopefully valuable enough to be well paid enough to pay off your student loans). For a single firm, the current market value of a firms property, plant, equipment, inventories, and intangible assets is called their capital stock. Over time the decline in value of an asset is referred to as depreciation. Many of you will be upset to know that even if you depreciate an asset off of your books entirely you will still be taxed on it for property taxes.New capital additions to a firms capital stock are referred to as investment. Savings winds up turning into investment as dollars households put into banks, credit unions, thrifts, etc. turn into loan able funds for business and other consumers, and the market connecting savings and investment is referred to as the capital market. When savers and investors interact directly, it is referred to as the financial capital marketsounds redundant..dang.Interest is the payments made for the use of money, and the interest rate is the interest payments expressed as percentage of the principle amount of savings or loans. For example, if you put $1000 into the savings and it pays an interest rate of 2%, you will earn $20 in savings over the course of the year. Thats how interest works. The two main ways that large firms raise money for expansion is by either issuing bonds or stocks. Bonds are contracts between borrowers and lenders. Investors lend money to the bond issuer in exchange for the bond which is an IOU. In addition to the principle (amount lent), interest will be paid out (usually semiannually). Stock represents ownership so a share of stock is claim the owner of the share has on the firm and its profits. Shareholders will profit from a stock either in the form of capital gains as the price increases or through the payment of dividends from the firms retained earnings. The expected rate of return is the annual rate of return that a firm expects to obtain through a capital investment. If the cost of borrowing funds (interest on a bond or loan) is higher than the expected rate of return, the firm will not invest in capital projects. This is why lower interest rates stimulate the economy. Firms want to borrow money to invest when rates are low. Low interest rates are good for borrowers and lead to increased purchases of capital equipment and durable goods. High interest rates are good for savers and tend to have a negative pull on the purchase of capital equipment and durable goods. The Investment Demand curve shown on page 233 shows how the demand for investment will fall at higher interest rates and rises at lower interest rates. Chapter 12Chapter 12 is a more in depth look at equilibrium and perfect competitionnothing too terribly exciting.In order to better understand supply and demand, partial equilibrium analysis is conducted. This is just a fancy way of saying that we look at the equilibrium for individual market, households, and firms separately before lumping them together into aggregate (total) equilibrium. General equilibrium is the condition in which all markets in an economy are in simultaneous equilibrium. In the real world general equilibrium is never reached, as even in completely free markets prices will continue to clear and change in order to achieve temporary equilibrium. Prices for some items may change as rapidly as daily, others monthly, others yearly, so general equilibrium is conceptually reachable, but it is highly improbable that all markets would reach a harmonious state all at once. The condition in which the economy is producing what people want at the least possible cost is efficiency. I tend to refer to efficiency as the use of resources and productivity as a measure of output. Efficiency is cost-based, productivity is output based. Page 246 shows some graphs that indicate how supply and demand will change depending upon profits and losses. If firms in perfect competition are losing money, they will cut production (some firms may even leave) and then prices will rise as supply shifts to the left restoring the market to a normal profit. If firms in perfect competition are making a profit, more firms will enter the industry and the profits will be spread thin, returning the market to a normal profit. Pareto optimality is the condition in which no change is possible that will make some members of society better off without making other members of society worse off. In other words, this is the condition where the allocation of scarce resources reaches the point of generating the most utility (benefit) for the most people possible. In perfect competition, this general rule applies: if Px>MCx then society gains value by producing x, but if Px