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Economics Mind Map

Presented by: Cleon Jones & Philip Wright

Chapter 1:

10 Principles of Economics

Chapter 1: 10 Principles of Economics

Principle 1: People face tradeoffs

- Pay something to get something

- The most significant trade-off we must make is between efficiency and equality.

Principle 1

Principle 2: The cost of something is what you give up to get it

- When making judgments, one must weigh the advantages and disadvantages of various options.

- Addresses opportunity cost, or what you have to give up in order to get something.

Principle 2

Principle 3: Rational people think at the margin

- Involves making assumptions that individuals will try their best to achieve their goals.

- People that are rational try their hardest to accomplish their goals.

Principle 3

Principle 4: People respond to incentives

- An incentive is something that motivates someone to take action.

- The activities can be rewarding or detrimental (punishment)

Principle 4

Principle 5: Trade can make  everyone better off

- Places more emphasis on specialty than on independence.

- This helps countries because they can import items that would be too expensive for them to produce.

Principle 5

Principle 6 : Markets are usually a good way to organize economic activity

- They provide answers to the concerns of what goods to produce and how to do so.

- The invisible hand hypothesis: When buyers and sellers make corrections.

Principle 6

Principle 7: Governments can sometime improve market outcomes

- May aid in protecting property rights.

- A market fails to allocate its resources when externalities and market power are present.

Principle 7

Principle 8: A countris standard of living depends on it's ability to produce goods and services

- The volume of products and services generated annually is referred to as productivity.

- Both international competition and labor unions can have an impact on productivity.

Principle 8

Principle 9: Prices rise when government prints too much money

- When the government issues too much money, prices rise. 

- The rate of inflation will increase as the government creates money more quickly.

Principle 9

Principle 10: Society faces a short term trade off between inflation and unemployment

- Economic policies influence unemployment and inflation in opposing ways. 

 - When inflation increases, unemployment decreases, and vice versa when unemployment increases.

Principle 10

Chapter 2: Thinking like an economist

Chapter 2: Thinking like an economist

1

Chapter 2: Thinking like an economist:

-Economists serve as both policy advisers and scientists who attempt to explain the world (try to improve the world).

- Two marketplaces (the market for factors of production and the market for goods and services) and two players make up the circular flow diagram ( households and firms).

- PPF illustrates the combination of two things that an economy can produce using its resources and technological capabilities. (It also displays efficiency, trade-offs, opportunity cost, and scarcity.)

-Factual and verifiable positive statement - Opinion-based normative statement

Chapter 4: The Market forces of Supply and Demand

Chapter 4: The Market forces of Supply and Demand

A market is a collection of buyers and sellers, where buyers control supply and sellers control demand.

Competition: Each customer is aware that there are a number of sellers, and each seller is aware that other sellers are also offering similar products.

The Market

Demand

Demand: The quantity of items that consumers are able and willing to buy. According to the law of demand, prices increase as quantity demand decreases.

Shortage: When there is a discrepancy between supply and demand. The link between a good's price and the quantity required is depicted by the demand curve. Demand rises when it shifts to the right, while demand falls when it shifts to the left. (Shifts are influenced by income, the cost of related commodities, consumer preferences, expectations, and the volume of purchases.)

Supply - The quantity of an item that sellers are capable and willing to sell. According to the law of supply, when prices increase, so does the amount supplied of an item.

When there is a surplus, more goods are provided than are needed.

The link between a good's price and the amount supplied is depicted by the supply curve. There is a rise in supply if the curve moves to the right, and a fall in supply if it moves to the left. Input price, technology, expectations, and the quantity of suppliers all contribute to shifts.

Supply

Equilibrium

Equilibrium - where quantity supplied equals quantity demanded.

Equilibrium quantity - quantity supplied and quantity demanded at equilibrium price.

Equilibrium price - the price that balances quantity supplied and quantity demanded.

Chapter 5: Elasticity of demand and supply

Elasticity - measure of the responsiveness of quantity supplied or quantity demanded of a good to a change in one of its determinant

Chapter 5: Elasticity of demand and supply

Price Elasticity of Demand: consumers responsiveness to a change in price.

Determinants:

Availability of Close Substitutes

Necessities VS LuxuriesDefinition of the Market

Time Horizo

- Cross-Price Elasticity of Demand :

Measure used to show the change in the price of one good affects the demand for another good.

%change in qty demanded of good 1/ %change in price of good 2

- Income Elasticity of Demand:

Measures how changes in income affect the demand for a good. = %change in qty/ %change in income

Normal good vs. Inferior good

Price elasticity of demand = %change in qty demanded/ %change in price

E>1 - elastic

E<1 - inelastic

E=1 - unit elastic

E=0 - perfectly inelastic

E= ♾️ - perfectly elastic

Price Elasticity of Supply

Producers responsiveness to a change in price. =%change in qty supplied/ %change in price

Determinants:

Flexibility Time Period

E>1 - production levels can be easily changed, goods are high quality, supply is very responsive to a change in price

E<1 - production levels cannot be chaged, supply is not as responsive to a change in price.

Chapter 6: Supply,De, Demand and GovernGovernment Poloicies

Price Ceiling - A legal maximum on price of a good or service.

Price Floor - The legal minimum on the price of a good or service.

Taxes - A governments revenue. It is used for public services.

Three ways of identifying tax incident:

Decide whether the tax affects supply or demand.

Decide which way the curve shifts.

Examine how the price affects equilibrium price and equilibrium quantity

Chapter 7: Consumers, Producers and the Efficiency of Markets

Price Ceiling: Not Binding

Is when the government imposes a price ceiling that is above equilibrium price.

Price Ceiling: Binding

Is when the government imposes a price ceiling that is below the equilibrium price.

Price floor: Not Binding

Is when the government imposes a price floor that is below equilibrium price

Price floor: Binding

Is when the government imposes a price floor that is above the equilibrium price

Chapter 6:  Supply, Demand and Government policies

Chapter 7: Consumers, Producers and the Efficiency of Markets

Welfare Economics- study of how allocation of resources affect economic well-being.

Willingness to pay (WTP)- The maximum amount a buyer will pay for a good.

WTP measures how much the buyer values the good.

Consumer surplus(CS)- The buyer willingness to pay minus actual price =WTP-AP

Willingness to sell (WTS) – minimum price a seller is willing or able to sell a good for.

Cost- Value of everything a seller must give up to produce a good.

NOTE – A seller will produce and sell a good only if the price exceeds the cost.

Producer Surplus(PS) = Price minus cost , P-C

Chapter 13:

The Costs of Production

Chapter 13:

The Costs of Production

Cost

Costs

● Total Revenue: The money a business makes through the sale of its goods.(TR = Price * Quantity)

● Total Cost: is the market cost of the materials used in a company's production (TC = Fixed Costs + Variable Costs)

○ Fixed Costs: do not change with the quantity of output

○ Variable Costs: do change with the quantity of output

● Profit: is the firm’s total revenue minus its total cost.

Costs as Opportunity Costs

Explicit Costs

● input expenses that the business must pay outright.

Implicit Costs

●cost inputs that don't require the company to spend any money.

Cost as Opportunity Costs

Economic Profit VS Accounting Profit

● A company's economic profit is calculated by economists as total revenue minus total costs, which includes both explicit and implicit costs.

● Accounting profit is calculated as total revenue of the company minus only explicit costs of the company.

● The company makes economic profit when total sales surpasses both explicit and hidden costs.

● Accounting profit is lower than economic profit.

Economic Profit VS Accounting Profit

Production and Costs

The link between the quantity of inputs needed to create a good and the quantity of that good's output is depicted by the production function.

Production and Costs

The Production Function

● The increase in output that results from an additional unit of any input during the production process is known as the input's marginal product.

● The property known as "diminishing marginal product" describes how the marginal product of an input decreases as the input's amount rises.

The Production Function

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