Economics

• Economics is the study of how human make decisions in the face of scarcity. Scarcity means that wants exceed available resources.

General Quantities §

• Marginal analysis is just a discretized form of the derivative.

  • Example: The marginal cost with respect to quantity is

  • Notation: For convenience, when we say, the marginal with respect to , we mean

    By default, assume is quantity

    We may also write this as a derivative as .

• Elasticity pertains to the responsiveness of one variable to changes in another variable. More elastic = more responsive / sensitive.
  • It is expressed as a ratio of two percentages
  • Notation: By default, assume elasticity is with respect to quantity.

The Market §

• The division of labor means that the way one produces a good or service is divided into a number of tasks that different workers perform rather than one person doing al the tasks.
  • Division of labor counters scarcity.
  • Division of labor increases production for three reasons ¹
    • Specialization of workers on tasks they are well suited for, which makes them more effective.
    • Specialization leads to a feedback loop where workers learn to produce more quickly and with higher quality. This also leads to innovation.
    • Specialization takes advantage of economies of scale where as production increases, the average cost of production for each individual unit decreases.
  • This necessitates trade because each individual specializes and must exchange their services for other needs that they are unable to produce.

• Economies are systems.
• Economics teaches you how to think, not what to think ²

• A simple economic model is the Circular Flow Model

Circular Flow Model. Taken from Shapiro, MacDonald and Greenlaw

• Economies can be organized into different ways.
  • Traditional - what you produce is what you consume. It is driven by tradition and there is little economic progress or development
  • Command - economic effort is devoted to goals passed down from the government, which dictates what gets produced and what gets consumed.
  • Markets - decision making is decentralized and is based on markets — institutions that bring buyers and sellers together.
    • Private enterprises own and operate production based on supply and demand.
    • Income is based on the ability to convert resources into something socially beneficial.
    • Market-oriented economies have fewer regulations, often just enough to facilitate fair trade.
    • Markets allocate goods to the people who value them the most, under the assumption that the value of the good is easily understood by all market participants.
  • Underground / Black Market - often present in heavily regulated economies. This market is unregulated.

Unfiled §

• Tax Incidence - the analysis of how tax burdens can be divided between consumers and producers

Topics §

• Microeconomics - focuses on the actions of individual agents within the economy
  • Behavioral Economics
• Macroeconomics - focuses on the economy as a whole.
• Money
• Computational Economics

Links §

• Game Theory
• Principles of Economics by Shapiro, MacDonald and Greenlaw

Footnotes §

1. According to Adam Smith ↩

2. From John Maynard Keynes ↩