General Principles

Economics Review – supply and demand curve (supply slopes up and demand slopes down)

income effect = more people can afford something when the price is low
'price ceiling = when gov says you cannot charge more than X for something
price floor = putting a min limit on the price of something (min wage in labor market)
2 basic assumptions: (1) individuals make decisions based on self interest; (2) the aggregate of these maximize wealth in society

An Intro to Micro-Economics

Goods & Services Market
- People or households – pay for the goods & services
- Firms/Corporations – supply goods & services
Labor Market
- People or households – give the labor/sweat/toil to the firms
- Firm – pay the households w/ wages
Capital Market
- Households – have $ that they invest in the firms
- Firms – send back interest payments, dividends, etc.
Value in exchange
Value in use
Price of the good in a competitive market & the supply of the good in a competitive market –
What can cause supply to change?
- Weather
- New market entrants
Rational market theory
- Assumes everyone behaves rationally
Price floors & price ceilings – imposed by gov’t
- Price ceiling
  - Ex: rent control
  - Creates a shortage
- Price floor
  - Creates a surplus
  - Ex: lowest you can charge for a bushel of grain is X
  - Ex: minimum wage
Elasticity – how responsive something is to a change in something else
Numbers
- Percentage change – change in the slope of supply/price
- Elastic – the slope of supply/demand changes a lot
- Inelastic – the slope of supply/demand does not change a lot
  - When demand is relatively inelastic, cost increases can be passed on to consumers; when demand is elastic, cannot usually be passed on to consumers

Welfare Economics

“welfare” – the overall wealth of society
- welfare = value – cost of production
- idea of welfare economics is to maximize surplus
Consumer surplus = value – price
Two ways society can get welfare
- Consumer gains
- Producer gains