 Economics is the social science that studies the choices that individuals, businesses,

government and societies make as they cope with society and the long incentives that

influence and reconcile these choices.

 Social sciences are any branch of academic study that deals with human behavior in its

social or cultural aspects.

 When thinking of scarcity, we are thinking about our resources like food, space, natural

resources, time, or land.

 As humans, we have insatiable wants and desires such as a bigger car, better vacation,

etc.

 With this idea of scarcity and unbound wants and desires, we must therefore decide how

we are going to deploy our resources across alternatives.

 Incentives help us make these decisions as they can be structured to encourage an action

or as a penalty to discourage an action.

 Prices act as an incentive in the movement and resources around the economy (it’s also

acts as a signaling mechanism)

 If the price of a hamburger is too low (lower than market value), fewer restaurants will

produce them.

 If the price of a hamburger is too high (higher than market value), restaurants will

increase their output.

 There is a price where the quantity of buyers = the quantity of sellers

 In our world, economics has two basic parts called micro (study of choices that

individuals businesses make) and macro (study of national and global economy)
 How do choices end up determining what, how, and for whom goods and services are

produced?

o Goods: iPhone, food, cars

o Services: Education, health

 The set of G&S produced in most countries are dynamic, it shifts over time (pre/post

Covid). How do businesses know how to change their product offering.

 The G&S are produced using resources called factors of production (natural resources,

labor, Capital, entrepreneurship)

 How do firms determine the combination of factors of production that they should use in

production and whom should the firm produce G&S? The consumer

 Can the purist of self-interest promote social interest?

o Something is in your self interest if it is the best option or choice for you.

o An action in the social interest is the one that leads to an outcome that is better for

society.

 We think of social interest along two dimensions

o Efficiency is the choice of action efficiently using society’s resources.

o Equity is the choice action fair.

 Whether we organize our economic loves so that when we make choices in our own self-

interest, we are also promoting the social interest.

o Can trading in free markets achieve social interest?

o Do we need the government to intervene and force social interest?

 Globalization refers to the expansion of international trade, borrowing and lending, and

investment.
 Expansion of trade leads to lower costs of G&S, shifts in production, or one country to

another to increase profits.

 The economic day of thinking

o A choice is a tradeoff.

 Limited resources (time) and must choose alternatives.

o Making a rational choice

 A rational person is one that “computes” costs and benefits and achieves

the greatest net benefit in making a choice.

o Benefits

 What you gave and the gain of pleasure we get from something

 These benefits come from our unique personal preferences.

 We measure benefits by what we were willing to give up.

o Cost

 What you actually gave up

 Opportunity cost- the highest valued alternative that must be given up in a

choice

 How much?

o We choose at the margin because at the margin, it has us think about the

incremental or next unit of consumption / production

o We are concerned at the margin by the margin benefits vs. the margin cost

 Choices respond to incentives

o We should be able to predict how people will act if we know the incentives that

we face
 o If people respond to incentives, then surely, we can structure those incentives to

ensure they make choices that we want

o Economists are out to believe that we can structure incentives so that self-interest

and social interest are aligned

o Positive statements: statements that tell us how something is

 These are testable theories like rent stabilization in New York city lowers

the quantity of apartments for the poor

o Normative statements: those statements that tell us how things should be

 These are personal like how we should provide cheaper accommodation to

the poor in New York

Chapter 2: Economic Problems

 Production possibilities, frontier, marginal cost, marginals benefits, economic growth,

gains from trade, and comparative advantage will be talked about this chapter

 In the United States, the labor force is 167 million people

 The unemployment rate is 3.8% which means that the number of people producing $268

trillion of G&S is 161 million

 The output is limited by the available resources and technology that we have at our

disposal

 If we want to produce more of one item, we need to reduce the production of another

item if not we are produced by trade off

 The possibility frontier (PPF) is the boundary between those combinations of G&S but

can be produced and those combinations that cannot

 Assume we have two goods in our economy like cola and pizza, we can produce

combinations of these good according to the following production schedule

 PIZZA (M)  COLA (M)

 5  0

 4  5

 3  9

 2  12

 1  16

 0  17

 The frontier represents the maximum of what we can produce

 Producing anything lower that it is inefficient or guilty of misallocation of resources and

anything above it is unsustainable

 Each point on the PPF involves a trade off

 The opportunity cost is the ratio of what you must reduce the production of one good

over the increase in production of the second good

 At point B, the opportunity cost of producing 1 million more pizzas is 2 million cans of

coke

 At point C, the opportunity cost is 3 million cans of coke

 A point D, the opportunity is 6 million cans of coke

 At point E, the opportunity cost is 5 million cans of coke

 The marginal cost of a good is the opportunity cost of producing one more unit of that

unit
 The absolute value of the slope of the tangent to PPF is the opportunity cost of that unit

of output

 We achieve production efficiency at every point on the PPF but which is the best point?

o We would like to produce the combination of goods that provides the greatest

possible benefit

 The marginal benefit from a good or service is the benefit from consuming the more unit

of that good

 Marginal benefit depends on people’s preferences, what they like, and what they don’t

like

 As a reminder, we measure benefit by how much we are willing to give up to get

something

 In general, the more of something we have, the less marginal benefit we get from one

more unit of the good

 Allocation efficiency occurs when G&S are produced at the lowest possible cost and in

the quantity that provides the great possible benefits

 When the MB=MC, both incentives (to increase and decrease output) are equal and

opposite

o We establish an equilibrium at this point

 The expansion of the PPF is called economic growth implying that we can increase

output with our current endowments of resources

o This growth comes from technological advances and capital accumulation

 Producing only one or more goods is called specialization

 Market is any arrangement that enables buyers and sellers to get information and to do

business together

 In order for a market to work, those involved must be confident in the structures and in

particular the peso

o You are buying something from and that your own ownership is protected

 Property rights are the social arrangement that given ownership, use, and disposed of

anything that people want

 Money is any commodity or token that is generally accepted as a means of payment

Chapter 3: Demand and Supply

 Market vary in the intensity of completion within the market

 The greater the number of buyers and sellers within the markets the great the competition

 The fewer the number of buyers and sellers within the market, the less the competition

 A competitive market is a market that has many buyers and sellers such that no one

players can influence the price

 All goods are homogenous which means all goods are exactly the same

 The money price of a good or service is the number of dollars that we must exchange to

purchase that good or service

 As a consume, the opp cost of a good or service is what you give up or in particular it is

the highest valued alternative that you

 The relative price of a good is the ratio of the price of that good over the price of another

 % in quantity demanded of good A over the % in price of good B is the cross elasticity of

demand
 A positive cross elasticity would mean an increase in the price of good B leads to an

increase in demand of good A

 We would expect consumers to shift away from hamburgers if they witness an increase in

price from say 1.50 to 2.50

Chapter 16

 Consumers have little incentive to pay for public goods

 Mankiw says a free rider is a person who receives the benefit of a good but avoids paying

for it because the good is provided for everyone and no one has an incentive to pay for it

 We plot marginal value at the midpoint of the discrete units indicating the benefit is

incremental

 The marginal social benefit curve is the combination of all individual marginal benefit

curves