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Unformatted text preview: • Capitalism: most efficient o Price system is the best way to allocate all resources o Conservative economist: the best way to do anything is the price system (not the gov't, the church, etc.) o Graph 12.1 • Consumption vs. Capital • If you are located on the production possibilities frontier, you are being efficient The price system will take you to the frontier • Inside the frontier=inefficient • Brings you to the "social optimum" (the best and most efficient point for you on that curve) • Conservative economist: doesn't like any sort of gov't or church intervention. Complete belief in a market system. • The marketplace: the price mechanism • Determinants of Quantity Demanded o Income effects • Normal Case-direct relationship b/t income and quantity demanded • Inferior case-inverse relationship (ex. Old milwaukee beer) o Income expectations • Direct relationships (recession is a self-fulfilling prophecy) Recession: if you expect economy to go into a recession, they will consume less, demand less, and buy less. This causes the economy to slump. Expectations of recession result in recession b/c of thoughts. o Price effects • Normal case-inverse relationship b/t price and quantity demanded • Snob case-direct relationship b/t price and quantity demanded (ex. Designer jeans) o Price expectation effects • Direct relationship (ex bull and bear market) Bull: prices are rising for a long period of time Bear: prices are falling Inflation: a self fulfilling prophecy also. o Cross price effects • Complements-inverse relationship (gas prices and gas hog vehicles) • Substitutes- direct relationships (ex. McDonalds v. Burger King) • "Ceteris Paribus": other things equal • Demand equation: o Q =Q[YI, Y2, PN, PS, PC, Psub.] • Graph 12.2 o Demand curve o As price decreases, quantity demanded increases • W/ increase in income o Normal goods: demand will increase o Inferior goods: demand will decrease • Steeper demand slope = we'll blow of less • Shallower demand slope=people can blow it off and will immediately upon price increase • Inelastic=steep curve • Elastic=shallow curve • When wages start to rise, the opportunity costs of not being in the labor force start to rise • Graph 13.1N1-->N2 o Labor market is at equilibrium at W0 o Minimum wage placed above equilibrium o Cause of surplus looking for jobs (unemployment)...
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This note was uploaded on 04/02/2008 for the course ECON 100 taught by Professor Vrooman during the Spring '07 term at Vanderbilt.
- Spring '07