This post was updated in September 2018 with new information and examples.

One of the things to do when analyzing a supply and demand graph is shift the demand curve.  When we consider what factors will shift a demand curve, we need to make a distinction between the endogenous factors (those contained in the model) and exogenous factors (those occurring outside of the model).  The easiest way to tell the difference between endogenous and exogenous factors is to look at the graph.  You can see from the graph to the right that both quantity and price are on the axis, which means they are controlled for within the model, or they are endogenous.  Every other factor that is not controlled for would therefore be exogenous, (which means that it is determined outside of the model and held constant).  

Some determinants of demand include income, tastes and preferences, and number of buyers. If one of these exogenous factors change, such as income or preferences, then we would need to shift the demand curve because that factor is not accounted for on the axes of the graph.  In this example, demand shifted right, so we would need to see an increase in income (assuming a normal good/not an inferior good), or a change in preferences towards more positive feelings toward the good or service being studied.

Let’s look at another example using math. 

This post was updated in August 2018 to include new information and examples.

At many points in the semester you will be asked to calculate marginal values. The most common are marginal cost and marginal benefit. The marginal cost formula is: Change in total cost divided by change in quantity or:

Change in TC / Change in Q = MC

While the formula for marginal benefit is the change in total benefit divided by the change in quantity or:

Change in TB / Change in Q = MB

We will now go over several examples of calculating marginal benefit and marginal cost to show how to get this right on exam or homework questions. This example problem goes over the degree of comfort experienced at different levels of clean air.  The different dollar value amounts are shown for every 10% increase in clean air.  We want to find the optimum amount of clean air that we should have in this area, and it is important to remember that there is an optimal amount of pollution.  Having 100% clean air is probably never going to be the solution.

So the first step is to recognize the type of data we are working with.  In this problem we have a table of information showing us what the benefits and costs are for different levels of clean air. 

This post was updated in August of 2018 to include new information and more examples.

The idea of a production possibility frontier (PPF)--also sometimes called a production possibilities curve--can seem difficult.  However, if you understand the intuition behind the economics of the PPF it is really just a graphical representation of what a country or individual is able to produce with a fixed amount of inputs. For example, most people are able to spend their day working or sleeping. A PPF would show this relationship between work and sleep (with the constraint of time in a day).

This article will describe how to derive and draw a PPF given information from a table.  Sticking with the example of the United States producing broccoli and pizza from the prior lesson on PPFs, lets plot out the following PPF given the information from this table:

You can see in the diagram below how we took the different combinations of goods

1. People make rational choices:

If you drove to work/school today, I bet you would disagree with this one (because of all of the irrational drivers out there).  However, it is an assumption that economists make to let the models work. Remember that to economists, rationality means that people act in their own best interest with the information that they have available to them. It doesn't mean they make the best long term decisions, it just means they make the best decisions according to their own desire for happiness (with the information that they have).

 In general, most people are rational. For example people eat food, go to work, play nice with others, etc. If people behaved irrationally, then there would be no chance in the world to predict their behavior.  By assuming that people are rational, and make decisions based on what is best for them, we can break down the decision making process.  This allows us to study the factors that influence decision making.

2. Costs and opportunity costs: