Chapter 1 : Lecture Flashcards
Law of Unintended Consequences
When incentives change, peoples behavior can change
Incentives are not objective fact,
subjective interpretation
Positive
refers to what ‘is’ or ‘is not’
Normative
refers to what ‘ought’ or ‘ought not’
Economics is value ____;
neutral
Comments about economics should be
positive
value subjectivity
value is subjective; stems from alleviation of pressing needs
Fact or Myth? Value stems from labor hours
MYTH
Fact or Myth? Value stems from scarcity
MYTH
Scarcity implies need for
trade-offs
Theory of Markets
how individuals trade with each other
First Law of Demand
All else being equal, inverse relationship between price of good and quantity of good
T or F? upward demand curve
False; it would be inviable
Ceteris paribus
“all things being equal”
Marginal
Next Additional Unit
Value stems from ability to
satisfy our pressing needs
Law of Diminishing Marginal Utility
As consumption of good increases, satisfaction derived from consuming more of good will eventually decline
Utility
our subjectivity determined benefits
Rate of DMU will
vary, more pronounced for perishable goods
Ex: Potato Blight
Does not violate 1st law - C.P.
5 Shifters of Demand
- Changes in income
- Changes in price of related goods
- Changes in preferences
- Changes in # of consumers
- Expectations of future prices
Normal goods
buy more when income goes up
Inferior goods
i. Income rise -> demand of inferior goods falls
Income falls -> demand of inferior goods rises
Elasticity
sensitivity to price changes
FLAT
Sensitive, elastic
STEEP
not sensitive, inelastic
Elasticity =
( % Change in Quantity ) / (% Change in Price)
If E > 1
Elastic
If E 0
Inelastic
Elastic goods are
highly responsive to changes in price, inelastic goods are not
he Second Law of Demand
Elasticity increases over time
The Third Law of Demand
If you add levy to prices of 2 substitute goods, relative consumption of higher priced good will rise
Four Behavior Postulates
- People have preferences
- More of a good is preferred to less
- People are willing to substitute
- Marginal value falls are you consume more