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ECON 103 > Chapter 2-6 > Flashcards

Chapter 2-6 Flashcards

1
Q

What are the three reasons economists assume people are selfish and not self-interested?

A
  1. Economists want simpler models
  2. Even though something may seem to be kind, it actually ultimately benefits them
  3. Self-interest would be so consistent that it would be useless, it would not be testable.
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2
Q

nonsatiation

A

Nonsatiation means you are never satisfied, you always want more of something. You may have just aten and do not want more food, therefore you are satiated with respect to food. You are not satiated with respect to lamborghinis though.

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3
Q

scarcity

A

If the demand of the good exceeds what is available, the good is scarce.

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4
Q

substitution

A

Everyone is willing to trade some amount of one good for some amount of another.

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5
Q

marginal value

A

The maximum amount of one good an individual is willing to sacrifice to obtain one more unit of another good.

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6
Q

indifference

A

Letting someone else choose for you

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7
Q

Why does trade take place?

A

Trade does not take place just because someone has more than they need of something. It happens when individuals have different marginal values.

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8
Q

diminishing marginal value

A

The maximum one is willing to sacrifice at the margin for a good, per unit of time, declines the more one has of that good - other things held constant

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9
Q

real income

A

Real income is a measure of how many goods ones can consume, and is determined by one’s income divided by some price. (M/p2)

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10
Q

relative price

A

measured by how much we must sacrifice one good to obtain another good. (p1/p2)

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11
Q

behaviour is based on…

A

real income and relative price, not nominal.

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12
Q

law of demand

A

There is an inverse relationship between a good’s price and the quantity demanded, other things are held constant.

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13
Q

When is a consumer in equilibrium?

A

Relative price = Marginal Value. The x position on the graph will be the quantity demanded.

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14
Q

total value

A

The maximum one is willing to pay for a given quantity rather than have none at all. (Area under graph from 0-Q)

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15
Q

What is the mathematical relationship betwwen total value and marginal value?

A

Inverse relationship

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16
Q

Explain the difference between change in demand and quantity demanded

A

Change in demand refers to a shift in the entire demand curve, either outwards or inwards. Change in quantity demanded

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17
Q

What does a leftward shift of a demand graph mean? What about a rightward shift?

A

Leftward means that there is a decrease in demand. Rightward means there is an increase in demand.

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18
Q

What causes a change in demand?

A

A change in the exogenous parameters, such as nominal income, nominal price and preferences.

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19
Q

Define normal goods

A

When income increases, demand for the normal good increases.

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20
Q

Define inferior goods

A

When income increases, demand for the inferior good decreases.

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21
Q

Define substitute goods

A

When the price of good 2 increases, the demand for good 1 also increases.

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22
Q

Define complement goods

A

When the price of good 2 increases, the demand for good 1 decreases.

23
Q

Explain the difference between change in demand and quantity demanded

A

Change in demand refers to a shift in the entire demand curve, either outwards or inwards. Change in quantity demanded is a movement along the demand curve.

24
Q

What causes a change in the quantity demanded?

A

It results from a change in the relative price.

25
Q

Formula for elasticity

A

^Q/^P X P/Q, slope times price/quantity

26
Q

Conditions for being elastic, inelastic, and unitary elasticity

A

Elasticity is when the number is smaller than -1, like -10. inelastic is when the elasticity is between 0 and -1, so like -0.5. unitary elasticity is when the elasticity is -1.

27
Q

Normal good elasticity

A

Ei > 0

28
Q

Inferior good elasticity

A

Ei < 0

29
Q

Income elasticity formula

A

Ei = ^Q/^M x M/Q1. ^Q1 is the quantity demanded at the final income - quantity demanded initially. ^M is the final income minus the initial income.

30
Q

Cross price elasticity

A

E12 = ^Q1/^P2 x P2/Q1. ^P2 is the difference between the new price and the old price. ^Q is the difference between the old quantity demanded and the new quantity demanded.

31
Q

Complement good elasticity

A

E12 < 0

32
Q

Substitute good elasticity

A

E12 > 0

33
Q

The second law of demand

A

Long-run demand curves are more elastic than short-run demand curves.

34
Q

Definition of consumers surplus

A

Total value minus the total expenditure of the consumer

35
Q

Definition of sellers’ surplus

A

Total revenue minus the total value of the seller.

36
Q

Theorem of exchange

A

All gains from trade are exhausted at the margin.

37
Q

Define efficiency

A

Gains from the trade are maximized

38
Q

Who is the marginal consumer?

A

The last person to enter the market. They receive no consumer surplus.

39
Q

marginal cost formula

A

^TC/^Q

40
Q

sunk costs

A

costs that cannot be recovered

41
Q

avoidable costs

A

opportunity costs that can be avoided or recovered

42
Q

variables costs

A

costs that change with output

43
Q

fixed costs

A

costs that do not change with output (lump sum costs)

44
Q

profit/loss

A

the difference between benefits and costs

45
Q

The competitive firm is

A

a firm that takes the price, ignores rivals decisions and doesn’t engage in strategic behaviour.

46
Q

Average Revenue Formula

A

TR/Q

47
Q

Profit formula

A

TR - TC

48
Q

Rent Formula

A

TR - TVC

49
Q

When are profits maximized?

A

Profits are maximized when marginal cost equals price. P = MC

50
Q

Profit when AC = AVC

A

Q x [AR-AC]

51
Q

Break even point

A

Minimum of the AC curve

52
Q

Shutdown point

A

minimum of the AVC curve

53
Q

Total Revenue Formula

A

P X Q

ECON 103 (1 decks)

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