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Economics for IB > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q

All economic systems must address:

A

What should be produced?

How should it be produced?

For whom will it be produced?

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2
Q

The market for any good or service consists of

A

All buyers and sellers of that good or service.

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3
Q

The demand curve

A

A schedule or graph showing the quantity of a good that buyers wish to buy at each
price

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4
Q

As price of a good or service goes down

A

The quantity that consumers wish to buy will increase.

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5
Q

As the price of a good or service increases

A

The quantity consumers wish to buy will decrease.

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6
Q

Why do buyers purchase a greater quantity at lower prices and vice-versa?

A

Substitution effect

Income effect

Buyer’s reservation price

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7
Q

Substitution effect

A

The change in the quantity demanded of a good that results because buyers switch to substitutes when the price of the good changes
the price of the good changes relative to other prices

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8
Q

Income effect

A

The change in the quantity demanded of a good that results because of a change in real income of purchasers arising from the price change
all prices change in the same way

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9
Q

Buyer’s reservation price

A

The largest money amount the buyer would be willing to pay for a unit of a good

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10
Q

If the reservation price (benefit) exceeds the market price (cost)

A

The consumer will purchase the good

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11
Q

The supply curve

A

A curve or schedule that tells us the quantity of a good that sellers wish to sell at each price

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12
Q

Seller’s reservation price

A

The smallest money amount for which a seller would be willing to sell an additional unit (generally equal to marginal cost)

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13
Q

Opportunity costs

A

Giving up your highest valued alternatives

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14
Q

Market Equilibrium

A

All buyers (consumers) and sellers (producers) are satisfied with their respective quantities at the prevailing market price at the intersection of demand and supply in the market equilibrium price and equilibrium quantity

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15
Q

Equilibrium price

A

Is the price at which a good will sell.

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16
Q

Equilibrium quantity

A

Is where the quantity supplied and quantity demanded are equal. There is no tendency for the system to change.

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17
Q

Excess Supply

A

The amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price

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18
Q

Excess Demand

A

The amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price

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19
Q

Price Ceiling

A

A maximum allowable price, specified by law

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20
Q

Price Floor

A

A minimum allowable price, specified by law

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21
Q

Change in demand

A

A shift of the entire demand curve:

a demand change at the same price

22
Q

Change in quantity demanded

A

A movement along the demand curve that occurs in response to a price change

23
Q

Change in the quantity supplied

A

A movement along the supply curve that occurs in response to a price change

24
Q

Change in supply

A

A shift of the entire supply curve: a supply change at the same price

25
Q

Complements

A

Two goods are complements in consumption if an increase (decrease) in the price of one
causes a leftward (rightward) shift in the demand curve for the other

E.g. tennis racquets and tennis balls; gin and tonic; printers and printer paper; pop-corn
and cinema tickets

26
Q

Due to substitutes

A

Two goods are substitutes in consumption if an increase (decrease) in the price of one causes a rightward (leftward) shift in the demand curve for the other

E.g. Wine and beer; long distance bus and train usage; airline tickets and car ferry tickets

27
Q

Normal Good

A

Demand curve shifts rightwards when the incomes of buyers increase and leftwards when the incomes of buyers decrease (fresh pizza?)

28
Q

Inferior Good

A

Demand curve shifts leftwards when the incomes of buyers increase and rightwards when the incomes of buyers decrease (frozen pizza?)

29
Q

Shifts in Supply

A

Prices of inputs and/or their substitutes

Technological change: producing more with the same input prices

Number of firms in the market

Expected future prices

Weather (farming)

30
Q

Buyer’s Surplus

A

The difference between the buyer’s reservation price and the price actually paid

31
Q

Seller’s Surplus

A

The difference between the price received by the seller and his or her reservation price

32
Q

Total Surplus

A

The difference between the buyer’s reservation price and the seller’s reservation price

33
Q

Price Elasticity of Demand explanation

A

A measure of the responsiveness of the quantity demanded of a good to a change in the price of that good

The percentage change in the quantity demanded that results from a 1 percent change in its price

34
Q

Price elasticity of demand equation

A

Percentage change in quantity demanded/percentage change in price

35
Q

When Price Elasticity of Demand is

A

> 1 : Elastic

=1 : Unit Elastic

<1 : Inelastic

36
Q

Point Elasticity of Demand

A

Midpoint approach is an approximation to the value of elasticity at all points between the upper and lower point on the demand curve

Demand curve could be “curved” rather than straight

This makes the mid-point approach less accurate in looking at effects of a small price change

37
Q

Perfect elastic demand

A

Demand is perfectly elastic with respect to price if price elasticity of demand is infinite

38
Q

Perfect inelastic demand

A

Demand is perfectly inelastic with respect to price if price elasticity of demand is zero

39
Q

Determinants of Demand Price Elasticity

A

Substitution Possibilities (+)

Budget Share (+)

Time (+)

40
Q

Total Expenditure equation

A

Total Expenditure = P x Q

41
Q

Total expenditure as function of price

A

For a good whose demand curve is a straight line, total expenditure reaches a maximum at the price corresponding to the midpoint of the demand curve.

42
Q

Cross-Price Elasticity demand

A

The percentage change in quantity demanded of one good in response to a 1 percent change in the price of another good

43
Q

Substitute Goods

A

Cross-Price Elasticity of demand is positive

44
Q

Complement Goods

A

Cross-Price Elasticity of demand is negative

45
Q

Income Elasticity of Demand

A

Is the percentage change in quantity demanded in response to a 1 percent
change in income

46
Q

Price Elasticity of Supply

A

The percentage change in the quantity supplied that occurs in response to a 1 percent change in price

47
Q

Price elasticity of supply equation

A

(P/Q) * (1/slope)

48
Q

Determinants of Supply Elasticity

A

Flexibility of inputs (+)

Mobility of inputs (+)

Input substitutes (+)

Time (+)

49
Q

Perfectly elastic supply

A

Supply is perfectly elastic with respect to price if elasticity is infinite

50
Q

Perfectly inelastic supply

A

Supply is perfectly inelastic with respect to price if elasticity is zero

Economics for IB (6 decks)

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