Concepts Flashcards
What is Economics
The study of the allocation of scare resources
What is scarcity
When the demand for a good or service is greater than the quantity of it
What is opportunity cost?
The value of the next best use of a scarce resource
What is positive analysis
Analysis of how things actually work
What is normative analysis
An analysis of how things should work
What is the law of demand?
As price increases, quantity demanded decrease
What is demand
The desire, willingness, and ability for consumers to pay a certain price for a certain good.
What does ceteris paribus mean?
All else equal
What shifts demand?
Population, income, preferences, quality of a good, price of substitutes
What is supply?
The total quantity of a good that producers are willing to to provide
Why does demand slope down?
Because as price increases, consumers’ marginal willingness to pay decreases. This is due to the law of demand.
Why does supply slope up?
Rising prices induce additional supply for suppliers who have a opportunity cost of giving up a resource.
What are diminishing marginal returns?
Diminishing marginal are proportionally smaller profits or benefits derived from producing a good as more money is invested in it.
What are shifts In the supply curve?
Anything that changes opportunity cost: wages, price of inputs, taxes, subsidies, trade barriers, tech.
What causes movement along the supply curve
Changes in quantity of a good.
What is Equilibrium?
Market equilibrium occurs when the state in which supply and demand balance each other and no force is acting to change the outcome. On a graph, it is when the supply and demand curves intersect.
What is supply Schedule
How much is supplied at every price
What is Marginal Willingness to Supply
The price at which the marginal supplier covers her marginal opportunity cost
How does tax change equilibrium
Shifts supply curve up and left
How does a price floor change equilibrium?
Shifts the supply curve up and left
How does a change in supply effect equilibrium (housing)
An increase in supply, all other things unchanged, will cause the equilibrium price to fall and quantity demanded will increase. A decrease in supply will cause the equilibrium price to rise and quantity demanded will decrease.
What is the equation for Elasticity?
% Change in Quantity / % Change in Price
What is Elasticity of demand?
Change in Q / Change in P * P/Q
Definitions of Elasticity
|Elas| < 1 ) “Inelastic”
|Elas| > 1 ) “Elastic”
|Elas| = 1 ) “Unit Elastic
What happens to Elasticity with changes in Demand
When prices fall demand rises and quantity demanded rises, when prices rise demand falls and quantity demanded falls
What is consumer surplus?
Consumer surplus is the total willingness to pay, of all consumers, minus the total amount paid.
What is producer surplus?
Producer surplus is the amount received by sellers, minus the opportunity of cost of selling (producing).
What is total surplus?
Total Surplus is the sum of Consumer and Producer Surplus
What is deadweight loss?
A Deadweight Loss (“DWL”) is the amount of total surplus that could be obtained under some other market quantity, but for some reason is not obtained.
What does an excise tax do?
A parallel vertical shift in the marginal opportunity cost of sellers so a parallel vertical shift of the supply curve.
What is marginal benefit
The change in benefit that occurs with a small change In x
What is the budget constraint equation?
P1X1 + P2X2 = Y
What is the slope of the indifference curve?
Solve: MU1change in x1 + MU2change in x2 = 0 = = MU1/
MU2
What is the substitution effect?
The substitution effect is the change in a consumer’s consumption choices that results from a change in the relative prices of two goods
What is the Income effect?
The income efect is the change in a consumer’s choices that results from a change in the purchasing power of the consumer’s income.
Why does demand slope down
Substitution Effect: increased slope of budget line pushes the optimum to the “Northwest,” more x2, less x1. Change in p1/p2 is pure opportunity cost effect. Income Effect: increased price pushes budget line down, like decreased income, with a normal good this reduces x1
