Econ LE 1 Flashcards
Define Comparative Advantage
It is a situation which arises when a country has lower relative costs/opportunity costs in the production of a good than another country.
Marginal Yield formula
Marginal Benefit - Marginal Cost
What are the types of market failure (3)
- The lack of competition
- Externalities
- Presence of pure public goods (the problem is free rider problem when everyone wants to use it but no one to pay for it)
What is the law of diminishing utility
When as consumption of a good increases, the marginal utility decreases with each unit consumed.
What is the underlying implication of the law of diminishing utility in relation to demand and price?
It shows how consumers would only purchase additional units goods if price falls
Non price determinants of supply
- Cost of FOP
- Technology
- Price of related goods - competitive supply (goods produced by the same producer compete to use the same resources ex: wheat or corn)
- Price of related goods - joint supply (production of goods derived from a single product. so that you cannot produce more of 1 without producing less of the other (ex: butter and skimmed milk)
- producer price expectations
- flexibility of sellers
- time (which leads to flexibility
- subsidies
- number of firms
PED, CPED IED
PED: (%change in qtd)/(%change in price)
CPED: (%change in qtd of good 1)/(%change in p of good 2
IED: (%change in qtd)/(%change in income)
What is point elasticity
it is when elasticity differs along the demand curve, the demand curve is more elastic on the top part than the lower part
In minimum wage graph, what does the excess show?
Minimum wage/Price floor excess (surplus) shows amt of unemployed
What does taxation on buyers do?
It reduces willingness to pay by the amount of the tax, resulting in a downward shift of the demand curve
What does taxation on sellers do?
It decreases willingness to sell or opportunity cost by amount of tax, causing an upward shift of the supply curve
For a relatively inelastic supply, where does the tax incidence fall more on
Sellers
For relatively inelastic demand, where does the tax fall more on
Buyers
If Domestic Price is less than World Price, what is that country described as
The country has comparative advantage in the good
If Domestic Price is more than World Price what should the country do
In free trade, the country should import the good
Benefits of International Trade
- Product variety
- Economies of scale
- Competition reduces market power of domestic firms (higher welfare for domestic buyers)
- Flow of ideas, facilitates spread of technology around the world
If a producer needed to increase prices to get more revenue, what is the relative price elasticity of demand is the good?
inelastic
What is the arc elasticity method to calculate PED?
((P1+P2)/2) / ((Q1+Q2)/2) X (change in Qd/change in P)
