Exam 1 Flashcards
What is allocation?
What we choose to use resources for
What is scarcity?
When there are more wants than availability
What are resources?
Land, labor, capital, time
What is a model?
A simplified representation of a real situation that is used to better understand real-life situations
What is ceteris paribus?
Holding all other things constant
What are the 5 postulates of human behavior?
- People have preferences
- Preferences can and do differ across individuals
- More is preferred to less
- People are willing to substitute one good for another
- The more we have of a good, the less we value of an additional unit of that good
Explanation of: People have preferences
Given a choice between goods, consumers can make a decision about which is preferred
Explanation of: Preferences can and do differ across individuals
Allows for trades to occur
What is the demand schedule?
Table showing how much of a good or service consumers will want to buy at different prices
What is the demand curve?
A curve which graphically represents the quantity of a particular good a consumer is willing to buy at each price level; graphical representation of the demand schedule
What is the Law of Demand?
The quantity demanded of a good is inversely related to price of that good, holding other factors constant
As price falls, quantity demanded increases
What is value?
The amount of other goods an individual is willing to give up in order to obtain some good
What is Total Value (TV)?
Amount of other goods an individual would be willing to give up in order to consume all units presently consumed instead of none at all
Sum of all marginal values of all units of good consumed
What is Marginal Value (MV)?
Amount of other goods an individual would be willing to give up in order to consume an incremental unit of good
What is the Law of Diminishing Marginal Value?
The Marginal Value of a good decreases as more units are consumed (Reason why individual demand curves are downward sloping)
What is Total Expenditure (TE)?
Total amount actually spent to purchase a given quantity of a good
TE = price x quantity
What is Consumer Surplus (CS)?
Net benefits to the consumer. The difference between what a consumer would be willing to pay for the units purchased (TV) and what the consumer actually pays (TE)
CS = TV - TE
What does how much the individual consumer consumes depend upon?
Price and marginal value
What is price?
How much the consumer must give up for each additional unit consumed
What is marginal value?
How much the consumer is willing to give up for each additional unit consumed
When do consumers stop consuming a good?
When price > marginal value
How is the marginal value represented on the demand curve?
The height of the demand curve at a given quantity
How is total value represented on the demand curve?
It is the area under the demand curve for all consumers in the market?
How is the consumer surplus represented on the demand curve?
Area between the demand curve and price