Exam 1 (CH 1&2) Flashcards
Production Possibilities Frontier (PPF) definition
a diagram that shows the combinations of 2 goods that are possible for a society to produce at full employment of resources
PPF: All points under the curve are…
feasible but not efficient
PPF: All points above the curve are…
not feasible, they are impossible to create b/c not enough resources
Opportunity cost definition
What must be given up in order to obtain a good
Op Cost Q: To produce 20 small jets, you give up 15 dreamliners. What is the op cost of 1 small jet? What is the op cost of 1 dreamliner?
SJ op cost = 3/4 dreamliners
Dreamliner op cost = 4/3 SJ
Shortcuts for finding op cost:
- If op cost for one product is constant, then the op cost for the other product is also constant
- The op cost of one product is the reciprocal of the other product
- The op cost of the product graphed on the horizontal axis is the slope of the PPF line
Op cost Q: If you devote all of your time to finding clams, you can get 100/week. If you devote all of your time to finding mangos, you can get 200/ week. What is the op cost for Mangos? For Clams?
mangos: 1/2 clam
clams: 2 mangos
What does it mean for the PPF to shift right?
Economic growth! The economy can now produce more of everything
Causes of economic growth
- An increase in factors of production: resources used to produce goods and services
- Better technology
Factors of production
- Land: includes nat resources and actual land acreage
- Labor: the economy’s pool of workers/size of the workforce
- Physical Capital: includes buildings and equipment
- Human Capital: educational achievements and skills of the labor force
Theory of comparative advantage
produce the things you’re especially good at producing and import/buy everything else
Comparative advantage
a country has a comparative advantage in producing goods for which it has the lowest op cost
Absolute advantage
a country can produce more output than the other
Positive economics
the branch of economic analysis that describes the way the economy actually works
Normative economics
the branch of economic analysis that makes prescriptions about the way the economy should work
P or N: More than 60% of women are in the labor market.
Positive
Competitive market
has many buyers and sellers of the same good or service, none of whom can influence the price
Supply and Demand model
a model of how a competitive market behaves
Demand def
the behavior of buyers
Demand curve def
show the quantity demanded at various prices
Quantity demanded def
the quantity that buyers are willing and able to purchase at given price
What is the demand schedule?
it is a table (price on left; quantity on right)
Law of demand
a higher price for a good or service leads people to demand a smaller quantity; this explains the downward sloping demand curve
Change in demand is shown by
a leftward or rightward shift of the demand curve
Change in quantity demanded
movement along the curve
Demand Shifters
- Changes in the prices of related goods or services
- Changes in Income
- Changes in consumer tastes and preferences
- Changes in consumer expectations
- Change in # of consumers
Changes in the prices of related goods or services
Substitutes: you buy one instead of the other
- Price of substitutes increase; D shift right
- Price of substitutes decrease; D shift left
Complements: have to buy together
- Price of complement increase; D shift left
- Price of complement decrease; D shift right
Changes in Income
Normal good: - Income increase; D shift right - Income decrease; D shift left Inferior good: ramen noodles - Income increase; D shift left - Income decrease; D shift right
Changes in consumer tastes and preferences
Tastes are subject and vary among consumers; seasonal = prediction
- Demand for boots shift right during winter
Changes in consumer expectations
- Consumers expect product to be cheaper in future; D shift left
- Consumers expect product to be more expensive in future; D shift right
Change in # of consumers
- More buyers in market; D shift right
- Less buyers in market; D shift left
Supply def
represents the behavior of sellers
Supply curve def
shows the quantity producers are willing and able to sell at a particular price
Change in quantity supplied def
movement along the supply curve
Supply Shifters
- Input prices
- Price of related goods and services
- Technology
- Change in Producer expectations
- Changes in the # of producers
Input prices
- Decrease price of input; S shift right
- Increase price of input; S shift left
Price of related goods and services
Substitutes
- Price of one substitute increases; S for other shift left
Complements
- Price of one complement increases; S for other shifts right
Technology
- Tech improves; S shift right
- Tech deteriorates; S shift left
Changes in Producer Expectations
- Expect higher price in future; S shift left
- Expect lower price in future; S shift right
Changes in # of Producers
- # of producers decrease; S shift left
- # of producers increase; S shift right
How to find the market supply curve?
fix the price and add up the quantity supplied at that price
Market Equilibrium def
when quantity demanded is exactly equal to quantity supplied at a certain price, the market is in equilibrium
Market Equilibrium (what it looks like on the graph)
Where the supply and demand curves cross
If market price is > equilibrium price …
This is a surplus:
- the price will fall until it reaches the equilibrium price
Surplus def
anytime qs exceeds the qd; occurs when the market price is above the equilibrium price
If market price < equilibrium price …
This is a shortage:
- the price will rise until it reaches the equilibrium price
Shortage def
occurs when the qd exceed the qs; the market price is below its equilibrium price
What happens when the demand curve shifts?
D shift right: price goes up, quantity goes up, increase in quantity supplied
What happens when the supply curve shifts?
S shift left; price rises, quantity falls, decrease in quantity demanded
