EXAM 1-Ch. 2, 3, 4, 5 & price ceilings/floors (2/19) Flashcards
“ceteris paribus”
all else constant
market
a group of buyers and sellers of a particular good or service
buyers determine demand for the product
sellers determine supply of the product
product market
where goods/services are sold
resource market
where resources (like labor) are bought and sold
think: a company buys labor by paying employees their salaries
marginal analysis
basically asking youself if a certain thing is
“worth it to you”
marginal definition
one more of something
marginal benefit:
the dollar value placed on satisfaction if you buy one more of something
marginal cost:
the dollar value of the sacrifice if you buy one more of something
when marginal benefit is greater than marginal cost
MB>MC
we will take action
positive statement
staten as if it’s a fact
normative statement
a “should be” statement
like an opinion
production possibilities frontier:
PPF
shows the maximum possible output of one good that can be produced with available resources, given the output of the alternative good over a set period of time
PPF curve & efficiency
-any point on the PPF curve=using resources effeciently
-any point inside the PPF curve=inefficient
-any point outside the PPF curve=unattainable (can never happen)
shifts in the PPF curve:
-change in quantity of resources
-change in quality of resources
-change in technology
opportunity cost:
the value of the next best alternative
basically choosing one item/activity over the other
the law of comparative advantage:
the individual, firm, or country with the lowest opportunity cost of producing a particular good should specialize in producing that good
if you have lowest opp. cost means that you should specialize in that!
opp. cost only involves the 2nd best choice (DO THE THING YOU’RE BEST AT DOING!)
absolute advantage:
ability to produce a good or service using fewer resources (at lower cost) than other producers
5 shifters of demand:
changes in:
-income of consumers
-price of related goods
-consumer expectations
-number of composition of consumers
-consumer tastes
normal good:
when the demand for a good falls, income falls
*normal goods are the norm
inferior good
when the demand for a good rises, income falls
*think: ramen noodles
substitutes:
A
when a fall in the price of one good reduces the demand for another good, the two goods are called subsitutes
*think: hot dogs and hamburgers
complements:
when a fall in the price of one good raises the demand for another good, the two goods are called complements
*think: peanut butter & jelly!
competitive market:
describes a market where there are so many buyers and so many sellers that each has a negligible impact on the market price
*think: each ice cream seller has limited control over the price b/c other sellers offering similar products
2 characteristics of a perfectly competitive market:
-the goods offered for sale are all exactly the same
-the buyers & sellers are so numerous that no single buyer or seller has any influence over the market price
price takers:
must accept the price that the market determines
monopoly:
market that only has one seller that sets the price
quantity demanded:
the amount of the good that buyers are willing and able to purchase
Law of Demand:
other things being equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises
Demand schedule:
a table that shows the relationship between the price of a good and the quantity demanded (holding everything else constant)
Market demand:
the sum of all the individual demands for a particular good or service
5 shifters of supply:
changes in:
-technology
-prices of inputs (relevant resources)
-number of producers
-producer expectations (about the future)
-weather
change in quantity demanded:
a change in price results in a change in quantity demanded ONLY
Law of supply:
when price increases, more products are produced and when price decreases, less products are produced
change in quantity supplied:
a change in price changes quantity supplied ONLY
the market conflict:
producers want to sell product at highest price & buyers want to buy at the lowest price
so, leads to negogiation
shortage
exists when the quantity demanded of a good exceeds the quantity supplied at a given price
not enough of the good to satisfy demand of customers
surplus
exists when the quantity supplied of a good exceeds the quantity demanded at a given price
too much of the good available
equilibrium
occurs when price of good=quantity sellers are willing/able to supply
consumer surplus=
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays
producer surplus=
the amount a seller is paid for a good minus the seller’s cost of providing it
price floor:
the legal minimum price (price floor must be above equilibrium price to be effective)
often set by the government
*remember: floor goes high, ceiling goes low
basically it’s the lowest price you can charge
price ceiling:
the legal maximum price (must be set below equilibrium price to be effective)
*remember: floor goes high, ceiling goes low!
price elasticity of demand:
a measure of how responsive consumers are to price changes
elasticity of demand=
% change in qty demanded/% change in price
basically use the midpoint formula!
elasticity of demand will always be negative!
for a 1% change in the denominator (price)…
the numerator will change by the elasticity of demand %
if the absolute value of elasticity of demand > 1
then the elasticty of demand is elastic, or very responsive to price changes
*raise price a little bit & lose lots of customers…
if the absolute value of elasticty of demand=1
then elasticity of demand is unit elastic
if the absolute value of the elasticity of demand < 1
then the elasticity of demand is inelastic, which means that consumers are not very responsive to price changes
*raise price a little bit & you won’t lose many customers!
total revenue=
price * quantity
inelastic demand
raise price & total revenue increases, lower price & total revenue decreases
elastic demand
raise price & total revenue decreases, lower price & total revenue increases
unit elastic
raise or lower price & total revenue stays the same
