Exam 1 Material Flashcards
economics
study of rational choice under conditions of scarcity
scarcity
when people have more wants than what are freely available
rational choice
people make choices after comparing the benefits and costs
opportunity cost
the value of the next best alternative
positive economics
predictive and/or descriptive
normative
judgmental and/or evaluative
scientific method
ask questions, produce explanations, and form hypotheses
microeconomics
is the study of the decision-making process of individuals
macroeconomics
is the study of aggregate decision-making
nominal variables
measured in terms of dollars
real variables
measured in terms of goods and services
scatter diagram
collection of points showing the relationship between two variables
direct relationship
two variables that move in the same direction
positive slope
a line that has a direct relationship between the variables
formula for a linear relationship
y= a + b*x
rise over run
slope of a linear line
Demand
Behavior of consumers in a market
Determinants of Demand
price of the good, price of substitute goods, price of complementary goods, tastes and preferences, consumer’s income, and expectations about the future
Ceteris paribus (latin phrase)
all other things equal
Demand function
mathematical relationship that predicts the quantity of a good demanded as a function of several related variables
Qd=
D(P, Pc, Ps, M, Ta, Ex)
Normal good
Increase in income leads to an increase in demand
Inferior good
Increase in income leads to a decrease in demand
Tastes and Preferences
If tastes for a product change, demand for that product changes in the same direction
If prices are expected to rise in the future, demand will ____ today
increase
If future prices are expected to decrease, demand will ____ today
decrease
For a normal good, if income decreases then
demand will decrease
For an inferior good, if income decreases then
demand will increase
A demand schedule
a table showing the relationship between the price of a good and the quantity of the good demanded, ceteris paribus.
A demand curve
is a graph showing the relationship between the price of a good and the quantity of the good that consumers are willing and able to purchase in a given period of time, ceteris paribus.
The behavior of price and quantity demanded is called the
Law of demand
A change in the price of a good results in a
change in the quantity demanded
A change in the price of a good is shown (on a graph) by a
movement along the demand curve.
On a graph, a change in demand is represented by a
Shift in the demand curve
According to the law of demand, the price of a good and the quantity demanded have
an inverse relationship
When the price of a good changes, the demand curve
never shifts
A change in demand is caused by
changing a variable other than price
Substitute goods are goods that
can be purchased instead of the original good because they satisfy the same needs
Complementary goods are goods that
are closely related to the original and used with the original gods
If the price of bagels falls, the consumer would demand ____ bread
less
If the price of cheese falls, the demand for bread will
increase
When there is a change in demand, the demand curve ___
shifts
The beer, Natural Light, is probably a(n) ____ good
inferior
When you change any of the factors that influence demand, except price, you will cause a
change in demand
Are most goods normal or inferior?
Normal
If the price of oil is expected to increase in the future, current demand will
increase
The determinants of supply are:
price of the product, the price of input goods used to make it, the state of the industry’s technology, government taxes and subsidies, and expectations about the future price of the good
Profit
is the difference between revenue and costs
Supply
is the amount of a good that a producer puts on the market for any time period.
The opportunity cost for a producer
is what the producer has to give up in order to produce
Law of Supply is illustrated by
the supply curve
Law of Demand is illustrated by
the demand curve
When there is a change in the price of the good, the supply curve does not shift, but there is
movement along the supply curve
If input prices increase, then supply of the good
decreases
If input prices decrease, then supply of the good
increases
Only if the supply curve shifts is there a ____ in supply
change
If technology improves then
supply of the good increases
If produces expect the future price of bananas to increase, then
the current supply of bananas will decrease
If producers expect the future price of salt to decrease, then
the current supply of salt will increase
Excess demand is when
consumers demand a greater quantity of a good than producers supply
Excess supply is when
producers supply a greater quantity of a good than consumers demand
Competitive equilibrium
exists when the market finds a price/quantity combination from which there is no incentive to move
Excess demand occurs when price is
lower than the equilibrium price
excess supply occurs when price is
higher than the equilibrium price
How many comparative statics situations to study?
4 (demand increases or decreases; supply increases or decreases)
If good X and Y are substitutes, then an increase in the price of good X will cause the price and quantity of good Y to
price and quantity of good Y will increase
A weak demand and a strong supply would necessarily result in:
a lower price
A drought that destroys half of the corn crops in the Midwest would cause:
a higher equilibrium price and a lower equilibrium quantity.
If beer and pizza are complements, a decrease in the price of pizza would increase the demand for beer.
true
If a product’s supply curve shifts outward, the new equilibrium quantity will be ________, and the new equilibrium price will be ________.
higher; lower
When there is excess supply in a market:
there is downward pressure on the price
When there is excess demand in a market:
there is upward pressure on the price.
The market for bread is experiencing a surplus. You could predict that:
price will decrease, quantity demanded will rise, and quantity supplied will fall.
If a change in the price of jelly beans has affected the chocolate bar market, the new point of equilibrium for chocolate bars occurs where:
the original supply curve intercepts the new demand curve.
An increase in the demand for chocolate bars results in:
a price increase and a quantity increase.
Assume that jelly beans and candy bars are substitute goods. If the price of jelly beans increases, the demand curve for jelly beans will shift inward.
false
