Exam 1 Material Flashcards by Joel potter

economics

study of rational choice under conditions of scarcity

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scarcity

when people have more wants than what are freely available

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rational choice

people make choices after comparing the benefits and costs

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opportunity cost

the value of the next best alternative

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positive economics

predictive and/or descriptive

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normative

judgmental and/or evaluative

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scientific method

ask questions, produce explanations, and form hypotheses

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microeconomics

is the study of the decision-making process of individuals

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macroeconomics

is the study of aggregate decision-making

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nominal variables

measured in terms of dollars

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real variables

measured in terms of goods and services

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scatter diagram

collection of points showing the relationship between two variables

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direct relationship

two variables that move in the same direction

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positive slope

a line that has a direct relationship between the variables

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formula for a linear relationship

y= a + b*x

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rise over run

slope of a linear line

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Demand

Behavior of consumers in a market

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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

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Ceteris paribus (latin phrase)

all other things equal

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Demand function

mathematical relationship that predicts the quantity of a good demanded as a function of several related variables

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Qd=

D(P, Pc, Ps, M, Ta, Ex)

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Normal good

Increase in income leads to an increase in demand

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Inferior good

Increase in income leads to a decrease in demand

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Tastes and Preferences

If tastes for a product change, demand for that product changes in the same direction

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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