Micro Quiz/Test #1 Flashcards
Definition of PPC
Every combination of 2 goods that can be produced using resources fully
How many resources are part of the PPC? What are they?
Five: Land, labor, capital, technology, time
Definition of opportunity cost
The lost value of the best alternative not chosen
Why is the PPC bowed outward?
Sets a boundary but follows the law of increasing costs
Law of increasing costs
To produce constant additions of one good we must give up greater and greater amounts of another good.
Two sides of the Market
Demand: consumers
Supply: products/good
A change in the price of good..
- leads to a movement along the demand/supply curve
- leads to change in quantity demanded/supplied
- does not shift the demand/supply curve
- does not change “demand”/”supply”
What shifts the demand curve?
- Tastes & preferences
- prices of related goods
- income
- number of consumers
- price expectations
What shifts the supply curve?
- number of producers
- technology
- cost of inputs
Substitute goods
goods that can be used in place of another
Complementary goods
goods that can be used together
Price ceiling
a maximum price allowed by government benefits consumers (us), set below the free-market price
Price floor
a minimum price allowed by government benefits producers set above the free-market price
A ____ is a result of a price ceiling as quantity supplied is ____ quantity demanded
shortage, less than
A ____ is a result of a price floor as quantity supplied is ____ quantity demanded
surplus, greater than
What is elasticity?
looks at how responsive one variable is to a change in another variable
definition of elasticity
% change of one variable over % change of another variable
three types of elasticity
- price elasticity of demand (Ed)
- income elasticity ((Ey)
- cross-price elasticity (Exy)
Ed
% change of quantity demanded of good x over % change of price of good x (absolute value)
When is demand “elastic”
% change in quantity demanded is greater than % change in price
When is demand “inelastic”
% change in quantity demanded is less than % change in price
When is demand “unitary elastic”
% change in quantity demanded is equal to % change in price
When demand is elastic ____ follows the ____
total revenue, change in quantity
Ed > 1
When demand is inelastic ____ follows the ____
total revenue, change in price
Ed < 1
Calculating Ed
(New qty dmd - initial qty dmd / initial qty dmd + new qty dmd) / (new price - initial price / initial price + new price)
What determines how elastic or inelastic the demand for a good will be?
- greater number of substitutes than goods more elastic will be the demand for that good
- longer time horizon, greater number of substitutes that can be found, more elastic will be demand
Ey
Income Elasticity of Demand
% change in qty dmd for good x over % change in income
normal good
Ey > 0
increase in income leads to a increase in demand for good x
decrease in income leads to a decrease in demand for good x
inferior good
Ey < 0
increase in income leads to a decrease in demand for good x
decrease in income leads to a increase in demand for good x
Inexpensive Good
Ey = 0
increase in income leads to no change in demand for good x
decrease in income leads to no change in demand for good x