Midterm 1 Flashcards
Principles of Economics
- people face trade-offs
- the cost of something is what you give up to get it
- rational people think at the margin
- people respond to incentives
- trade makes everyone better off
- markets are usually a good way to organize economic activity
trade-off
- have to give up something in order to get something
- ex. study one more hour or talk to a friend
opportunity cost
-whatever must be given up to obtain an item
thinking at the margin
- -rational people who do the best they can given their opportunities
- compare marginal benefits > marginal costs
firms and consumers respond to incentives
- higher price: buyers consume less while sellers produce more
- change in public policy
trade
- increases welfare
- allows people to specializes
- enjoy greater variety of goods and services
markets organize economic activity
- government officials best position to allocate economy’s scarce resources
- guided by price and self interest
government improves market outcomes
-government promotes efficiency and equality
no gains from trade when
- opportunity cost is the same
- if one country as absolute advantage
- ratio is the same between the two x and y outputs
absolute vs. comparative advantage
absolute: goes to producer that requires smaller input to produce good
comparative: ability of group to produce good at lower opportunity cost than another group
equilibrium price
- where supply and demand intersect on graph
- quantity of goods demanded = quantity of goods supplied
supply shifters
- change in technology
- input prices
- number of sellers
demand shifters
- tastes
- income
- price of related goods
- expectations
market demand
-sum of all individual demands
elasticity
the degree to which individuals change their supply or demand in response to price or income changes
inelastic
- necessities
- vertical demand
- more than 1
- y axis
elastic
- luxuries
- goods with close substitutes
- horizontal demand
- less than 1
- x axis
perfectly inelastic
no matter what price stays the same
perfectly elastic
small change causes infinite cage in demand
unit elastic
- curve equal to 1
- quantity supplied or demanded changes the same as the change in price
price floor above equilibrium market price
results in surplus
price ceiling set below equilibrium market price
results in shortage
tax on buyers vs sellers
- buyers: shifts demand curve in
- sellers: shifts supply curve left
burden of tax
shared by both consumers and sellers
division of tax burden
depends on the relative elastic of supply and demand
consumer surplus
- amount buyer is willing to pay minus amount buyer actually pays
- demand curve
producer surplus
amount seller is paid for a good minus the seller’s cost of providing it
-supply curve
externality
- when a person does something that affects bystander
- negative: bad impact of bystander, supply curve left
- positive: good impact on bystander, demand curve left
pigovian tax
- tax on market that generates a negative externality
- corrects inefficient market outcome
- ex. paying extra for bags at grocery stores
chase theorem
- if private parties can bargain without cost over distributing resources, they can solve externality problems on their own
- ex. offering someone money to get rid of their barking barking dog
rival
- one person’s consumption of a good reduces the amount of good available for others
- private goods
- common resources
excludable
possible to prevent one person’s consumption go a good if that person does not pay for the good
- private goods
- club goods
public good
non-rival and non-excludable
private good
rival and excludable
diminishing marginal product
as quantity of input increases, the amount of output (marginal product) decreases
total cost
fixed cost + variable cost
marginal cost curve
- determines quantity of good firm is willing to supply at any time
- intersects with average total cost at lowest point bc each new output lowers the ATC
profit maximizing level of output
MC = MR
firm should decrease output when
MC > MR
firm should increase output when
MC < MR
profits
- P= (P - ATC) x Q
- pushed to zero for all firms in competitive market
- profit needs to be > ATC
competitive market
- firms earn zero profit
- profit = ATC
- hires amount of workers where equilibrium market wage = value marginal product of labor
monopoly
- firms earn positive profit
- profit > ATC
- MR not constant price (depends on quantity)
- impose dead weight loss on society
- reduce consumer surplus
- increase producer surplus
P > ATC
firm making profit
P < ATC
firm losing profit
P = ATC
firm making zero profit
equilibrium wage
were supply and demand curves intersect
