Midterm 1 Chapters 1-3 (Supply & Demand) Flashcards
Economics
Study of the choices people make & the actions they take to make the best use of scarce resources to meet wants & needs
Scarcity
Allocation of resources
How are Allocaitons Evaluated
- Efficiency
- Equity
- Moral & Political Consequences
Calculation of Net Benefits
Benefits - Costs
If Benefits of X > Cost …
DO activity X
If Benefits of X < Cost …
DO NOT do activity X
Contingent Valuation
What is this worth to you?
Thinking on the Margin
What’s the Benefits & Costs of adding a value
Marginal = Additional
Microeconomics
Choices & actions of individual economic units
- EX: households, firms, consumers
Macroeconomics
Behavior of the entire economy
- EX: unemployment, inflation, national income
Positive Economics
Statements about what is / can be tested by checking against observed facts
- AKA Empirical Science
Negative Economics
Statements that depends on values & beliefs
- CANNOT be tested
Correlation Fallacy
Incorrect belief that Correlation = Causation
Post Hoc Fallacy - Special Case of Correlation Fallacy
Incorrect reasoning that a 1st event Causes a 2nd event because it occurred before the 2nd
Fallacy of Composition
Incorrect belief that what is true for an individual = true for a group
The Production Possibilities Frontier (PPF)
Show what we are capable of producing
(Unattainable VS Inefficient)
- Combinations of goods that can be produced when the factors of production are at full-potential
Opportunity Cost (Opp Cost)
Benefit given up by not using the resources in the next best alternative way
Law of Increasing Cost
To produce extra amounts of a good, the supplier must give up increasing amounts of another good
Pure Centrally Planned
All decisions made by governemnt
Market Chooses
Thousands of industrial choices directed by market prices
Mixed Economy
Market economy guided by the government
Absolute Advantage
Good / Service can be produced at a Lower Absolute Cost
- # of Goods
Comparative Advantage
Good / Service can be produced with a Lower Opportunity Cost
Rationality Assumption
We assume people are motivated by self-interest & act rationally
- Individuals do not make decisions that will leave them worse off
- The baker doesn’t make bread for the good for society, it’s to make $$$
Quantity Demanded
Amount consumers wish to buy
Law of Demand
As the product’s Price INCREASES, the Quantity Demanded DECREASES
As the product’s Price DECREASES, the Quantity Demanded INCREASES
Changes in Quantity Demanded
Changes in Price corresponds to movements across Demand Curve
Price of Substitute for good A Increases …
Demand for good A Increases
Price of Complement of good A Increases …
Demand for good A Decreases
Normal Goods
A commodity that Increases when your income Increases
- EX: Going out to eat MORE after getting a raise
Inferior Goods
A commodity that DECREASES when your income Increases
- EX: Buying LESS ramen when you get a raise
Law of Supply
As the product’s Price INCREASES, the Quantity Supplied INCREASES
As the product’s Price DECREASES, the Quantity Supplied DECREASES
Change in Quantity Supplied
Change in Price corresponds to a movement along the curve
As Technology IMPROVES …
Costs Decreases, Increase in Supply
Costs of Inputs INCREASE …
Supply Curve shifts, Decrease in Supply
Number of Firms INCREASE …
Supply Increases
Taxes INCREASE …
Costs Increase, Supply Decreases
Equilibrium
Where Supply Curve interesects with the Demand Curve
- When the Market Clears
FOUND the Equilibrium
When Quantity Supplied = Quantity Demanded
The Invisible Hand
A metaphor for the unseen forces that coordinates economic actions & allocation of resources
The Invisible Foot
How political / legal policies & regulations have the opposite effect of what is intended in influencing the market
Why do we need governments to take part in the market economy?
- To conform to social, cultural, legal, political norms
- Allocation of resources
- To correct failing markets
Price Floor
Government set the MINIMUM Price for good / service
- EX: Minimum Wage Laws
Price Ceiling
Government sets the MAXIMUM Price for good / service
- EX: Rent Ceilings
Quotas
Government sets MAXIMUM Quantity for a good / service
The Invisible HandShake
Combination of Social & Historical forces & Cultural norms that influence market outcomes
