Midterm 1 (Weeks 1-6) Flashcards
economics
study of human choices in response to scarcity
scarcity
want exceeds limited resources
principles of economics
1) people are rational (use all available info to achieve their goals)
2)optimal decisions are made by calculating opportunity costs at the margin
3) people respond to incentives
opportunity costs
the true cost of something is the value you could have gained by doing something else
marginal cost/marginal benefit
cost/benefit associated with doing a small amount extra of some action, e.g producing one more car at a factory
sunk costs
costs already paid for, should not be considered when making next decision
incentives
positive or negative, sways behavior by changing the trade-offs
describe points on a PPF (production possibilities frontier)
a) on line = attainable and efficient
b) above line = unattainable
c) below line = attainable and inefficient
slope of PPF = ?
opportunity cost of y axis
invisible hand
global production/trade is a natural result of self-interested individuals trying to improve their lives
economic growth
ability of economy to increase production/expand PPF
absolute advantage
ability to produce more goods using same resources
comparative advantage
good can be produced there at a lower opportunity cost than anywhere else
specialization
each country has their own comparative advantage, specialization allows for trade
markets
individuals and businesses decide production and allocation
demand
the more it costs, the fewer people want it
four features of a competitive market
1) no transaction costs (no pay to compete)
2) standardized goods (doesn’t matter what you buy)
3) full info (quality, price)
4) price-taking participants (individuals cannot affect price)
demand vs. quantity demanded
overall curve vs. point on curve at specific price
ceteris paribus assumption
“all else held equal” - when variables other than price/quantity are held constant, demand decreases as price goes up
income effect
price down, purchasing power up
substitution effect
people will gravitate towards substitutes if they are cheaper
if ANYTHING other than price changes ____ happens
the entire demand curve shifts
if price changes ___ happens
shift down or up curve occurs
normal good
income up, demand up (most goods)
inferior good
income up, demand down (ramen noodles)
substitutes
goods that can be used in place of one another (big mac and whopper)
complements
bought together (peanut butter and jelly)
law of supply
all else held equal, price up means supply up
input
used in production of good or service. if price goes up, supply goes down bc less profitable for company
technological changes
increase supply as they increase productivity
more firms in a market means…
more goods supplied
excess supply (glut)
supply outweighs demand
excess demand
more demand exists than supply of good
market equilibrium
point where quantity demanded = quantity supplied
predictions based on shifts in supply and demand
1) same direction shift = predict quantity change, not price
2) opposite direction shift = predict price change, not quantity
elasticity
way to measure responsiveness of buyers to changes in prices
elasticity is always _____ (number sign)
negative
PED (price elasticity of demand) >1
good is price elastic
PED < 1
good is inelastic
PED = 1
good is unit elastic
vertical demand/supply curve
perfectly inelastic, price up, quantity demanded stays the same (water, air)
horizontal demand/supply curve
perfectly elastic, price up or down, quantity demanded goes to 0 (diamonds, gold)
midpoint formula
solves for elasticity, (Q2-Q1/midpoint Q)/(P2-P1/midpoint P)
determinants of elasticity
1) availability of close substitutes (more subs, more elastic demand)
2) passage of time (goods are more elastic long term)
3) luxuries vs. necessities (luxuries very elastic, necessities very inelastic)
4) definition of market (widely defined market = more inelastic)
5) share of good in budget (good is low cost to consumer, price is mostly indifferent)
revenue
price x quantity sold
when quantity effect > price effect
demand is elastic (PED>1)
when price effect > quantity effect
demand inelastic
where is revenue highest?
where elasticity = 1
price elasticity of supply (PES)
measures producers response in quantity to a change in price, also determined by midpoint formula
PES is always ____ (number sign)
positive
cross-price elasticity of demand
how quantity demanded of one good changes when price of another changes. Concerns substitutes and complements, e.g if peanut butter goes up in price, what happens to quantity demanded of jelly?
income elasticity of demand
quantity response to income of consumer, if elasticity >1 it is a luxury good
efficiency
1) is society better off in a measureable way because of this? marginal benefit of trade outweighs marginal costs
2) market maximizes consumer and producer surpluses
surplus
remains above what is used or needed
consumer surplus
maximum price willing to pay for good vs. actual price of good, any discrepancy is this surplus
area BELOW demand curve, ABOVE price line
Willingness to Pay/Willingness to Sell (WTP/WTS)
maximum amount consumer is willing to pay for a good/minimum amount producer will sell a good for
producer surplus
any marginal benefit at or above the cost of a good
area ABOVE supply curve, UNDER price line
total surplus
consumer surplus + producer surplus
deadweight loss (DWL)
amount of inefficiency in a market, caused by lacks in supply or demand or price caps, etc. 0 at competitive equilibrium
calculated by area of triangle, 1/2bh
taxes
supply and demand curves shift left, both surpluses decrease
government takes revenue
subsidies
supply and demand curves shift right, surpluses increase
government pays
price floor
legal minimum price instilled to pay for a good; creates surplus (think milk price floor for dairy farmers, govt. must buy up surplus)
price ceiling
legal maximum price for a good, think rent control, gas price caps, etc. creates shortage
