Midterm Flashcards
10 principles of economics
- people face tradeoffs (e.g. between efficiency and equality)
- cost is what is given up to recieve something
- rational people think at the margin
- people respond to incentives
- trade can make everyone better off (allows specialization and greater variety of goods)
- markets usually good way to organise economy
- country’s standard of living depends on ability to produce goods/services
- prices rise when government prints too much money
- SR trade off between inflation and unemployment (Philips’ curve)
- governments can improve market outcomes
economics
study of
- how society manages scarce resources
- how people make decisions
- how people interact with each other
- forces/trends that affect economy as a whole
efficiency
property of society getting the most it can from resources
equality
property of distributing economic prosperity among members of society
opportunity cost
whatever must be given up in order to obtain an item
market economy
economy that allocates resources through decentralised decisions of firms and households based on price and self-interest
market failure
situation in which market on its own fails to produce efficient allocation of resources
externality
impact of someone’s actions on well-being of bystander
market power
ability of single economic actor to have substantial influence on market prices
productivity
quantity of g/s produced from each unit of labor input
inflation
increase in overall price levels in an economy
macroeconomics
study of economy-wide phenomena (e.g. inflation, unemployment)
microeconomics
study of how individual households/firms make decisions and how they interact in markets
postive statements
claims that attempt to describe world as it is
normative statements
claims that attempt to prescribe how the world should be
circular flow model
photo
law of demand
decrease in price increases quantity demanded
normal good
good for which, ceteris paribus, an increase in income leads to an increase in demand
inferior good
good for which, ceteris paribus, an increase in income leads to a decrease in demand
substitutes
2 goods for which an increase in the price of one leads to an increase in the demand for another
complements
2 goods for which an increase in the price of one good leads to a decrease in demand for the other
law of supply
increase in price increases quantity supplied
non price determinants of demand and supply
demand
- taste
- expectations
- number of buyers
supply
- input prices (F of P)
- technology
- expectations
- number of sellers
equilibrium
situation in which the market price has reached level at which Qs equals Qd
graph showing surplus, shortage, equilibrium
PED
measure of how much Qd of a good responds to change in price of that good
PED equation
((Qn-Qo)Po)/((Pn-Po)Qo)
determinants of PED
- availability of close substitutes (without close stubstitute demand less elastic)
- necessities (inelastic) vs. luxuries (elastic)
- SR (inelastic) vs. LR (more elastic)
elastic vs. inelastic PED
- |PED| > 1 elastic
- |PED| < 1 inelastic
perfectly inelastic demand
|PED| = 0 vertical demand curve
unit elastic demand
|PED| = 1
infinitely elastic demand
|PED| = infinity horizontal demand curve
PES equation
((Qn-Qo)Po)/((Pn-Po)Qo)
perfectly inelastic supply
PES = 0 vertical supply curve
unit elastic supply
PES = 1
infinitely elastic supply
PES = infinity horizontal supply curve
elastic vs. inelastic PES
- PES > 1 elastic
- PES < 1 inelastic
price ceiling
legal maximum on price at which a good can be sold
price ceiling graph
price ceiling example
- both demand and supply inelastic
- in LR, demand and supply increasingly elastic
- D-side: Qd for apartments increases
- S-side: no incentive to build new housing and don’t maintain old houses
- ration housing, lower quality housing
price floor
legal minimum on price at which good can be sold
price floor graph
price floor example
minimum wage –> labor surplus
tax levied on sellers graph
tax levied on buyers graph
tax burden: elastic supply, inelastic demand
greater burden on consumers
tax burden: elastic supply, elastic demand
consumers and producers share tax
tax burden: inelastic supply, elastic demand
greater burden on producers
willingness to pay
maximum amount that a buyer will pay for a good
consumer surplus
difference between amount a buyer is willing to pay for a good and amount actually paid
consumer surplus graph
producer surplus
area below price and above supply curve
total surplus
- value to buyers - cost to sellers
- consumers + producer surplus
why does taxation lead to DWL?
prevent buyers/sellers from realising some gains of trade
determinants of DWL
- inelastic supply/demand –> increased DWL
- elastic supply/demand –> decreased DWL
