Midterm Review Flashcards
Economics
The study of how to best allocate scarce resources & help find our optimal allocation
Microeconomics
The study of decision making at the individual level
Macroeconomics
The study of overall performance of an economy
Fundamental Concept of Economics
Resources are scarce relative to our wants and needs (scarcity)
Opportunity Cost
The cost of pursuing a given choice
Ceteris Paribus
“other things being equal”
Total Utility (TU)
an inidividual’s total satisfaction
Sum of Marginal Utility
Marginal Utility (MU)
change in TU resulting from a change in quantity
MU=∆TU/∆Q
Marginal Product (MP)
change in output (Q) due to each additional unit of a resource
(MP=∆Q/∆N)
Value of the Marginal Product (V): ∆TU/∆N
With just one option and assuming no scarcity
Continue until reach bliss point where MU = 0
Value of the Marginal Product (V): ∆TU/∆N
With N options and no scarcity
Reach bliss point
MU1 = MU2 = ……. = MUn = 0
Value of the Marginal Product (V): ∆TU/∆N
With N options and scarcity
Continue until utilities are equal across all options (Cannot reach bliss point)
MU1 = MU2 = …………. = MUn = X (where X>0)
Value of the Marginal Product (V): ∆TU/∆N
With several options for using productive resources and faces scarcity
Value of the Marginal Products are equal across all options
V1= V2 = ……=Vn= X (where X>0)
What role do assumptions play in economic models?
Models are based on assumptions and used to make predictions
Absolute Advantage
the ability to produce more of a good than others using the same amount of resources
Comparative Advantage
the ability to produce more of a good at a lower opportunity cost than another
(Necessary for trade to be beneficial)
Barter
the exchange of goods and services for others of similar value (flawed system)
General Equivalent
one commodity that is generally accepted for all others (best method)
Medium of Exchange
Three Roles of Money
facilitates the exchange of goods and services
Unit of Account
Three Roles of Money
provides a common way to measure value of holdings
Store of Value
Three Roles of Money
holds value over time and can be used later
Demand
shows the quantity (Q) of a good buyers are willing and able to purchase at various prices (P)
Supply
shows the qantity (Q) of a good suppliers are willing and able to produce and sell at various prices (P)
Excess Supply
Market Price is too HIGH (Qs > Qd)
Price adjusts downward until it reaches equilibrium
Price Elasticity of Demand
Measures the responsiveness of QD to a change in P
Determinants of Inelastic Demand
- Necessity
- Number of Substitutes
- Broadly Defined Market
- Small Change Relative to Income
- Short Run
Determinants of Elastic Demand
- Luxury
- Quality of Substitutes
- Narrowly Defined Market
- Large Change Relative to Income
- Long Run
Excise Tax on a Good: Elastic Demand
Sellers bear the tax burden
Excise Tax on a Good: Inelastic Demand
Buyers bear the tax burden
Cross-price elasticity
ε1x2
Measures the effect of a price change of one good on the demand for another good
Income elasticity
εI
Measures the effect of an income change on the demand for a good
Shift Variables of Demand
- Taste/Preference
- Price of Related Goods
- Consumer Income
(Number of buyers only shifts the market demand)
Shift Variables of Supply
- Price of inputs into production
- Level of technology
- Environment of production
(Number of firms only shifts the market supply)
Characteristics of Competitive Markets
- Large number of buyers and sellers
- Same quality good across sellers
- Free entry into or exit out of industry
- Perfect information across firms
Complements
Demand decreases as price for other good increases. Negative
ε1x2
Substitutes
Demand increases as price for other good increases
ε1x2 > 0 (Positive Sign)
Normal Goods
Necessary; Demand increases as income increases
εI > 0 (Positive Sign)
Inferior Goods
Luxury; Demand decreases as income increases. Negative
εI
Risk
events that may affect one’s decision
Discount Rate
measures one’s willingness to wait for future utility
Present Value
value of future utility put into today’s value
Uncertainties
might affect our plans but we do not see them coming
Positive Extranalities
positive effect on bystander (flu shot)
Government Solution: subsidize firms
Negative Extranalities
negative effect on bystander (smoking)
Government Solution: tax firms
“internalize the externality”
implement change so that Lp = Ls again
Shift Variables of Labor Demand
Wage
Price of Good (P)
Price of Other Inputs
Shift Variables of Labor Supply
Wage Wealth Preferences/Attitudes of Workers Other Opportunities # of Workers
Why is labor supply upward sloping?
Opportunity cost of work is the value of leisure (increasing opportunity cost with hours worked)
Why is labor demand downward sloping?
Due to diminishing value of marginal product.
As a result, a firm will hire additional units of labor as wage decreases.
Labor Demand
the amount of labor that firms are willing to hire
Labor Supply
the quantity of labor that workers are willing/able to provide
