mt1 Flashcards
Economics Definition
study of choices ppl make, actions ppl take
- how ppl use scarce resources to meet their wants and needs
Cost benefit analysis
-if benefits (x) > costs (x) = do activity x
-if costs (x) > benefits (x) = dont do activity x
-if marginal benefits (x) > marginal costs (x) = do activity x
2 branches of econ
micro economics
macroeconomics
Microeconomics
study of choices and actions of individual economic units ex. households, firms
Macroeconomics
Study of behaviour of entire economy
ex. unemployment, inflation, change in national income level , international trade / finance
how do u judge economic allocations
based on:
- efficiency
-equity
-moral and political consequences
types of efficiency
productive and allocative
productive efficiency
-mix of goods and produced at the lowest possible resource of opportunity cost
-as much output as possible produced w given amnt of resource = production efficiency
- provide the highest products to society at the lowest cost
allocative efficiency
mix of goods and services produced only what society desires
-ppl who desire the good the most obtain it
equity
- distribution of resources in a fair matter
-not popular w economists
positive economics
- statements= what ifs
-tested by putting it against observable facts
-ex. if coffee price increases = less ppl drinking coffee
normative economics
- statements: what ought to be
- depends on values and beliefs- cant be tested
-ex. taxes should be used to redistribute income form high income to low income groups
why is econ a science
- social science: seeks to explain how people act
- uses models, theories, assumptions
correlation fallacy
incorrect belief that correlation implies causation
post hoc fallacy
1st event causes 2nd event bc 1st occured before the 2nd
- special case of correlation fallacy
fallacy of composition
incorrect belief that whats true for individuals is also true for the group
production possibilities frontier
-shows combos of goods that can be produced when factors of production are utilize to full potential
-drawn for given level of society’s inputs ( labour, natural resources, capital) + given state of society’s technology
what does investing do to a PPF
increased capital good = outward shift of ppf
- each unit of labour increases productivity therefore it increases capital good produced and increases economic growth
how can a PPF be inefficient
-if capital good doesnt increase then if demand for consumer goods increases the demands cant be met therefore its inefficient
opportunity costs
-benefits given up by not using resources in the next best alternative way
opportunity / production= opportunity cost
scarcity problem
with scarcity, ppl have to make choices and with choices lead to opportunity cost
law of increasing cost
-in order to produce extra amnts of 1 good, society must give up ever increasing amounts of the others good which leads to opportunity costs when producing one commodity
-therefore resources not equally productive in all activities
PPF characteristics
-points on or inside the PPF= attainable (have reosurces and tech to produce)
-points above the PPF= unattainable
-points on the line = efficient
-points below the line = inefficient (ex. unemployment)
what causes PPF to shift OUT
- increase in human capital (more and smarter workers)
- capital accumulation: investments into equipment
- technological innovation
- discover more resources
Absolute advantage
someone/ country ahs absolute advantage over someone/country over a good if they can produce it at a lower absolute cost
comparative advantage
comparative advantage over someone/ country in production of good if they can produce it at a lower opportunity cost
types of economies
-market
-centrally planned
-mixed
market economy
- we assume individuals act as if motivated by self interest and act in rational ways
-rationality assumption
rationality assumption
-ppl dont intentionally make decisions that make them worse off
-doesnt imply that ppl only make choices based on monetary benefits
-doesnt rule out kindness/ charity
types of players in the market
- households: consumers of goods and services
- sellers of factors of production
-objective= maximize satisfaction - firms: producers of goods and services
-demanders of factors of production
-objective=maximize profit - government
characteristics of market econoomy
- self interest: individuals pursue own self interest
- incentives: ppl respond to incentives
- market prices and quantities: determined in open markets( sellers compete to sell their products to would be buyers)
- institutions: all above activities governed by set of institutions created by government
market Institutions
- individualist institutions of property and decision making
- ppl must be clear on what belongs to whom before making exchanges ( Property rights) - social institutions of trust
- trust must exist btwn buyers and sellers
- established thru: cultural norms, direct 1-1 relationships, contract establishment - infrastructure for smooth flow of goods
- physical infrastructure of transportation and storage - money as medium of exchange
-facilitation of goods and services flow = generally accepted means of payment
how are private property and contractual obligations defined
- by legislature and enforced by courts
Demand function
Quaintly demanded for different levels of prices given the values of their variables
Look at circular flow diagram
What’s quantity demanded
Amount consumers are willing to buy
Law of demand
-As price increases, quantity demand decreases
-as price decreases quantity demand increases
Movement along the demand curve
- different form shifting
-movement= change in quantity demanded - movement occurs when there’s a change in price
Variables that influence(shift) DEMAND
- Price of substitutes: 2+ goods that satisfy the same needs or wants
-if the price of substitute increases the demand for the other substitute shifts out which increases demand - Price of complements: 2 goods consumed or used together
- if price of complement increases the demand curve for commmodity shifts in which decreases demand - Number of buyers: increase buyers increases demand
- Preferences: changes in preference changes demand (shift in or out)
- Expectations: consumer expectations of a good in the future shifts demand in or out
- Income
-normal good: as income increases the demand for normal good increases ( income positively linked to demand)
-inferior good: income increases demand for inferior good decreases
Supply function
Quantity of a good supplied at different prices givenhe technology, price of inputs and other factors
Quantity supplied
Amount producers are willing to sell during given time period
Law of supply
- when price commodity increase
,quantity supplied increases
-when price of commodity decreases, quantity supplied decreases
-movement and supply curve
Movement is change in quantity supplied
Caused by change in price
Variables that influence (shift) supply curve
- Number of firms: more firms = more supply
- Costs of inputs
Costs increase and supply curve shift in decreases supply - Technology nd productivity: better or more tenchnology increases supply
4.taxes: taxes increase decreases supply - Expectations: producers expectation on future economic conditions impact t current supply
- Price of substitutes in production: goods that are produced using same key inputs / outputs
- if price for sub increases supply of good decreases - Prices of complements in production: products which by the nature of production are produced together ex. Beef and leather
-if price for complement for good increase then supply of good - Changes in weather
Equilibrium
- achieved when supply curve interesents with supply curve
- mends quantity demanded = quantity supplied
- no surpluses or shortage
How does shortage happen
- when quantity demanded is greater quantity supplied
How do es surplus happen
When quantity supplied is greater than quantity demanded
Consumers surplus
Amount consumer is willing to pay minus amount consumer has to pay
- benefits consumers
- shown thru demand curve
Producers surplus
What producer is paid minus what producer is willing to accept
- benefits producers
-shown thru supp,y curve
What values are on a table of values
Discrete values
What values are shown on an equation
Continuous variables
Elasticity of demand
Measure the responsiveness of quantity demanded to a change in price
Elasticity demand formula
%change in Q demanded / % change in prices
incentive
factors that influence how ppl make decisions
invisible handshake
social and historical forces that can prevent market from operating
invisible foot
political and legal forces that guide and limit market activities
invisible elbow
when markets fail
factors of production
- land
- labor
- capital
- entrepreneurial ability
market
an institution that enables buyers and sellers to interact and transact with one another
what happens if elasticity of demand is negative
demand is elastic
elasticty of demand is positive
demand is unelastic
elasticity of demand is 1
demand is unit elastic
what influences elasticity of demand
- # of substitutes: more choices of product = more you can respond
- ex. if good A has more subs than good b then good A is elastic
- time influences elasticity of demand
- more time to respond = more demand elasticity
willingness to pay
maximum amnt one is willing and able to pay for a good or service
- highest value one believers good or service is worth
what causes change in quantitiy demanded
change in price of product = movement along curve
supply
maximum amnt of product that producers are willing and able to offer for sale at varius prices and all other relevant factors held constant
demand curve slope
curve downwards right
supply curve slope
curve upwards right
how do you determine surplus on a graph
anything above the equilibrium point
-minus the two quanitities = surplus
how do you determine shortage on a graph
-points below the equilibirum point
- minus the two quanitites = shortage
when is equilibrium price indeterminate
- when both curves shift in the same direction
when is equilibrium quantity indeterminate
when both curves shift in opposite drxn
price ceiling
government establishing the max legal price that can becharged for product or service
price floor
governement establish minimum legal price that product cannot go under
-ex. labour - minimum wage laws
how does a price ceiling become binding/ non binding
when it goes below equilibrium price / above equilibrium price
how does a price floor become binding / non binding
when it goes above equilibrium price / bellow equilibrium price
what happens when price ceiling becomes binding
shortage
what happens when price floor becomes non binding
surplus
market failure
-when freely funtioning markets fail to provide optimal amount of goods and services
causes of market failure
- lack of competition
- information mismatch
3/existence of externalities - existence of public goods
5.
quota
when governments sets maximum quantity for good or service
how does quota change in response to changing price
- for foreign products: when price increases, quota decreases
-for selfproducts: when price increases quota increases
