Reading notes

Question 0

Marginal benefit

Answer 0

The extra enjoyment you receive from receiving one more unit of a good

Question 1

Three important economic ideas

Answer 1

1. people are rational
2. people respond to incentives
3. optimal decisions are made at the margin

Question 2

optimal decision

Answer 2

Optimal decision is to continue any activity up to the point were marginal benefit equals marginal cost

Question 3

Centrally planned economics

Answer 3

Government decides how can I make resources are allocated

Question 4

Market economy

Answer 4

Decision of the household and firms interacting in markets Allocates economic resources

market economy answer the question who is receives goods and services with, “who those who are most willing and able to buy them.”

Question 5

Modern mixed economy

Answer 5

Primarily a market economy because most economic decisions result from interaction between buyers and sellers in markets

however the government plays a significant role in allocation of resources

Question 6

Allocative Efficiency

Answer 6

Is achieved when the combination of competition among firms and voluntary exchange between firms and consumers results of her is producing a mix of goods and services that consumers prefer the most

Question 7

Productivity efficiency

Answer 7

Is achieved when competition among firms in markets forces firms to produce goods and services at the lowest cost

Question 8

Smith’s ideas

Answer 8

Individuals promote their own interests but in doing so they promote the public interest

“Greed is good”

Invisible hand = market competition

Question 9

Change in revenue ^R/R

Answer 9

Relative change in revenue is approximately qual to percent change in quantity plus percent change in price

^R/R = ^Q/Q + ^P/P

Question 10

Invisible hand properties

Answer 10

The pursuit of profits in a competitive market leads to:

1. Production decided across firms in such a way that total costs of production are minimized
2. Resources move across firms in such a way that the total value of production is maximized

Question 11

Competitive industries

Answer 11

An industry is competitive when forms don’t have much influence over the price of their products:

Conditions:’

• products being sold are similar across sellers
• There are many buyers and sellers each relative to the total market
• There are many potential sellers

Question 12

Budget constraint

Answer 12

Identifies which combinations of goods and services the so summer can afford with a limited budget at given prices

Question 13

Budget line

Answer 13

The graphical representation of the budget constraint, showing the maximum affordable quantity of one good for given amounts of another good.

Question 14

Relative price

Answer 14

The price of one good relative to another

Px price of good on vertical axis and Py price of good on horizontal axis, then

Px/Py is :
=relative price of good x
= opportunity cost of 1 more unit of x
=absolute value or the slope of the budget line

Question 15

Changes in budget line

Answer 15

Increase in income will shift budget line upwards and rightward

Decrease in income will shift line down and to the left

Changes are parallel do not affect slope

When price of good changes budget line rotates, both slope and one of its intercepts will change

Question 16

Normal good

Answer 16

Increase I’m income increases demand for good

Question 17

Inferior good

Answer 17

Increase in income decreases demand for good

Question 18

Law of demand in terms of normal and inferior goods

Answer 18

For a normal good the income effect of an increase in price is negative ( because an increase in price is like a decrease in income)

For all goods the substitution effect of an increase in price is negative

For a normal good and increase in price decrease demand

Question 19

Law of supply

Answer 19

If the price of a good or service increase sellers are willing to supply more of it

Question 20

Do narrow or widely defined markets have more elastic demand?

Answer 20

Narrowly defined markets tend to have much more elastic demand than broadly defined markets because it is easier to find substitutes for narrowly defined goods

Ex. Broad category like food in elastic no substitutes
Narrow category like ice creams can be substituted with any other dessert