summary Flashcards
scarcity principle
having more of one thing means having less of another
cost-benefit principle
an individual should take action if and only if extra benefits are at least equal to extra costs
incentive principle
a person is more likely to take action if its benefit rises and less likely if its cost rises
economics
study of how people make choices under scarcity
three decision pitfalls
treat small proportional changes as insignificant
ignore implicit costs
fail to think at the margin
microeconomics
individual choices and group behaviour in individual markets
macroeconomics
study of performance in national economies and policies govs use to improve economic performance
demand curve
downward sloping line, quantity buyers demand at any given price
supply curve
upward sloping, quantity sellers offer at any given price
variations in price
effected by willingness to pay
market equilibrium
when the quantity buyers demand = quantity sellers offer
measures value of last unit sold and cost required to produce it
excess supply
price of a good is above equilibrium value
motivates sellers to reduce prices
excess demand
price of a good is below equilibrium value
motivates buyers offer higher prices
what changes effect demand curve
increase in demand, increase in equilbrium price and quantity
decrease in demand, decrease in equilibrium price and quantity
what changes effect supply curve
increase in supply, decreases in equilibrium price, increase in quantity
decrease in supply, increase in equilibrium price, decrease in qunatity
what changes effect supply curve
increase in supply, decreases in equilibrium price, increase in quantity
decrease in supply, increase in equilibrium price, decrease in quantity
efficiency principle
efficiency is an important social goal, when pie grows larger everyone can have a bigger slice
equilibrium principle
market equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action
price elasticity of demand
measure of how strongly buyers react to change in price
percentage change in quantity demanded for 1% change in price
elastic good
price elasticity > 1
inelastic good
price elasticity < 1
unit elastic
price elasticity = 1
price elasticity of demand/supply at a point formula
(ΔQ/Q) / (ΔP/P)
(P/Q) x (1/slope) for straight line
how does reduced price effect elasticity
increased total spending if good is elastic
reduced if good is inelastic
how does increased price effect elasticity
increased total spending if good is inelastic
reduced if good is elastic
when does total expenditure on a good reach maximum
when price elasticity of demand = 1
accounting profit
difference between revenue and expenses
economic profit
revenue - (explicit + implicit costs)
normal profit
difference between accounting and economic profit
no-cash-on-the-table principle
if someone owns a valuable resource, market price of that resource will typically reflect its economic value
total economy surplus
measure of the amount by which participants in a market benefit by participating in it
sum of total consumer surplus and total producer surplus
rational consumer
allocates income among different goods so marginal utility gained from the last dollar of each good is the same
law of demand
people do less of what they want to do as the cost of doing it rises
principle of increasing opportunity cost
rational producers take advantage of their best opportunities first, moving on to more costly/difficult opportunities after the best ones have been exhausted
law of diminishing returns
when some factors of production are held fixed, the amount of additional variable factors required to produce successive increments in output grows larger
utility maximisation formula
MUa/Pa = MUb/Pb
consumer/producer surplus formula
1/2 x Q x ΔP
average labour productivity
output / employees
aggregate output
C + I + G + NX
point price elasticity formula
ΔQ/ΔP x P/Q
MC < AVC
AVC decreases
MC = AVC
curves intersect, lowest point on graph
net investment calculation
gross investment - capital depreciation
i - (d+n) k
prisoners dilemma
cooperate with a partner, both benefit
betray partner for individual reward
nash equilibrium
player achieves desired outcome by not deviating from initial strategy, numbers are the same in grid
cournot model
rival companies compete on amount of output produced
gini coefficient
measure of how different groups receive differing shares of total household income
eg bottom 5% may share bottom 1% of income
comparative advantage
produce a good at a lower cost than everyone else
negative externality
occur when production/consumption impose external costs
positive externality
if production/consumption benefits a third party not involved in transaction
marginal product capital formula
ΔY / ΔK
gross investment per worker
i = sy = 1
required investment per worker
(d+n)k
constant returns to scale
average inputs and outputs are proportional
marginal prosperity to consume
ΔC / ΔY
income expenditure multiplier
1 / 1-MPC
AS=AD model formula
Y = C+I
liquidity trap
occurs when interest rates fall so low that most people prefer to let cash sit than invest
increase aggregate demand
when the components of aggregate demand–including consumption spending, investment spending, government spending, and spending on net exports –rise
seignorage
profits made by gov issuing currency, difference between face value of coins and production costs
elasticity
an economic concept used to measure the change in the aggregate quantity demanded of a good or service in relation to price movements of that good or service
price elasticity of demand
percentage change in quantity demanded by change in price
profit maximisation monopolies
MR=MC, if MR>MC then more output can be produced for maximisation
marginal revenue formula
change in total revenue / change in output
marginal cost formula
deriative of total cost
perfectly competitive firm price
= MR
monopoly price
> MR
ultimatum bargaining game
experimental economists game, two parties interact anonymously and only once
monopsony
only one buyer in market
tragedy of the commons
individuals with access to public resource act in their own interest
moral hazard
lack incentive to guard against financial risk
production curve increase
capital and labour moves point up curve
technological improvement cause curve to shift
increased money supply
more economic growth
decreased money supply
less economic growth
quantative easing QE
buy bonds to increase prices and decrease long term interest rates
how does inflation affect unemployment
inflation rises, unemployment falls
monetarism
implies nominal income is a function of money supply
balance for official financing
balance of monetary movements in and out country
coase theorem
bargaining between individuals/groups over property rights causes optimal and efficient outcome
marginal product of labour
change in production output / change in input labour
isoquants
curve when plotted shows all combinations of two factors that produce a given output
perfect compliments isoquants
l-shaped
perfect substitutes isoquants
straight line
long run equilbrium
when prices adjusted to production costs
when is labour supply curve backward bending
when higher wage encourages people to work less and have more leisure
monopolist
lone seller of a product
oligopolist
one of a few sellers in a market
monopolistic competitor
large number of firms that sell similar, but slightly different products
market power
power to set the price of a product
perfectly competitive firm elasticity
infinitely elastic curve
what causes market power
control over important inputs, economies of scale, patents and gov licenses and network economies
perfectly discriminating monopolist
charges each buyer their reservation price
law of diminishing returns
when a firms capital and other productive inputs are held fixed in the short run
adding workers beyond a point increases output less and less
positive analysis
objective to determine the consequences of a proposed policy
normative analysis
address whether a particular policy should be adopted
GDP
market value of final goods produced in a country in a given period
cyclical unemployment
caused by changes in economy eg recession/boom
frictional unemployment
short-term, when someone is searching for a job
structural unemployment
mismatch of skills, may be from increased industrial improvements
if price elasticity of demand is 2
buy 2% more of the good in response to a 1% price cut
cross price elasticity of demand
percentage change in quantity demand after a price change for another good
income elasticity of demand
economic measure of how responsive quantity demanded for a good or service is to a change in income
