Test 1 Flashcards
economics (def) micro vs macro
economics - analyzes how society employs its limited resources among alternative competing uses
micro - behavior of economic agents and interactions within markets (how agents decide consumption, output and pricing)
macro - economy-wide phenomena, growth, inflation, and employment (determination and fluctuation of economic activities)
economic resources and factor payments
labor [L]/wages [w] - hired human effort directed towards production and distribution of goods and services (quality depends on human capital)
entrepreneurship [E]/profits [pi] - combine all other factors of production to produce something of value
capital [k]/interest [i] - (physical) produced means of further production
land [T]/rent[R] - natural resources used in the production process
markets (competitive vs non competitive)
competitive - large number of economic agents (buyers and sellers), actions of single agents cannot influence market outcomes
non-competitive - small number of economic agents can impact market outcomes
factor markets vs product markets
factor markets - where firms that employ economic resources to produce goods and services pay for these resources
product markets - where consumers buy from producers
scarcity and fundamental economic problem
scarcity - limited availability, need to allocate
fundamental economic problem - scarce resources vs unlimited wants for goods and services
opportunity cost
choosing one option relative to the next best economic option - how economists measure the trade-off when one option is chosen over the other
law of demand (def and equation)
intentions of all customers about their willingness to purchase a given good or service, and what influences that willingness
Dx: Qdx=f(Px, other influences)
as Qdx goes down, price goes up - as Qdx goes up, price goes down
demand determinants
M = consumer income (a measure of purchasing power) - impacts willingness to buy a good (normal - M goes up, demand goes up; inverse - M goes up, consumption goes down)
Py = price related to other goods (substitutes - Py goes up, Dx goes up; complementary - Py goes down, Dx goes up)
N = number of potential customers (direct relationship)
T = tastes and preferences
E = expectations (consumer expectations about current and future market information
Demand functions
mathematical way to represent the nature of consumer demand - can represent the demand for an individual consumer or an entire market
change in demand vs change in quantity demanded
change in demand = shift in demand curve (results from change in M, Py, T, or N)
change in quantity = movement along curve (change in price)
basic linear demand equation
Qdx = a + bPx
quantity demanded of good x = quantity (at $0) + coefficient showing expected movement * price of good x
b is movement in quantity demanded (how far left or right) that results from change in price
expanded linear demand equations
Qdx = a + bPx + cM + dPy …
takes into account the other impacting factors - measure the movement in quantity demanded resulting from a change in each variable (aside from Px because this impacts quantity demanded)
law of supply
intentions of firms/producers in a competitive market
quantity supplied has direct relationship with price (one goes up, the other goes up)
supply determinants
C - cost of inputs (resources, factors of production, inputs)
Tx - production technology and efficiency (link between input, output, and productivity)
Py - price of other related goods or services
Nf - number of firms
basic linear supply equations
Qsx = c + dPx
c = quantity demanded if price is 0
d = slope
change in quantity supplied vs change in supply
change in quantity = (movement along supply function) results from change in market price
change in supply = (shift of supply curve) results from change in C, Tx, Py, Nf
market equilibrium combination
where quantity demanded equals the quantity supplied - occurs at the point where the market demand and supply curves intersect
determining market equilibrium outcome
steps -
use the supply and demand functions (Qdx = a - bP AND Qsx = c + dP)
set the two equations equal to each other to find Pe
insert Pe into either equation to determine Qe
non-equilibrium market outcomes
surplus - excess supply, the market price is greater than the equilibrium price
shortage - excess demand, the market price is below the equilibrium price
prices above the equilibrium price put pressure on the price (upward or downward pressure) which creates an automatic tendency for price to reach equilibrium
comparative statics
predicting movement in the market equilibrium outcome due to changes in supply or demand (or both)
change in demand can be changed by M, Py, N, T, E - increase in demand causes increase in price and quantity (and vis versa)
change in supply can be changed by C, Tx, Py, Nf - supply and price have inverse reactions and supply and demand have related reactions
price elasticity of demand (ep) (def)
measures the proportionate responsiveness of movements in the quantity demanded of good x - steeper demand is more elastic
price elasticity of demand general formula
ep = (%changeQdx)/(%changePx)
price elasticity of demand point formula
ep = |((change Qdx)/(change Px)) * Px/Qdx|
classifications for elasticity values
0 = inelastic
0-1 = relatively inelastic
1 = unitary elastic
1-infinity = relatively elastic
infinity = perfectly elastic
determinants of demand elasticity
number of availability of potential substitutes for good x - more substitutes for good x = more elasticity
necessities vs luxuries - food, housing, commute have lower elasticities - vacations, jewelry, and hobbies have higher elasticities because the costs can be deferred
time period to adjust to a price change - over time, customers are more sensitive (greater elasticity) to price changes
proportion of income spent on good - the greater the proportion, the larger the elasticity is
total revenue (definition and equation)
TR = P * Qdx = P * Q
the dollar value of consumer purchases at a given price, quantity combination
the area under the demand curve
relationship between price elasticity of demand and total revenue
price elasticity provides more information about total revenue because the relationship between price change and price and quantity of demand x are generally inverse
income elasticity of demand and types of goods
the percentage change in quantity demanded resulting from a percentage change in income
em = (%change Qd)/%change M
or em = (change Qd/change M)*(M/Qd)
positive value = normal good, negative value = inferior good
normal goods - greater than 1 = luxury, less than 1 = necessity
cross price elasticity of demand
the percentage change in quantity demanded of good x resulting from a percentage change in the price of good y
exy = %change Qdx/%change Pxy
or exy = (change Qdx/change Py) * (Py/Qdx)
negative = complements, positive = substitutes
competitive market equilibrium and welfare
when the intentions of buyers and sellers coincide with respect to market price and quantity
welfare/efficiency - the total market surplus is maximized
consumer and producer surplus and marshallian surplus
consumer surplus - when consumers are willing to pay a higher price than is required by the current market price - consumers have a willingness to pay
can be determined by CS = WTP - Pmkt OR the total area between the demand curve and market price
producer surplus - net benefits for firms when the supply price is subtracted from the market price
can be determined by PS = Pmkt-supply price OR total area between the market price and the supply curve
marshallian surplus - the combination of CS and PS
invisible hand
competitive markets allocate resources to their highest valued use in society - measured by CS, PS, and MS
excise taxes effect on competitive market equilibrium outcomes (CB, PB, gov tax revenue)
excise tax - taxes paid on the purchases of specific goods and services, either a per unit tax or percentage of price, collected from sellers
consumer burden - measured by the amount that market price raises CB = Pt - Pe
producer burden - based on the decline in per-unit revenue firms receive after paying the tax PB = Pe - Ps
government tax revenue - money collected from the excise tax = t * Qt
