Test 1 Chapters 1,2,3,6 Flashcards
Economics
the study of man’s unlimited wants in a world of limited sources
When is a good considered scarce?
if everybody can’t get all they want for free
Guideposts to Economic Thinking
- There’s no such thing as a free lunch.
- People choose purposefully- therefore they econmize.
- Information, like everything else, is a scarced good.
- People respond to incentives
- Remember the secondary effects
- Value is subjective.
absolute advantage
you can produce the product faster than the other guy
comparative advantage
you can produce the product cheaper than the other guy
You have the lowest opportunity cost because
you have the comparative advantage
opportunity cost
what you have to give up in order to do something else
the value of your second best alternative
absolute advantage
economics is based on
supple and demand
first law of demand
there is negative or inverse relationship between the price and the quantity demanded
first law of demand- Price goes up, Quantity Demanded
goes down
first law of demand - Prices goes down, Quantity Demanded
goes up
there is not a good that can violate the
first law of demand
the demand curve plots out
every possible price and quantity demanded combination and shows the maximum you are willing to pay to buy at any give quantity
change in the quantity demanded
is due only to a change in the price of the product
change in demand
at any give price you want to buy more or less than before
increase in demand
at any give price you want to buy more than before
decrease in demand
at any give price you want to buy less than you did before
demand determinants
- taste and preferences
- cost of related goods
- income
- number of buyers
- future price
susbtitutes
goods that can be used in place of one another
coke - pepsi
complimentary goods
goods that are used together
milk-cereal
substitues - if the price of coke goes up what happens to Pepsi
its price goes up
substitutes if the price for coke goes down what happens to pepsi
the price goes down
compliments - if the price price of milk goes up what happens to cereal
the demand for cereal goes down
compliments - if the price for Big Mac goes down what happens to French fries
the demand goes up for French fries
income - the less you make the quality of your goods _
go down
income - the more you make the the quality of your goods _
increase (better quality)
future price - if you expect the price to rise in the near future you will _
increase your current demand (buy more)
future price - if you expect the price to fall in the near future you will _
decrease your current demand (buy less until the price lowers) (upcoming sale at hobby lobby, you wait for the sale, so your current demand decrease for hobby lobby)
price of the product will never change the
demand
first law of supply
there is a positive or direct relationship between the price and quantity supply
first law of supply - price goes up, quantity supply goes
up
first law of supply - price goes down, quantity supply goes
down
supply curve
plots out every possible price and quantity supplies combination and shows the minimum price you are willing to accept to supply any given quantity
surplus
will exist whenever at a give price, the quantity supplied is greater than the quantity demanded
what causes a surplus
the price is too high (it is above the market equilibrium price
what cause a shortage
will exist whenever at a given price the quantity demanded is greater than the quantity supplied (the price is too low) (it is below the equilibrium price)
demand goes up, price* goes up, quantity* goes
up
demand goes down, price* goes down, quantity* goes
down
supply goes up, price* goes down, quantity* goes
up
supply goes up, price * goes up, quantity* goes
down
demand goes up
at any given price you buy more
demand goes down
at any given price you want to buy less
supply goes up
at any give price you want to sell more
supply goes down
at any give price you want to sell less
price ceiling
the maximum you can legally charge for the product
for ceiling price to be effective
it has to be set below the market equilibrium price
- it will always cause a shortage
price floor
the minimum price you can legally charge for the product
for price floor to be effective
it has to be set above the market equilibrium price
- it will cause a shortage
second law of supply and demand
over time the supply and/or demand for a product becomes elastic
elasticity
how responsive you are to a change in the price of the product
elastic
you are very responsive to a change in the price of the product
a small change in the price results in
large change in the quantity demanded
inelastic
you are very unresponsive to a change in the price of the product
a large change in the price results in
a small change in the quantity demanded
what does a relatively elastic graph look like
slight slope in demand
elasticity determinants
- number of substitutes
- percentage of income
- necessity vs. luxury
consumer surplus
the difference between the maximum you were willing today for the product and the price you actually paid for it
producer surplus
the difference between the minimum price you were willing to sell the product for the price you actually sold it for
change in the quantity supplied is a change in the
supply
change in the quantity supplied is due only to a change in the
price of the product
at any given price you want to supply more or less than before
Change in supply
supply determinants
taxes and subsidies number of sellers costs of input technology nature
at any given price you want to supply more than before (curve shifts right)
increase in supply
at any given price you want to supply less than before (curve shifts left)
decrease in supply
