UNIT 1

Question 1

What is a market

Answer 1

Where buyers and sellers agree to “conditions of exchange” and voluntary transaction occurs

Question 2

What is economics?

Answer 2

How or which good or services are produced or allocated. How limited resources are distributed among alternative competing uses.

Question 3

What is the core problem according to neoclassical economics?

Answer 3

The core problem is the organization and allocation of available resources for the production of goods and services.

Question 4

What is rational behavior?

Answer 4

The assumption in neoclassical economics that economic agents (consumers and firms) constantly evaluate the benefits and costs of their actions.
EX. FIRMS MAXIMIZE PI OR PROFIT
CONSUMERS MAXIMIZE UTILITY. Assume some wellbeing or benefit in the product.

Question 5

What are the three properties of economic goods or services?

Answer 5

1. SCARCITY: limited availability compared to the consumer wants
2. PROVIDE UTILITY: somehow improve the wellbeing of the consumer enough for them to sacrifice funds for good/service.
3. TRANSFERABLE: the benefit of the good are transferred to the consumer as the cost is transferred to the servicer.

Question 6

What are the four basic factors of economic production?

Answer 6

LAND (T): natural resources, minerals, land. Payment as rent (R).
LABOR (L): hired human effort used to produce or distribute good or service. Payment as wage (W).
CAPITAL (K): produced method of further production. Physical or machinery. Payment in interest (i). EXAMPLE: borrow funds for physical addition to production creates interest expenditure by the firm. So the input from the firm for the machinery becomes the source of income for the investors.
ENTREPRENEURSHIP (E): increases risk of success or failure. Hire labor or input to produce goods or services. Payment as PI or PROFIT.

Question 7

What is a product market vs. a factor market? How is it shown in the 2-sector circular flow diagram?

Answer 7

A product market includes TANGIBLE economic good and NONTANGIBLE services for benefit. Goods and services from BUSINESS to HOUSEHOLD.

A factor market is where the economy determines the economic use of employment and resources. So as LABOR, ENTREPRENEURSHIP, CAPITAL, and LAND is transferred from household to businesses, similarly WAGES, PROFIT, INTEREST, and RENT are transferred as payment from businesses to households.

Question 8

What is the concept of scarcity?

Answer 8

That in a time restriction frozen image of the current level of resources (so given and fixed) the finite resources and production technology are limited and create finite output.

Question 9

What is the fundamental economic problem?

Answer 9

The combined existence of scarce resources and unlimited consumer wants. Therefore the necessary decisions include trade offs including the types or service being produced.

Question 10

What is opportunity cost?

Answer 10

Attempt to measure the full economic cost of a decision by measuring the next best alternative that was sacrificed.
EX. If Spain produced corn and textiles and decides to only produce corn, the opportunity cost in the lower amount of textiles produces. That which comes at the cost of a different opportunity.

Question 11

What are the differences between a competitive and noncompetitive market?

Answer 11

REQ. FOR COMPETITIVE:
- Large number of buyers and sellers
- So large so that no single individual or small group can influence market outcomes.
EX. no issue if someone stops buying coffee/farming soy beans.
NON-COMPETITIVE:
relaxed on one or both of the previous bases. Therefore, single economic agent could have market influence.

Question 12

What does DEMAND do? Where does the quantity of demand come in?

Answer 12

Demand measures the market intentions of consumers in a competitive market. Dx = amount of goods/service that consumers are willing to purchase (QD pr Quantity of Demand) compared to market price or P. The Quantity of Demand is the only dependent variable on the demand side.

Question 13

What assumption is common in economic models and hypotheses?

Answer 13

CETERIS PARIBUS assumes “all else equal” or held constant from latin.

Question 14

What is the LAW OF DEMAND?

Answer 14

The law of demand assumes and inverse relationship between the quantity of demand and the price. For example, as the price for a product increases, the quantity demanded by consumers will decrease. INVERSE RELATIONSHIP.

Question 15

What is the demand function? What are three ways to express it?

Answer 15

Mathematical way to express nature of consumer demand.
1. LINEAR DEMAND EQUATION:
QDx = a - b (Px)
2. DEMAND CURVE: linear graph with price on the y axis and demand on the x axis.
3. DEMAND SCHEDULE: table with the values showing an inverse relationship.
(see notes for visuals)

Question 16

What is Consumer Income?

Answer 16

Consumer Income (M) is the quantitative gage of disposable income or purchasing power.
2 ways fluctuations in income change rates of purchases of good x:
POSITIVE/DIRECT RELATIONSHIP: Increase in M = increase in quantity of demand of good x or QDx –> NORMAL GOOD

NEGATIVE/INDIRECT RELATIONSHIP: Increase in M = decrease in quantity of demand of good x or QDx –> INFERIOR GOOD. EX. The richer someone is, the less likely they are to use public transit, making it an inferior good.

Question 17

What is the influence of the price of a related good?

Answer 17

The price of a related good or Py exist as SUBSTITUTES: where the increase in price of Py will lead to a higher demand in product Px. Example if the price for pepsi increases, the demand for cola will increase as people would rather buy that. DIRECT RELATIONSHIP

OR COMPLEMENTS: where the increase price of a complementary product reduces the price of the demand for product x. For example, if the price of milk increases, the demand for cereal will decrease.
INDIRECT RELATIONSHIP

Question 18

What is the influence of the number of consumers on the market?

Answer 18

There is a direct relation between quantity demanded and number of consumers. As the amount of consumers increases, the demand for a product increases as well.

Question 19

What are the two qualitative variables in demand side of the market and their influences?

Answer 19

The first qualitative variable is taste and preferences (T/P) which means the increase in demand if good x is trending or suggested by influencers.
The second is consumer expectations (Ex) of the current or future market conditions. For example waiting for goodx to go on sale or be out of season for the price to reduce.

Question 20

What are the possible variables on the demand side?

Answer 20

Px (price of good x), Py (price of good y), M (consumer income), Nc (number of consumers), T/P (tastes and preferences), Ex (consumer expectations of the market)

Question 21

How do changes in price and income influence the demand curve?

Answer 21

Change in price creates a movement ALONG the given quantity demand curve.
Change in income creates a new demand curve as price stays the same and demand of the good changes. DIRECT RELATION OUTWARD IF INCREASE.

Question 22

What is a change in demand and how does it change the curve?

Answer 22

Change in demand is general shift to a new demand curve. An increase in demand is an OUTWARD shift. A decrease in demand is an INWARD shift.

Question 23

What is the supply side of the competitive market?

Answer 23

determines the relationship between market price and the amount firms or producers are willing to make available for SALE.

Question 24

What is the law of supply?

Answer 24

Law of supply assumes that in a competitive market, there will be a direct positive relationship between market PRICE and AMOUNT of product sellers are willing to produce for sale (QSx). Considering firms are REACTING to the given market price.

↑ 𝑷𝑿 ⟹ ↑ 𝑸𝑿𝑺 𝒂𝒏𝒅 ↓ 𝑷𝑿 ⟹ ↓ 𝑸𝑿𝑺

Question 25

What is the supply price on the supply curve?

Answer 25

The supply price is the lowest price that firms would produce a certain quantity supplied. No end in the supply curve as it holds its intercept at alpha and the curve incline at beta. SO increase in price creates an increase in the amount of product a company will supply.

Question 26

What are the influences of variables on the supply side?

Answer 26

Nc: NUMBER OF CUSTOMERS A higher amount of customers creates the increase in supply an outward movement in the supply curve TECH: INPUT PRODUCTIVITY OR EFFICIENCY OF PRODUCTION PROCESS Lower technology efficiency (ex. lower grape crop harvest) creates a lower ability to produce supply (lower wine production). Positive bumper crop would create positive shift. C: PRODUCTION COST Higher production cost lowers firms' willingness to make product available. Inward shift on supply curve.

Question 26

What is change in quantity supplied vs. change in supply?

Answer 26

Change in quantity supplied is a result of a change in MARKET PRICE ONLY and a shift along the given supply curve. A change in supply is a new supply curve based on the shift in a different variable and an overall change in firms willingness to produce good separate from the market price.

Question 26

What is competitive market equilibrium? How can you see it on a graph?

Answer 26

The point at which intentions of buyers and sellers coincide with market price and quantity. MARKET CLEARS at equilibrium and amount of goodx supplied is amount demanded.

Question 27

What is market equilibrium combination? What is the opposite?

Answer 27

This point where the demand curve and the supply curve intersect is market equilibrium combination and any other point is non-equilibrium outcome.

Question 28

What are the theories behind stable equilibrium?

Answer 28

The thought that the market will return to equilibrium through LEON WALRAS auctioneer concept or ADAM SMITH invisible hang concept (increased price in product reduces the competition among consumers as less are able to purchase).

Question 29

How do you find market equilibrium?

Answer 29

Set the demand equation against supply equation and solve.

Question 30

What is a shortage?

Answer 30

When P1 < Pe so QDx > QSx When price is lower than Pe so demand is higher than supply creating less supply than consumers want.

Question 31

What is a surplus?

Answer 31

P2> Pe so QDx

Question 32

What are comparative statics?

Answer 32

as the equilibrium won't change unless there is a large shift, the static is a shift in a variable other than price which causes a change in demand and supply

Question 33

What is an example of comparative static on the demand curve?

Answer 33

As consumer tastes or preferences increase (T/P), consumer income increases on normal good or decreases on inferior good (M), substitute good price increases or complement good price decreases (Py), or as number of consumers increases (Nc), the demand increases. This creates a rightward shift in the demand function while the supply curve remains the same. CONSUMERS ARE MORE WILLING TO PURCHASE A GOOD. This shift takes place to find a new equilibrium. Possibilities also for leftward shift in demand curve (opposite influence of one of the variables).

Question 34

What is an example of comparative static on the supply curve?

Answer 34

Possible for supply curve to have outward shift with increased tech (TECH), higher firms creating production (Nf), and decreased production cost (C). Inverse in these influences will create leftward shift in market supply. PRODUCERS ARE LESS WILLING TO PRODUCE THE SAME QUANTITY OF GOOD. Demand curve remains the same. A decrease in market supply, ceteris paribus, results in a higher equilibrium price and lower equilibrium quantity. ↓ 𝑺 ;𝑫 ̅ ⟹ ↑𝑷𝒆,↓𝑸𝒆

Question 35

If demand and supply shift in similar directions, what happens to price and quantity? Which one is certain?

Answer 35

The quantity will be certain (if supply and demand increase, quantity will increase) however the price is case dependent.

Question 36

If demand and supply shift in opposite directions, what happens to price and quantity? Which one is certain?

Answer 36

The price will be certain (if supply increases price goes down, if demand decreases price goes down) however the quantity will be case dependent.

Question 37

What is "a priori" and what does it have to do with equilibrium?

Answer 37

"A priori" states that it's not possible to predict the change of equilibrium before the changes occur. The effect on price depends on the magnitudes of the shifts in supply and demand.

Question 38

What is the price elasticity of demand?

Answer 38

primary tool economists use to determine the sensitivity of quantity demanded to movements in the determinants of demand --> SENSITIVITY or PROPORTIONATE response

Question 39

what is price elasticity of demand?

Answer 39

calculated in price elasticity coefficient, this value measures the proportionate responses in the quantity demanded for good x (QDx) based on the change in price of good x, holding all other determinants constant. eP = %change in QDx/ %change in Px

Question 40

what are the values related to price elasticity?

Answer 40

ep = 0 = perfectly inelastic ep < 1 = relatively inelastic ep = 1 = unitary elastic ep > 1 = relatively elastic ep ~ infinity = perfectly elastic

Question 41

What can you assume of elasticity if the demand curve is very steep?

Answer 41

A steep demand curve will be considered relatively less elastic.

Question 42

What are the three ways to measure elasticity?

Answer 42

1. General elasticity formula (ep = %change QDx/ %change Px) 2. Arc / midpoint formula 3. Point approach

Question 43

What is the process in the arc/midpoint formula?

Answer 43

Converting average price and average quantity to percentage figures. Necessary because 10 --> 14 is a 40% increase but 14 --> 10 is not a 40% decrease. example given in notebook

Question 44

What is the point approach?

Answer 44

Considered most precise approach to determining ep and most used in empirical demand studies.

Question 45

What is the relation between part of the demand curve and ep?

Answer 45

Although demand curve is linear, ep differs along demand curve. Higher on the demand curve will create higher elasticity, the middle of the demand curve is unitary elasticity, and the bottom is relatively inelastic.

Question 46

What are the four influences on price elasticity of demand?

Answer 46

Substitutes for good x: !! higher number of substitutes = higher eP lower number of substitutes = lower eP !! necessities (generally lower elasticity) vs. luxury goods (higher demand elasticities) !! time period to adjust to a price change elasticity of demand long term: customers more sensitive to price changes and higher elasticity short term: less elasticity !! proportion of income spent on good: larger proportion = larger elasticity

Question 47

What is total revenue?

Answer 47

The total revenue from the sale of a good or service equals the price of the good multiplied by the quantity demanded or sold. Graphically shown in the space under the demand curve. If relatively inelastic, price moves in the same direction as TR. If unitary elastic, no TR change. If relatively elastic, price and TR in opposite directions.

Question 48

what is income elasticity for demand

Answer 48

measures the proportionate (percentage change) in quantity demanded for a good based on shift in income. NOT ABSOLUTE VALUE as if eM<0, good is INFERIOR, if eM>0, good is NORMAL. IF NORMAL eM<1 =necessity, if eM>1 = luxury

Question 49

what is cross price elasticity for demand

Answer 49

the proportionate percentage change in quantity demanded of good x based on shift in price of a related good y. NOT WITH ABSOLUTE VALUE as if value is + good are substitutes, if value is -, good are complement

Question 50

understand expanded linear demand and calculated point elasticity

Answer 50

𝑸𝑿𝑫 = 𝒂 −𝒃𝑷𝑿 ±𝒄𝑴±𝒅𝑷𝒀 so point formula elasticity is coefficient times value/quantity demanded

Question 51

what is elasticity of supply

Answer 51

the responsiveness of market quantity supplied to change in price of a good. similar elasticity inferences as elasticity of demand.

Question 52

what are market influences on elasticity of supply?

Answer 52

TIME PERIOD: for market producers to react to market price changes (short run supply less elastic than long run) PRODUCTION CAPACITY AND INPUT COSTS: forms with excess production have higher elasticity and ability to shift output

Question 53

what is consumer surplus and the two ways to determine it?

Answer 53

consumers with a higher "willingness to pay" than the demand price. if market price is below WTP, consumers have a net positive benefit (ready to pay more for a good than necessary) CS = WTP - Pmkt OR TOTAL AREA ON GRAPH in triangle above market price and below demand curve (1/2 x b x h)

Question 54

what are net benefits to consumers

Answer 54

measure of utility, wellbeing, and welfare. every market should result in some customer surplus. benefit measured in $.

Question 55

what is producer surplus and the two ways to measure it (include def of supply price)

Answer 55

PS measures net benefit for firms when supply price is subtracted from market price. SUPPLY PRICE: lowest value firms can receive to produce given quantity supplied and cover production costs TWO WAYS TO MEASURE: PS = Pmkt - SP or GRAPHICALLY area of triangle below market price and above supply curve

Question 56

what is the maximum marshallian welfare in a competitive market equilibrium

Answer 56

Adam Smith's invisible hand concept assumes market will reallocate resources to land on new equilibrium. This creates EFFICIENT MARKET ALLOCATION which is MS = CS + PS

Question 57

what is a market failure

Answer 57

a market failure is an inefficient outcome as a result of a reduced combined CS and PS. Fewer market transactions create a DEAD WEIGHT LOSS. so lower MS because deviation from competitive equilibrium --> price ceilings or price floors.

Question 58

what are externalities

Answer 58

cost or benefit that arises from a market transaction that affects someone other than consumer or producer.(negative = social cost, positive = social benefit) "spill over" and affect non market participants.

Question 59

example of negative externality

Answer 59

societal welfare lowered if incorporate negative externality. spillover costs of pollution (noise, air quality, enviro degredation) not included in supply curve SO markets will OVERALLOCATE resources to the good and produce more than social optimal (because spillover costs not included in production costs)

Question 60

example of positive externality

Answer 60

education creates private benefits however also social benefits of productive workforce and economic benefit not included in demand curve. therefore benefits not included and markets UNDERALLOCATE resources to the good and produce less than socially optimal.

Question 61

what is excise tax

Answer 61

the tax paid on the purchase of specific goods or services

Question 62

what are the assumptions and definitions involved with excise tax

Answer 62

assume that taxes are collected from the least amount of agents --> sellers. GIVEN DEFINTIONS: t = excise tax itself in $ S, D = supply and demand function without tax St = supply function after tax Pt, Qt = new equilibrium quantity and price after tax imposed

Question 63

what do excise tax and dead weight loss have to do with eachother

Answer 63

inclusion of tax will increase the price and therefore decrease the market interactions as customers will probably purchase less. therefore lost economy and marshallian surplus leads to dead weight loss

Question 64

what is tax incidence or burden

Answer 64

tax incidence measures the market impact of excise tax on buyers and sellers and competitive market equilibrium...increased tax is increased production cost so higher supply curve, therefore lower quantity demanded.

Question 65

what is consumer burden

Answer 65

amount market prices rise due to excise tax CB = Pt - Pe --> ONLY WAY quantity demanded doesn't change is if the elasticity is 0

Question 66

what is producer burden

Answer 66

the decline in per-unit revenue that firms receive after paying tax TO NOTE: t = PB + CB

Question 67

what is governmental tax revenue from excise tax

Answer 67

t x Qt tax times quantity demanded

Question 68

what is the relation between tax incidence and elasticity of demand

Answer 68

the more INELASTIC the demand the the larger the CONSUMER BURDEN of the tax and greater expected government revenue