Unit 1 - Supply, Demand, and PPC Flashcards
Scarcity
Limited resources
Opportunity cost
True cost of something, what you are giving up to get it
What are the factors of production?
- Land - all natural resources
- Labor - effort of workers
- Capital - tools, equipment, buildings
- Entrepreneurship - organizing things that cause production
Efficiency
Achieves growth and wants
Production Possibilities Curve (PPC or PPF)
Shows true cost of production (graphical representation of opportunity cost)
1. On curve - efficient
2. Below curve - possible but inefficient
3. Above curve - impossible/unattainable
How do you find opportunity cost in a table?
Find what you are losing from unit to unit
ex: opp. cost of producing the 4th unit is what you are losing going from point 3 to 4
Increasing opp. cost
Bowed outward graph
Constant opp. cost
Straight line graph
Specialization & Trade
leads to exchange which leads to increased standard of living
Gains from trade
You get more
As long as both parties have diff. opp. cost, everyone benefits
Output problems
Other goes over
Comparative advantage
Whoever has the least opp. cost
(based on opp. cost)
Absolute advantage
Makes more overall with amount of given resources
Terms of trade
Both parties will benefit if the terms of trade are in between the opp. cost
Competitive market
Many buyers and sellers
Ex: Iowa and corn, Kansas and wheat
Law of Demand
Price goes up - Quantity demanded goes down
Price goes down - Quantity demanded goes up
(inverse relationship)
Shifters of the Demand Curve
TRIBE + G
1. Tastes
2. Price of related goods
3. Income
4. Number of buyers
5. Expectations
6. Government policy
Substitutes - demand
If the price of good 1 increases, the demand of good 2 increases
Compliments - demand
If the price of good 1 increases, the demand of good 2 decreases
Substitutes - supply
If the price of good 1 increases, the supply of good 2 decreases
Compliments - supply
If the price of good 1 increases, the supply of good 2 increases
Normal good
If income increases, the quantity demanded increases
Inferior good
If income increases, the quantity demanded decreases
Law of Supply
Price goes up - Quantity supplied goes up
Price goes down - Quantity supplied goes down
Shifters of the Supply Curve
I-RENT-G
1. Inputs
2. Price of related goods
3. Expectations
4. Number of producers
5. Technology
6. Government policy
Price Ceiling
Sets the max price (limit)
Horizontal line under equilibrium
Price Floor
Sets minimum price
Horizontal line over equilibrium
Quota rent
Tax - what consumers pay minus what producers pay
