ECON 202 Quiz #1
|Trade-offs||To get something one usually has to give something up|
|Opportunity Cost|| Whatever must be given up to obtain some item.|
Additional monetary expenditures next best forgone opportunity
|Thinking on the margin|| People are rational/logical|
*More is preferred to less
* Firms want to maximize profits
* Individuals want to maximize utility or happiness
* Marginal changes are small incremental changes on the edge (margin) of what you are doing.
Marginal Cost (MC) vs. Marginal Benefit (MB)
* If MB>MC do it
|People Respond to Incentives|| Incentive=something that induces a person to act (what drives people)|
* If one wants to change an outcome, alter the current incentive
|Trade Can Make Everyone Better Off|| *Allows specialization in what countries do best|
*Greater variety of goods/services at lower cost.
|Market Economy||allocates resources through the decentralized decisions of many households and firms as they interact in markets.|
|Price system|| *The interaction of many buyers and sellers determines prices. (set by the market) |
*Each price reflects the good's value to buyers and the cost of producing the good.
*Prices guide self-interested households and firms to make decisions that, in many cases, maximize society's economic well-being. (people that value the good the most consume it and it is produced by the lowest cost firms)
|Market failure||market left on its own fails to allocate resources efficiency|
|Externality||the impact of one person's actions on the well being of a bystander|
|Market power||a single economic actor (or small group) has a substantial influence on market prices, i.e. a monopoly|
|Equality||resources are spread evenly through society|
|Efficiency||society is getting maximum benefit from scarce resources|
|2 roles of an economist|| 1) Scientist|
2) Policy maker
|Circular Flow Diagram|| - Basic economy|
- Dollars circulate back and forth between firms and households.
- Both "actors" interact in the market for goods and services, where the firms sell products to households and in the market for factors of production where households sell land, labor, and capital to the firms
|Micro||the study of how households and firms make decisions and how they interact in markets|
|Macro||the study of economy-wide phenomena, including inflation, unemployment, and economic growth|
|Positive statements||claims that attempt to describe the world as it is. A statement of what is, objective analysis.|
|Normative statements||claims that attempt to prescribe how the world should be. A statement of what ought to be, subjective analysis.|
|Competitive Market||one with many buyers and sellers, each has a negligible effect on price|
|Perfectly Competitive Market|| - All goods exactly the same|
- Buyers & sellers so numerous that no one can affect market price - each is a "price taker"
|Law of Demand||the claim that the quantity demanded of a good falls when the price of the good rises, other things equal|
|Law of Supply||the claim that the quantity supplied of a good rises when the price of the good rises, other things equal|
|# of Buyers||Increase in # of buyers increases quantity demanded at each price, shifts D curve to the right.|
|Income|| - Demand for a normal good is positively related to income. |
-Increase in income causes increase in quantity demanded at each price, shifts D curve to the right.
- (Demand for an inferior good is negatively related to income. An increase in income shifts D curves for inferior goods to the left.)
|Price of Related Goods||Two goods are complements if an increase in the price of one causes a fall in demand for the other|
|Tastes||Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right.|
|Expectations||Expectations affect consumers' buying decisions|
|Input Prices||A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right.|
|Technology|| - Technology determines how much inputs are required to produce a unit of output. |
- A cost-saving technological improvement has the same effect as a fall in input prices, shifts S curve to the right.
|# of Sellers||An increase in the number of sellers increases the quantity supplied at each price,shifts S curve to the right|
|Elasticity||measure of the responsiveness of Qd or Qs to one of its determinants|
|Mid point Method|| (Q2-Q1)/[(Q2+Q1)/2]|
|Elasticity Determinant||- Price elasticity is higher when close substitutes are available|
- Price elasticity is higher for narrowly defined goods than broadly defined ones
- Price elasticity is higher for luxuries than for necessities
- Price elasticity is higher in the long run than the short run
- The more easily sellers can change the quantity they produce, the greater the price elasticity of supply
|Total Revenue||Revenue = P x Q|
|Total Revenue's Relationship to Elasticity||If demand is inelastic, then |
price elast. of demand < 1
% change in Q < % change in P
The fall in revenue from lower Q is smaller than the increase in revenue from higher P, so revenue rises.
If demand is elastic, then
price elast. of demand > 1
% change in Q > % change in P
If price is increased: The fall in revenue from lower Q is greater than the increase in revenue from higher P, so revenue falls.