3 Key Economic ideas
people are rational, people respond to incentives, people optimize at the margin
3 fundamental economic questions
What will be produced, how will it be produced and who will receive the goods
Limited resources and income?
In a market system, prevents people from getting as many goods and services as they wish
Voluntary Exchange occurs when?
All transactions are an improvement for both parties, every one is well off
A third variable can influence a graph by?
It can shift the slope to show positive or negative relationships
What does the slope of ppf mean?
Increasing marginal opportunity cost, the basic trade off of items to create one thing
PPF bowed shape indicate?
Increasing marginal opportunity, because increasing the production of one thing requires to decrease the production of another
The ability of an individual, a firm, or country to produce a good or service at a lower opportunity cost than competitors
Competitive market equilibrium
Economically efficient level of output is produced, economic surplus is maximized- there is no deadweight loss, the marginal benefit equals the marginal cost of the last unit sold
Additional benefit and additional cost
consumer surplus and producer surplus is said to measure the net benefit from participating markets
5 determinants of price elasticity of demand
Availability of close substitutes, passage of time, luxuriess versus necessities, definition of the market, share of the good in consumers budget
Economic Model predicts consumers will do two things
Follow the rule of equal marginal utility per dollar, total spending on all goods must equal to the amount available to be spent
Law of Demand implies
Holding everything lease constant that price of a product falls, the quantity demanded will increase and vice versa
Price decrease on normal good
Income effect (IE) price falls, income feels higher, QTYD increases Substitution effects (SE), price falls, good relatively cheaper, QTYD increases
Price decrease on inferior good
Income effect (IE), price falls, income feels higher, QTYD decreases Substitution effect (SE) prices falls, good relatively cheaper, QTYD increases
A curve that show the combinations of consumption bundles that give the consumer the same utility