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Global Markets Midterm
Terms in this set (65)
Knight's Wheel of Wealth
The flow of goods and services, and the flow of money move in opposite directions. Between the Firm (the producers) and the Household (consumers). The Household provides savings and labor to factory markets and receipts to the firm. The firm sells goods in the products markets and gives wages to the household.
Factors of production
land, labor, and capital; the three groups of resources that are used to make all goods and services. also now technology.
highest value of the option foregone by a certain choice. Highest preference is subjective.
Austrian economic school of thought
Opportunity cost is subjective.
People make the best choice possible if they have a choice. If all are favorable, pick at random
When economy does better, population growth goes down
the increase in total cost that arises from an extra unit of production
total cost divided by the quantity of output
fixed costs plus variable costs
Movement along the demand curve
A change in price
A shift in the demand curve
A change in something other than price, like substitutes or other factors
Law of demand
consumers buy more of a good when its price decreases and less when its price increases
Law of supply
the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
True or False: According to the law of demand, the relationship between price and quantity demanded is inverse
If the demand for potatoes increases as income decreases, economists would consider
potatoes as an ______ good.
If the demand for eggs decreases as the price of bacon increases, economists would
consider eggs and bacon as____.
True or False: An increase in income will increase the demand for all goods.
False - it will increase the demand for normal goods, but decrease the demand for inferior goods.
True or False: A supply curve shows the minimum price producers are willing to charge.
Law of diminishing marginal utility
As the quantity of a good consumed increases the extra satisfaction gained decreases
a function of points that are not connected
a function that can be graphed with a line or a smooth curve
When the marginal cost is greater than the average cost, the average cost will ___
When the marginal cost is less than the average cost, the average cost will ___
How to solve for average cost
AC=Total Cost/Quantity of Output. Total cost divided by the times that cost has been paid for.
What does it mean to cover your cost
The marginal gain has to be higher than the marginal cost incurred by choice of product consumed
What is the equi-marginal principle?
Individuals allocate the income so each product's marginal utility is equalized according to its price. (Write formula)
What are normal goods?
a good for which demand increases when income increases
What are inferior goods?
goods for which the demand falls when income rises
What are factors that could shift the demand curve?
income, taxes, tariffs, preference, substitutes, population etc.
What is the formula for price elasticity of demand?
% Change in Quantity Demanded
% Change in Price.
What does price elasticity of demand mean?
How much the quantity demanded changes based on the change in price. How responsive buyers are to changes in price.
When is demand elastic?
When the % change in Quantity demanded is greater than % change in price (or coefficient of elasticity is greater than 1)
When is demand inelastic?
When the % change in Quantity demanded is less than % change in price (or coefficient of elasticity is less than 1)
What does a vertical demand curve mean?
Perfectly inelastic, the quantity demanded doesn't change when price does
What does a horizontal demand curve mean?
Perfectly elastic, the price never changes (fixed) while quantity demanded does
What is the price elasticity of supply?
% change in quantity supplied / % change in price
The demand curve is also known as?
The marginal utility curve
What three factors influence elasticity?
1. Time (longer people have to adjust to price changes, the more elastic demand will become.)
2. Availability and closeness of known substitutes. (The more substitutes, the greater the elasticity of demand. Fewer substitutes lead to lower elasticity of demand.)
3. The proportion of one's budget spent on a good. (The smaller the proportion of one's budget spent on a good, the less sensitive consumers will be to price changes. Demand will be less elastic.)
What is the Babbage Principle of Manufacturing?
Double the productivity because of specialization of steps in the process
Why is a monopoly backed by government a problem?
Because there is no competition for others to become monopolies
What is a product market?
when the goods and services that households produce are purchased
What is a factory market?
The input where factors of production are used to make the goods and services
Who is John Stuart Mills?
19th century leading economist, father of the welfare program
Who is Frank Knight?
American economist, created Knight's Wheel of Wealth
Are demand curves completely inelastic?
No, most purchases will respond at least a little to changes in the cost.
How to solve for the Marginal Cost?
Change in Total Cost/Change in Quantity. The cost of the last unit produced or variable cost of producing one more unit of a product.
When is the elasticity of demand constant?
Never. Even when slope is constant, the price elasticity keep changes.
What is the cross price elasticity?
How consumption changes in response to changes in price. Substitutes and complements
Are costs objective?
No, all costs are costs to someone who places value on foregone opportunities.
True or false: All costs relevant to decisions to supply are in the future?
What is marginal opportunity cost?
Any cost relevant to decision making
What is equilibrium in the market?
When the supply and demand curve intersects, so the price producer and consumer are both satisfied.
What is shortage?
When the quantity demanded is higher than the quantity supplied.
What is surplus?
When the quantity supplied is higher than the quantity demanded. Above the equilibrium.
What is the supply curve also known as?
The marginal cost curve
What factors shift the overall supply curve?
Anything that changes the marginal cost of production, e.g. technological changes, resource deterioration, change in relative price of alternative product, change in expected price of producer output, change in overall number of suppliers
How is revenue calculated?
Profit - cost
What is the cross-elasticity of demand of two unrelated products?
What is the cross-elasticity of demand of complements?
What is the cross-elasticity of demand of substitutes?
What is the effect of a positive externality?
Exists when an individual or firm making a decision does not receive the full benefit of the decision. The benefit to the individual or firm is less than the benefit to society
What is a price floor?
The lowest legal price a commodity can be sold at
Where does the price floor have to be set to be effective?
Above the equilibrium price
What is a price ceiling?
An imposed price limit that is set at a price that is lower than the equilibrium price and is the highest amount that can be charged for a good.
Net benefit sacrificed by society when such a per unit tax is impose
Recommended textbook explanations
Principles of Economics
N. Gregory Mankiw
Essentials of Economics
N. Gregory Mankiw
N. Gregory Mankiw
Paul Krugman, Robin Wells
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