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Econ 201 Test 1

Terms in this set (61)

economics
study of how people & firms make choices to use scarce resources
scarcity
a situation in which unlimited wants exceed the limited resources available to fulfill those wants
4 assumptions of Microeconomics
1. choices create opportunity costs
2. people are rational
3. people respond to incentives
4. the best decisions are made at the margin
opportunity cost
The highest-valued alternative that must be given up to engage in an activity.
use the PPF to model...
-Efficient production possibilities
-opportunity cost
-economic growth
-changes in technology
-comparative advantage & gains from trade
slope of PPF
gives us the opportunity cost of the vertical item
-reciprocal=opportunity cost of horizontal item
straight PPF
constant opportunity cost
concave PPF
increasing opportunity cost
economic growth of PPF
-more resources become available
-resources increase in quality
-there is an overall technology advance

whole PPF shifts out
technological innovation on PPF
increases productivity

lopsided shift in PPF
marginal analysis
Marginal Benefit=Marginal Cost
sunk cost
a cost that has already been paid & cannot be recovered
theory of comparative advantage
the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors

specializing in good for which one has a lower opportunity cost then trading for another good can be win-win for both trading partners
absolute advantage
ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources
comparative advantage
ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors
basis for trade
comparative advantage
better off if you...
specialize in producing good and services for which you have comparative advantage and obtain the other good and services through trade
total utility
the enjoyment or satisfaction people receive from consuming good and services
marginal utility
the added enjoyment or satisfaction people receive from consuming ONE MORE UNIT of the good or service
law of diminishing marginal utility
consumers experience less & less additional satisfaction as they consume more of a good/service during a given period of time
demand
the willingness & ability to buy certain quantities of a good or service at different prices
law of demand
for all normal goods if price goes up, quantity demanded goes down, ceteris paribus
substitution effect
good becomes more/less expensive relative to substitute
income effect
consumer's purchasing power changes
demand curve
negative slope
relationship between quantity and price
decrease in demand
shifts in
increase in demand
shifts out
5 determinants of demand (BRITE)
1. income
2. tastes & preferences
3. expectations of future goods
4. prices of relative goods (substitute & compliments)
5. number of buyers
income increases
demand increases
inferior goods
if consumers get more money, demand decreases
tastes become more popular
demand increases
expectations of future goods goes up
demand increases
price of a substitute good goes up
demand increases
price of compliment goes up
demand decreases
number of buyers increase
demand increases
supply
willingness and ability of firms to produce certain quantities of a good/service at different prices
law of supply
as price goes up, quantity supplied goes up
supply slope
upward sloping
5 determinants of supply (SPITE)
1. price of inputs
2. technology
3. expectation of future prices
4. # of sellers
5. price of substitute good in production
price of an input increase
supply decreases
advance in technology
supply increases
expected prices go up
supply decreases
# of sellers increase
supply increases
price of substitute good in production increases
supply decreases
market
where buyers & sellers come together to trade
equilibrium price
quantity demanded = quantity supplied
when demand increases
price and quantity increase
when demand decreases
price goes down & quantity decreases
when supply decreases
price goes up & quantity decreases
when supply increases
price goes down & quantity increases
market price is too high...
surplus

quantity supplied-quantity demanded
market price is too low...
shortage

quantity demanded-quantity supplied
price controls
an attempt to stop market forces
price ceiling
market price above ceiling

shortage

some consumers win
producers lose
price floor
an attempt to stop prices from falling to equilibrium

equilibrium below floor

surplus

quantity supplied>quantity demanded
economic surplus
economist measure the welfare of all market participants using economic surplus
surplus formula
economic surplus= consumer surplus+producer surplus
producer surplus
the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives

above supply curve & below price
consumer surplus
the difference between the highest price a consumer is willing to pay for a good or service & the price the consumer actually pays

under the demand curve & above the price
how to calculate CS & PS
area of a triangle
deadweight loss
when we lose market transaction due to intervention the we lose CS & PS that went along with it
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