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EC110 Test 1
Terms in this set (66)
When does trade happen?
when both people believe they are going to be better off (mutually beneficial)
What is a PPF?
Production Possibility Frontier- a visual representation of potential choices available in the allocation of inputs between two activities or goods
The production possibilities frontier illustrates the
maximum combinations of goods and services that can be produced
A production possibilities frontier is a straight line when?
rate of trade is constant, as you give up one from one side, you gain one on the other
A production possibilities frontier is bowed outward when
rate of tradeoff depends on amount being produced
What is opportunity cost?
-whatever must be given up to obtain some item
-it is your next best alternative
-it is not everything that you could possibly be doing at a given point in time but it the one thing (because you can't be doing everything at once (your sacrifice)
What is absolute advantage?
-the ability to produce a good using fewer inputs that another producer
-doesn't matter in life and is input based
-the classic "better than"
What is comparative advantage?
-the ability to produce a good at a lower opportunity cost than another producer
-opportunity cost based
-want to base trades off of this
What is the demand curve?
the willingness to pay for the buyer (what you think it's worth)
What is supply curve?
the producers cost to make something
What is quantity demanded?
-amount of the good or service that buyers are willing and ABLE to purchase
-it means two things: you WANT it and you can AFFORD it
When is quantity demand zero?
when a buyer wants something but no one can afford it
What is the law of demand?
-the claim that other things being equal the quantity demanded of most goods falls, when the price of that good rises
-when the price rises, quantity demanded falls
-inverse relationship between price and quantity demanded
-demand curve slopes down
What is the exception for when demand curves do not slope down?
griffin goods- typically the lowest quality food stuff that can keep people alive (if the price of Ramen goes up people will not eat out more, they will continue to buy the Ramen and eat out fewer times a week)
If you move along an existing demand curve, demand _______ change. The only thing that changed is quantity demanded
What is Quantity supplied?
the amount of a good that sellers are willing and able to sell
What is law of supply?
as price increases, quantity supplied increases
What are the 5 factors?
income, prices of related goods, tastes(showing style), expectations(about the future), number of buyers
What do normal goods entail?
increase in income leads to increase in demand (steak)
What do inferior goods entail?
increase in income leads to decrease in demand (ramen)
What is a compliment?
-when a fall in the price of one good increases the demand for the other good
-if there is a sale on asparagus and the price of steak remains the same, people are still going to buy the steak to compliment the asparagus
What is a substitute?
-when a fall in the price of one good reduces the demand for the other good
If we move along an existing supply curve, supply ________ change
did not; instead quantity supplied is changing
What is equilibrium?
a situation in which the market price has reached a level at which quantity supplied equals quantity demanded
What is price equilibrium?
the price that balances quantity supplied and quantity demanded
What is quantity equilibrium?
the quantity supplied and the quantity demanded at the equilibrium price
A shortage puts _______ pressure on price. (bringing it closer to equilibrium)
Surplus puts ______ pressure on price because people are having to sell things for cheaper.
What is the equation for Quantity Demanded?******
What is the equation for Quantity Supplied?******
How do you find price in equilibrium?
-set quantity demanded equal to quantity supplied
-solve for p
How do you find Quantity equilibrium?
plug price equilibrium into one of the equations and solve
How do you find surplus?
plug in a number higher than the price at equilibrium
What happens if demand falls and supply rises?
when both curves move it's ALWAYS going to be price will go up or down or quantity will go up or down (the effect depends on which one changed the most)
What happens if demand rises and supply falls?
more people will want to buy something and less people will want to sell it so it has to get more expensive
What happens if income rises in a market for inferior goods and input prices fall?
-the affect on price is certain, it certainly goes down
-the affect on quantity is ambiguous, don't know what will happen until you get more info
If income rises, demand ______
If input prices fall, supply ______
-with both of these, more people want to sell something and less people want to buy it, so it should get cheaper
When does supply change?
when the price of something goes up or down
You have $10 to produce 100 hydroflasks. If the price of steel (an ingredient in making hydroflasks) goes down, then you will now be able to produce more hydroflasks with that same $10 so your supply will ______
increase (go to the right)
What is elasticity?
-a measure of the responsiveness of one variable (how much you listen to Spotify) to changes in another variable (the amount of ads they put in)
-the % of change in one variable that arises due to a given % change in another variable
-pushes customers in certain direction
What is price elasticity of demand?
measure of how much quantity demanded responds to a change in the price of a good
Elasticity is NOT slope, so what matters when determining it?
labels, stories, and math
What is the equation for elasticity?
the absolute value of the %change in quantity over %change in price
On a graph with multiple demand curves, which one is the most elastic given all variable of labels, stories, and math are the same?
the one that is the closest to be horizontal
What is income elasticity of demand?
measure of how much quantity demanded responds. to a change in consumer's income
What is cross-price elasticity of demand?
measure of how much quantity demanded of one good responds to change in the price of another good
%change in Quantity demanded of good 1
%change in price of good 2
Are necessities and luxuries inelastic or elastic?
necessities- inelastic (because you have to buy it)
luxuries- elastic (if one good or service gets more expensive you can buy something else)
How do you determine if something is elastic or inelastic by definition of market?
the narrower the definition the more Elastic demand and the broader the definition, the more inelastic demand
ex) Red Bell Peppers-most elastic
vegetable- in between
When finding elasticity and the numerator is greater than the denominator behavior is changing more therefore the graph is ________
elastic (because customers are sensitive to price)
When finding elasticity and the denominator is is greater than the numerator, price is changing more and more, and customers stay with you so they are not sensitive to price meaning the graph is _______
How do you calculate elasticity and what is the equation?
absolute value of
(Q2-Q1)divided by 2
(P2+P1) divided by 2
How do you find total revenue?
Price x Quantity
With elastic demand, if you lower the price you pick up a bunch of additional sales causing you to make _____ money
What is income elasticity of demand and give examples.
-what happens to our behavior given a change in income
ex)normal goods (steak)- as income goes up you buy more steak and as income goes down you buy less steak and you have a positive income elasticity
inferior goods (sushi)- as income goes up you buy less sushi and as income goes down you buy more sushi so you have a negative income elasticity
The income elasticity demand is negative. Is it a normal or inferior good?
Substitutes have a _______ cross-price elasticity
Compliments have a ______ cross-price elasticity
What is consumer surplus?
measures the benefit that buyers receive from a good as the buyers themselves perceive it
How do you solve for consumer surplus?
take the amount the buyer is willing to pay and subtract the actual amount paid
Where is consumer surplus on a graph?
everything under the demand curve and above the the price they actually pay
What is producer surplus?
measures the benefit to sellers participating in a market
How do you solve for producer surplus?
-take the amount a seller is paid for a good or service minus the seller's cost of providing the good or service (their profit)
-what was the seller paid minus what they were willing to sell for (cost)
Where is producer surplus on a graph?
the area below the market price and above the supply curve
How do you solve for total surplus?
consumer surplus + producer surplus
Ts= value to buyer minus what they pay + amount received by seller minus cost of seller
-measures market efficiency
Where is total surplus on a graph?
everything between the supply and demand curves up to equilibrium
What does total surplus have to do with efficiency?
an economy experiences economic efficiency when total surplus gets maximized
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