Microeconomics Exam 1

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Scarcity
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Terms in this set (414)
Scarcity
the limited nature of society's resources
Economics
the study of how society manages its scarce resources
The Four Principles About Individual Decision Making
1. people face trade offs
2. the cost of something is what you give up to get it
3. rational people think at the margin
4. people respond to incentives
Three Principles Concerning How People Interact
5. trade can make everyone better off
6. markets are usually a good way to organize economic activity
7. governments can sometimes improve market outcomes
Three Principles Concerning How the Economy Works as a Whole
8. a country's standard of living depends on its ability to produce goods and services
9. prices rise when the government prints too much money
10. society faces a short-run trade off between inflation and unemployment
Market Economy
an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services; "invisible hand" by Adam Smith
Property Rights
ability of an individual to own/exercise control over scarce resources
Market Failure
situation where the market on its own fails to allocate resources efficiently
Externality
impact of one person's actions on the well-being of a bystander
Market-Power
ability of a single economic actor (or small group) to have a substantial influence on market prices
Inflationan increase in the overall level of prices in the economyBusiness Cyclefluctuations in economic activity, such as employment and productionProduction Possibilities Frontiera graph that shows the combination of outputs that the economy can possibly produce given the available factors of production and the available production technologyMicroeconomicsstudy of how households and firms make decisions and how they interact in marketsMacroeconomicsstudy of economy-wide phenomena, including inflation, unemployment, and economic growthPositive Statementsclaims that attempt to DESCRIBE the world as it isNormative Statementsclaims that attempt to PRESCRIBE how the world should beMarketa group of buyers and sellers of a particular good or serviceCompetitive Marketa market in which there are many buyers and sellers so that each has a negligible impact on the market price; "price takers"Quantity Demandedthe amount of a good that buyers are willing and able to purchaseLaw of Demandthe claim that, all other things being equal, the quantity demanded of a good falls when the price of the good risesDemand Schedulea table that shows the relationship between the price of a good and the quantity demandedDemand Curvea graph of the relationship between the price of a good and the quantity demandedMarket Demandsum of all individual demands for a particular good or serviceIncrease/Decrease in Demandany change that affects the QUANTITY demanded at every price; i.e.: income, price of related goods, tastes, expectations, number of buyersNormal Goodan increase in income leads to a INCREASE in demand; i.e.: booksInferior Goodan increase in income leads to a DECREASE in demand; i.e.: bus ticketsQuantity Suppliedthe amount of a good that sellers are willing and able to sellLaw of Supplythe claim that, all other things being equal, the quantity supplied of a good rises when the price of the good risesSupply Schedulea table that shows the relationship between the price of a good and the quantity suppliedSupply Curvethe graph that relates price and quantity suppliedMarket Supplythe sum of the supplies of all the sellersEquilibriumthe market price has reached the level where quantity supplied equals quantity demandedMarket-Clearing Price/Equilibrium Pricethe price that balances quantity supplied and quantity demandedEquilibrium Quantitythe quantity supplied AND demanded at the equilibrium priceLaw of Supply and Demandthe claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balanceThree Steps to Analyze Changes in Equilibrium1. decide if the event shifts the supply and/or demand curve 2. decide in which direction the curve shifts 3. use the supply and demand diagram to see how the shift changes the equilibrium price and quantityin order to have DEMAND consumers need to have the..ABILITY to buy WILLINGNESS to buylaw of demandCereris Paribus (other things remain the same), as price goes DOWN, MORE quantities are demanded6 Determinants of DEMAND SHIFTS ARE CAUSED BY... (know 4 & explain)1. NUMBER of buyers (population changes) 2. INCOME of buyers -normal goods v. inferior goods -as income increases the demand for normal goods INCREASES; as income increases, the demand for inferior goods DECREASES. 3. TASTE/PREFERENCES of consumers; people want different things which can increase/decrease demand- if they really want something it will increase 4. EXPECTATIONS; when consumers expect price changes of certain goods; expect price to increase, demand will go UP before the spike (get it quick!) 5. RELATED goods: substitutes/complementary goods 6. TAXESdemand curveaka: DEMAND NEGATIVE (indirect/inverse) relationship= price goes UP, quantity goes DOWN displays relationship of only ONE product/good each point = QUANTITY DEMANDED - depends on price ONLY.normal gooda good or service whose consumption increases when income increases and falls when income decreases (its price doesn't change)inferior gooda good or service whose consumption declines as income rises (its price doesn't change)substitute goodproducts or services that can be used in place of each other. when the price of one falls, the demand for the other product falls; when the price of one product rises, the demand for the other product risescomplementary goodproducts and services that are used together. when the price of one falls, the demand for the other increases (and conversely)DEMAND; shift to the left=DECREASEDEMAND; shift to the right=INCREASEin order to SUPPLY businesses need to have the..ABILITY to supply WILLINGNESS to supplylaw of supplyCereris Paribus (other things remain the same) as prices go DOWN(UP), LESS(MORE) quantities are supplied think: if they're not making enough money, they won't keep supplying more goodssupply curvesupply curve = supply schedule = SUPPLY POSITIVE (direct) relationship= price goes UP, quantity goes UP displays relationship of only ONE product/good each point = QUANTITY SUPPLIED - depends on price ONLY.6 determinants of supply SHIFTS ARE CAUSED BY... (know 4 & explain)1. NUMBER of suppliers (firms) 2. RESOURCE PRICES (costs) -- higher rent/interest/wages = LESS supply 3. better/advanced TECHNOLOGY = MORE supply 4. REGULATION - MORE regulation = LESS supply 5. EXPECTATIONS - HIGHER expectations = MORE supply 6. TAXES & SUBSIDIES - HIGHER taxes = LESS supply (bc it costs more to produce) - MORE subsidies = MORE supply (bc more gov assistance so it costs less for them to produce.. "taxes in reverse")SUPPLY; shift to the rightINCREASESUPPLY; shift to the leftDECREASEequilibrium-quantity supplied EQUALS quantity demanded -NO surplus or shortagesurplus-quantity supplied is GREATER than quantity demanded -occurs when market prices are HIGHER than equilibrium price (think: prices are too high, so less people buy, so there are more products un-bought) -Qs > Qdshortage-quantity supplied is LESS than quantity demanded -occurs when market prices are LOWER equilibrium price (think: if prices are lower than usual, more people want to buy, so products are harder to find!) -Qs < Qdproductive efficiencythe production of a good in the LEAST COSTLY wayallocative efficiencyMOST DESIRED goods/services by consumersprice ceiling-a legally established MAXIMUM price for a good or service -CEILING = SHORTAGE - can result in black market sales and rationing -ex: rent controlprice floor/support-legal MINIMUM price that can be paid to the producer (seller) -FLOOR = SURPLUS -ex: minimum wage; price supports (farmers) (a producer includes workers!)OUTCOMES of rent control (4)1. Discrimination by landlords 2. Refuse to maintain/repair properties 3. Not many new apartments 4. Higher search costs for renterscommand system-socialism; planned economy; communism -"EVERYTHING belongs to EVERYBODY" -gov. owns property resources -no social classes -everyone has equal rights -gov. makes all decisions regarding the economy/marketplace -*NO INCENTIVE TO IMPROVE* because everyone already has the 'best' & everything is the same; NO potential for monetary rewardmarket system-capitalism; "FREE(dom) Economy"; laissez faire -4 MAIN: (1) private ownership of resources/capital (2) incentive to grow/"invisible hand" (3) competition (4) freedom of CHOICE and ENTERPRISE -everyone for THEMSELVES -2 classes (poor/rich) -keep gov OUT of economy -HIGH potential for monetary rewardfreedom of enterprisebusinesses/entrepreneurs are free to: -obtain and use resources -produce products of their choice -sell in the market of their choicefreedom of choiceOWNERS are free to: -use or dispose of their property/money as they so choose WORKERS are free to: -try to enter any line of work their qualified for CONSUMERS are free to: -buy whatever goods/services they want & can afford'invisible hand'SELF-INTEREST; the drive for businesses to better their goods/services for selfish reasons (ex: they don't care about making better products for the public's sake, they care about making money) the drive for consumers to purchase goods/services for selfish reasons only (ex: I don't care about giving UML money, I care about furthering my education for myself)marketwhere buying/selling takes placespecializationthe use of resources of an individual, a firm, a region, or a nation to concentrate production on one or a small number of goods and servicesdivision of laborhuman specialization; ex: assembly linemedium of exchangeMONEY; what we use/is accepted to buy a good/servicebarterthe exchange of one good or service for another good or servicemoneyany item that is generally acceptable to sellers in exchange for goods and services.consumer sovereigntyconsumers are the 'ultimate decision makers' in the marketplace, because everything depends on what they buydollar voteseach dollar spent in the product/resource market is like a "vote" for what to produce the 'votes' that consumers and entrepreneurs cast for the production of consumer and capital goods, respectively, when they purchase those goods in product and resource marketscreative destructionold things go OUT when new/better things are CREATEDcircular flow diagraman illustration showing the flow of resources from households to firms and of products from firms to households. these flows are accompanied by reverse flows of money from firms to households and from households to firms.resource marketa market in which households sell and firms buy resources or the services of resourcesproduct marketa market in which products are sold by firms and bought by householdseconomicsthe SOCIAL SCIENCE of how people/society makes the best choices under conditions of scarcityopportunity cost-anything that is GIVEN UP/SACRIFICED to get something -NOT monetary value alone (i.e. time, effort)other-things-equal assumption-the assumption that factors, other than those being considered, DO NOT CHANGE. -used to focus SOLELY on the relationship between the two variables being considered ONLY.MICROeconomicsSMALL SCALE; concerned with individual units, details; ex: price of one product, a particular household, a particular businessMACROeconomicsLARGE SCALE; concerned with the economy as a whole; ex: households in general, the government, "U.S. consumers"economizing PROBLEMwe have UNLIMITED wants, but LIMITED resourcesbudget linea curve/schedule that shows various COMBOS of 2 products you can buy with a SPECIFIC amount of money (ex: with $120, i can buy 6 DVDs and 0 books, OR i can buy 5 DVDs and 2 books, etc)landNATURAL resources used to produce goods and serviceslaboranything you're getting PAID to do, to help produce goods and services.capitalHUMAN-MADE resources used to produe goods and services (buildings, machinery, equipment)investmentspending for the production and accumulation of capital and additions to inventoriesentrepreneurial abilityspecial human talent; used in combination with the other resources to produce a productconsumer goodsdo NOT produce anythingcapital goodsproduce FURTHER goodsFive Fundamental Questions1. WHAT is to be produced? 2. HOW is it to be produced? 3. FOR WHOM is is being produced? 4. HOW will the system accommodate CHANGE? 5. HOW will the system promote GROWTH/PROGRESS?positive statementsthings as they are; FACTSnormative statementsvalue judgement; SHOULD BEGDPGross Domestic Product; used in MACROeconomics; goods & servicesWhat kind of SCIENCE is Economics?a SOCIAL science; it cannot be guaranteed, and it is not the same across the board4 TYPES of RESOURCES (factors of production)1. land 2. capital 3. labor 4. entrepreneurProduction PAYMENTS for types of Resources1. land = rent 2. capital = interest 3. labor = wages/salaries 4. entrepreneur = profitOTHER words for Resources-inputs -factors of productionTYPES of capital-real -financial (money) -human (labor)Productivity (formula)output/inputProductivity (definition)the amount of work, done by an average worker, in an HOUR of time4 FUNCTIONS of the Entrepreneur1. Risk taking 2. Innovation 3. Initiative 4. Decision MakingMarginal Analysisthe comparison of marginal BENEFITS vs. marginal COSTS -- for decision making3 economic GOALS1. economic GROWTH- produce more goods/services; higher GDP 2. full employment- want little/no unemployment 3. low inflation- want price stabilityproduction possibilities curve(frontier)a curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy5 assumptions of the P-P curve1. Only 2 goods 2. Resources are FIXED in quality and quantity 3. FIXED (same) technology 4. Efficiency (maximum) 5. FULL employment of resourcesPoints ON the curve...are ATTAINABLE and EFFICIENTPoints INSIDE the curve...show IN-EFFICIENCY/UNEMPLOYMENT of resourcesPoints OUTSIDE the curve...are UNATTAINABLELaw of INCREASING (opportunity) COSTSas the PRODUCTION of a certain good INCREASES, the opportunity COST of producing an ADDITIONAL unit RISESCORE inflation excludes...FOOD and ENERGY pricesshift to the LEFT caused by...- less resources - lower quality resources - natural disasters - man-made disasters - NOT DESIRABLEshift to the RIGHT caused by...- more resources - better resources - better technology - DESIRABLELimitations of CIRCULAR FLOW (4)1. No mention of government 2. No interaction between firms 3. No mention of international sector 4. ALL EXPENDITURE = ALL INCOME10 examples of uncommon sense in economics1. Wars are bad for the economy and reduce living standards 2. Competition can direct self-interest toward broader interest, and may promote overall goods 3. Prices are information 4. Our real income is determined from labor productivity, not credentials (example, a college degree does not guarantee a good income) 5. we pay taxes according to implicit bargaining power, not according to explicit tax laws. 6. Entrepreneurs in private businesses don't always face "correct" market incentives (under/overproduce) 7. Price controls and regulations often have unintended consequences. 8. small groups often have advantages over large groups 9. Economies need the financial sector, but it is also subject to recurring crises. 10. There are no quick/easy paths to wealthBroken Window Fallacyrelates to the idea that wars are bad for the economy-repairing damage does require a lot of work, but doesn't increase overall wealthEconomicsa studies how people perceive causal connections between scarce resources and alternative end uses for these resources.What do we mean by scarce resources/economic goods?Just about anything that isn't unlimited to people. Time is a scarce resource. Air is not. But scarce resources must be allocated, and economics studies how they are allocated (i.e. why we use diamonds for jewelry and not for something else maybe)The Planning Probleminability of many people to take advantage of the most advantageous means of settling the allocation problem. This happens when we don't really know the true causal connections scarce means and desired goods.Rationalitypeople try to identify causal connections between scarce means and their ends as best as possible.Buchanan-Becker approachok so these two guys applied econ to a bunch of social studies like marriage, family planning, crime, charity, etc.academic imperialismwhen economists take over topics studied and taught by political scientists, anthropologists, and sociologists.macroeconomicsfocus on trends in statistical aggregates of the economic systemmicroeconomicsfocuses on individual markets and organizationPositive issueswhat actually happens in economics, like facts and statistics. i.e "Some women choose to have abortions"normative economicswhat should happen in economics, like how things should work. i.e. "Women should not have abortions"Ad Populum Fallacythe idea that something is true because a majority believes it.Appeal to AuthoritySomething to avoid-it is when people believe someone simply because they have high credentials. It doesn't mean that person is correctThe Psychologist's Fallacybelief that one's own perception of one's own experiences is universally and objectively trueThe Historian's Fallacythe idea that a current belief is correct because it is modernThe Fallacies of belief include:Ad Populum Appeal to Authority Psychologist HistorianNirvana Fallacieswhen people use economic theory to imagine ideal systems, then criticize or reject actual economic institutions/systems because an imaginary system looks better includes the false dilemma, and the moralistic fallacyFalse dilemmathe idea that we can only choose between a real (imperfect) option and a superior imagined alternative.Moralistic fallacythinking that something is feasible because it is good. (i.e preventing auto fatalities is good, but we can't prevent all auto fatalities)Fallacy of compositionthinking that if something is true for one person, it must be true for the whole groupFallacy of divisionthinking that things that are good for groups are good for the individual.Post hoc fallacy"after this, therefore caused by this" aka believing that something was caused by something else because it came after it.Appeal to Emotionscience relies on logic, not pity, fear, humor, whateverloaded terminologywords that evoke strong emotionsopportunity coststhe expected value of whatever a person gives up in order to get what they want in the future.Laissez-Faire Economyan economic system with private ownership of industry, directed by entrepreneurs. The entrepreneurs are regulated by private competition in markets. Government officials protect property and settle disputes.Activist EconomyOpposes L-F Economy, where government officials activist government consists of public agencies that design and implement plans intended to override or change the economic results of rivalry in private marketsFalse dilemmawhat prices result in the most efficent use of scarce resources?prices that achieve a balance of everyones personal interests and get the most gains from trademarketssocial orders where people sell goods and serviceslow opportunity cost consumersome people have a high preference for one type of product and dont much like the alternatives (good customers) pg42Adam Smith's "The Invisible Hand" of marketsasserts that regulation by competition mechanism in L-F economics outweighs the activist economy. Basically, the markets are self-regulating and self correcting. It limits how entrepreneurs make profits, rivalry may guide entrepreneurs to "do the right things" demand influences supply, if demand for one good rises the suply of alternatives goes downThe Tragedy of the CommonsAristotle's contribution to econ, which says people have strong incentives to use and care for their own property, and strong incentives to use public property, but personal incentives to care for public property.losses from tradeequal the difference between the high end of the supply curve and the low end of the demand curve (look at pg 42)gains from tradea money price or exchange value that is below the personal use value of any consumer provides net gains to these consumersSmith-Hume theorythey thought price reflects the cost of labor/production to make a good (wrong, btw), and invisible hand drives progress. Marx would disagree on the progress bit. This other guy, Ricardo, liked the Smith-Hume theory, but saw that prices didn't always match production cost.private enterprisesorganizations within which people organize to achieve goals (make profit)high opportunity cost producerthey produce but have many other valuable opptions and therefore have highopportunity costs of production pg 42positive sum gamewhen both parties in a trade make out with gainsentrepreneurs surplusexcess of market price of over marginal costs, below the selling price of P*when do people get the most gains from trade?people get the most gains when the market is in equilibriumconsumers surplusexcess of use value, or wilingness to pay, below the demand curve and above the price pg 46reverse valuationmeans people trade goods in reverse order of valuation - each gives something that they value less than what they acquire. implies that both groups can benefit by trading goods of unequal valuelow opportunity cost producerthey produce and dont have many other options besides producing the good that they produce so they have low opportunity costs pg 42high opportunity cost consumersome people have a high preference for alternatives so they have a high opportunity costoppertunity costforgone option, speculative cost, whenever there is a choice there is an opportunity costsunk cost thinkingthinking that you have to continue with something even though you may not want to because you have invested a lot into it (bad but long relationship) irrational thinkingconsumer soveriegntysocial state where the use of resources is directed towards the most urgent consumer demands (if people want cars more than trucks than people buy cars )cardinal measumentmeasurement of utility that is an objective measurement of happiness of well-being (measuring happiness like weight)production triangepost hoc fallacyjust because something follows something else doesn't mean it was caused by itdormant marketlike the presidency , only comes around for new president close to end of termforms of exchange in thepublic sector- funding candidates -lobbyinglaw of demand-the quantity bought or demanded of a good varies inversely with its relative price -people if given the choice will always pay lower price than a higher priceexpected profit =...expected profit= total revenue - total costproduction posibilities fronteir???law of supplythe seller will provide lower price for greater number purchases opportunity cost - if you don't sell more, you miss out on opportunities for higher profitsabsolute advantageus is a much better producer of agriculture - it has an absolute advantagecomparative advantagepeople focus on area of production where you have greatest advantage or where you have the least disadvantage - best option or least worst optionutilitysatisfaction or fulfilment people get from applying goods/services toward our end purposesutilitarianismnormative belief that the highest moral good is to achieve the greatest happiness for the greatest number of peoplewelfare economicsstudy of changes in expected economicscardinal measurment of utilitydifferent goods and services can be measured and ranked according to specific amount of utility - a utileconomic efficencymarkets direct scarce resources to the highest utility consumer demandscausal economic processesrefers to changes in some human activity in the economy in response to changes in incentives or knowledgepositive relationshipsexist where an increase in the value of the independent variable causes the value of the dependent variable to riseeconomic good : must meet five conditions1. must have some type of human want or demand to satisfy 2. must be a scarce supply relative to demand for it 3. must possess specific characteristics which enable it to satisfy people's wants 4. only an economic good if people recognize it as satisfying a human demand 5. becomes a good only if people have ability to use it to satisfy their wantsconsumer goodscarce resource that directly satisfies some human end or purposeproducer goodsatisfy human end purposes indirectly by producing consumer goods (labor is a producer good)capital goodtools, machines or other devices that increase the ability of labor to produce goodscomplementary goodsgoods that are more useful together - if an increase in the price of one good causes the demand of another to good to decreasesubstitute goodsgoods that can be used toward the same end purpose -if increase in price of one good cause demand for one good to increaseintermediate goodsgoods at each stage of production down to natural resources and up to final goods -value of goods at stages of productionstructure of productionordering and productivity of many intermediate and producer goods in lines of production -production triangemarketsocial institution where 2 or more people act upon their perceived reverse valuation of some good or service by entering into an exchangeinstitutionlaws, legal titles, deeds, receipts, govmoneymedium of exchangeprimary marketssale of new goodssecondary marketsinvolve the sale of used goodsfuture marketsarrange trades in advance of the final production of actual goodsspot marketsface to face immediate exchangesprivate enterpriseorgs whoes owners aim to maximise profitssole proprietershipbuisness that one person ownes and manages direclypartnershipsowned and managed by some group of peoplecorporationslarge businesses, separation of ownership and control, ownedreverse valuationeach has what the other wants and wants what the other has - greatest gains from most divergent valuescorrelary of excess supplyprice goes down if lots of sellers in marketcorrelary of excess demandprice goes up if lots of buyers in marketequalibrium pricewhere supply = demandAFC Average Fixed Costacross whatever range cost is the same - (cost stays the same no matter how many a produced)AVC Average Variable Costchange in cost asociated with each unit producedATC Average Total Cost- variable cost and fixed cost together =ATCMarginal Cost-rate of change of average total costCompetitive markets-lots of buyers and sellersperfect competition- everyone is well informed -free entry and exit of buyers and sellers -lots of buyers and sellersbarier to entryanything that keeps you from entering a market (licence if you need one )total costvariable cost +fixed costmarginal costchange in total cost / change in quantity - always below ATC where ATC is declining and always above ATC where ATC is increasingaverage total costtotal cost /quantity = variable cost/quantity + fixed cost/quantitypricePrice = marginal cost = marginal revenueLong Run ATC??? - all inputs are variable (labor, capital, natural resources LKN) but only in long-run ATC curve, not in the short-run ATClong run ATC Curve minimumwhere short run ATC curve is most profitablehigher income- raises demand for goods, and people are willing to buy more of a good at a higher price - people will choose to buy superior goods as opposed to inferior goods -changes that alter demand (3)- knowledge of goods changing (red wine is heart healthy) - change of income -change of preferencesPrice of Elasticity of Demand% change in quantity in relation to % change in price of that good, so we know the magnitude price change ( as well as the direction)equation for PED???elasticityelasticity measures the degree of responsiveness of a dependent variable in a market to changes in an independent variablecross Price Elasticity of Demand (XED)- the degree of responsiveness in demand (X) to a change in price of another closely related good (y)short term vs long term demand elasticityshort term demand inelastic while long-term demand more elasticelastic demandElastic demand is a type of demand that will rise or fall depending on the price of the good. For example, candy bars are an elastic demand. If the price of candy is around $1, most people will buy the candy and it will be high in demand. However, if that same candy bar's price rose up to $4, most people would not buy the candy.inelastic demandPeople will buy goods with an inelastic demand no matter what the price is. A good example of this would be gas. People complain and complain about gas prices, yet they still buy it because they need it, even if it $3 a gallon. Another example would be life-saving medications. Even if they are expensive, people will still buy them or else they could possibly die.perfect markets-free entry /exit -perfect info -zero transaction costs -perfect defined property rightsmarket imperfections (normal market)-low entry/ exit barriers -optimal info -low transaction costs -imperfect property rightsmarket failure-high entry-exit barriers -no info -huge transaction costs -no property rightswhat does relative elasticity tell us?it tells us about bargaining power -inelastic side of market= more bargaining power(both supply and demand )transaction costscosts of negotiating and carrying out the trading process ( never 0) -serve as impediments from gains from tradesearch costdevoting time to search (opportunity cost ) - spending money on info - longer search = higher costrational ignorance- knowing that you don't need to know certain things (everything)optimal information- the info needed for a market (no more no less)aysemetric information- where some people have private info that is pertinent to decisions made by others (each side plays up strengths and down weaknesses )how to achieve better info and avoid losses from trade- incentive compatibility -search goodincentive compatabilityincentives line up to bring about or signal (pertinent ) private info credibly - so incentivise the reveal of private info to enable better trades to happen thereby making markets work bettersearch good- a good in which characteristics of which can be learned in advance so we can be reasonably confident in assessment of marginal benefits -can't learn somethingscreedence goodeven with experience you cant know if its goodknowledge compatabilityexists when person forms plans that contain all pertinent info from the plans of others - ability to use all goods best - prices convey info - info exchanged efficiently -experience, search, compatible schemes -prices all info that enable industries to be coordinated from consumersplan alignmentwhen market prices are close to equilibrium they are sending info to sellers and buyers - prices convey info about supply side and info to supply sidegame theory/prisoners dilemmadescribe how players interact based on their informationNash EquilibriumWhere each player in a game has incentive to play strategy that is optimal given the strategy played by other players. The Nash strategy dominates over all othersType I errorrejecting correct informationType II erroraccepting incorrect informationProfit=(Price*Quantity)-(unit cost*Quantity) pi=PQ-cQThe PQ=total revenue cQ=total cost when looking at a market where multiple products are made from one source (like grain->beer, bread, beef), each one has this formula and are affected by the source and other markets. When all the equations are close to equilibrium, the markets are all happyspontaneous order of marketstheory that alignment of individual plans emerges spontaneously guided by supply and demand in each marketPrice of Elasticity in Demand (PED) formula((Q2-Q1)/.5(Q2+Q1)) / ((P2-P1)/.5(P2+P1))Net Market Efficiency formula(Consumer Surplus+Entrepreneur Surplus)-(Consumer Loss+Entrepreneur Loss)menger's paradoxmore complex industries in the modern world seem to work better and provide a better standard of livinghow does elasticity affect bargaining power? How does time affect elasticity?The more elastic, the more bargaining power. The more time, the more elasticWhat determines price. Labor input, or marginal cost and benefit and opportunity cost?marginal cost and benefit plus opportunity cost, because labor is a sunk cost. As marginal cost is low, ATC is decreasing, so profits likely are increasing and the price is moving toward equilibrium. As marginal cost increases, ATC increases and price moves away from equilibrium.ScarcityThe situation where our unlimited wants exceed the limited resources available to meet those wants. Consequently, whenever we make the decision to use our limited/scarce resources in one way, we cannot use them in their next-best way (i.e. opportunity cost). Hence, we need to try to develop ways of using the limited resources we have in the best way possible (i.e. we need to figure out how to make the best choices!).EconomicsThe study of how we (individuals and societies) attempt to best meet unlimited wants with limited/scarce resources, which have alternative uses.Resources/Factors of ProductionsThe inputs (land, labor, capital, entrepreneurship) used to make goods and services.LandAll natural resources.LaborHuman talents/resources used in the production process.CapitalSomething made so that it can make something else. In this class, capital is physical capital and is NOT referring to money, stocks, bonds, etc.EntrepreneurshipManagerial and risk-taking talent that joins all the other inputs together.Opportunity CostThe next-best alternative sacrificed when a choice is made.Pure CapitalismAn economic system (based on the ideas of Adam Smith from his book The Wealth of Nations 1776) in which buyers and sellers, operating in "free markets," operate with little government intervention ("laissez faire").Pure Command/Control EconomyAn economy in which government controls virtually all allocation, production, and distribution. The government (also called the "state") owns the capital and plans the production levels and production and distribution methods for most goods and services.Traditional EconomyAn economy in which economic activities today occur based on the way things have been done in the past.Mixed EconomyAn economy which combines (to varying degrees) reliance on markets, tradition, and government involvement to deal with the problem of scarcity of resources.Technical EfficiencyProducing the maximum possible output from our currently available inputs.Economic EfficiencyProducing the maximum possible output from our currently available inputs and having that output match the desires of the society. While there are many ways to be technically efficient, there is only ONE way to achieve this type of efficiency. In capitalist economies, prices/markets determine what the society "desires," while in command/control economies, the government makes those choices.EquityThis term means "fairness." The idea of fairness depends on the type of economic system in place. In capitalism, fairness means rewarding people based on what they produce that is of value in the market. In command/control economies, fairness is based on the Marxian concept of meeting each person's basic needs, irrespective of what each person produces.John RawlsPhilosopher whose "original position" thought experiment challenges us to define what "equity" would look like. Specifically, the "original position" experiment asks us to consider what type of economic system we would establish if we hadn't yet been born but were going to be born, with equal odds of being born into the richest family in the society or the poorest family in the society.Adam SmithAuthor of The Wealth of Nations (1776), in which he sets out the characteristics of a purely capitalistic economic system - one that relies on competition, private property rights, and free markets (prices), with very minimal role for the government ("laissez-faire"). This author argues that when each person pursues their own "self-interest," their choices end up maximizing the benefits for the overall society (via the "invisible hand" of the marketplace).Karl MarxAuthor of Das Kapital (1867+) and The Communist Manifesto (1848). This man believed that capitalism would destroy itself because of the conflict/struggle between the oppressed working class (the "proletariat") and oppressive capitalist owners (the "bourgeoisie"), leading to revolution and an overthrow of the capitalist system. This man's ideas inspired individuals such as Vladimir Lenin (1st Communist leader of the Soviet Union) and others to pursue government control of the economy and a "communal" view of economic life.Production Possibilities Frontier (PPF)A graph illustrating the maximum output combinations an economy could possibly produce, given the existing state of technology and currently available quantity and quality of inputs.Law of Increasing Opportunity CostsAs we produce more and more of one good, we sacrifice increasingly larger amounts of other goods. Graphically, this means the PPC curve of a nation is "concave to the origin." The reason this law holds is that inputs are better suited to some tasks than others (i.e. they are "imperfect substitutes" for each other).In economics, we assume that our wants and needs are ___________ our ability to satisfy themgreater thanWhich of the following best describes what economists assume is true about human behavior?People make rational decisions about how to allocate scarce resources and are motivated by self interestMost college students work outside of school, but they typically work at jobs unrelated to their future career plans, i.e. at restaurants or other part-time jobs. Those students delay the beginning of their careers in order to attend college. For those students, what is the opportunity costs of attending college?the income and work experience they would have earned by beginning their careers earlierWhich of the following is not a fundamental economic question that all societies must answer?At what price will goods and services be soldIn the US, what is the primary resource allocation mechanism?the marketWhich of the following sets of factors determine the production possibilities frontier for a given country over a given period of time?the resources it has available to it and its level of technologyIf the production possibilities frontier for a given country increased (i.e. shifted up and to the right), what would this mean?the country could produce more goods and servicesIf a country is producing at a point on its production possibilities frontier and it wanted to produce more of one good, it must also-reallocate resources to the good it wants to produce more -produce less of some other good - incur an opportunity cost by changing what it produces All of the AboveIn 2008, farmers in the US began to grow more corn, in response to rising corn prices. The opportunity costs of this decision wasthe value of other crops (i.e. soybeans) that farmers could have grown insteadAll points above and to the right of a production possibilities frontier are considered to beunattainableAll points underneath a production possibilities frontier are considered to beinefficientThe market consists of the interaction of __________ and __________demand; supplyWhich of the following statements about the market is not true?the market is controlled by a central planning organizationThe demand curve is downward sloping becausea decrease in price will lead to an increase in quantity demandedWhich of the following events would tend to cause an increase in demand for economics textbooks?an increase in the number of students enrolled in college economics classesIn question 15, economic textbooks and economics classes are considered to becomplementsIf a good is considered inferior, we know that a(n) ____________ in income will cause a(n) __________ in demand for that goodincrease; decreaseAccording to the Law of Supply, an increase in ___________ will cause an increase in ____________price; quantity suppliedWhich of the following events would cause the supply of economic textbooks to increase?an increase in the number of publishers producing economics textbooksWhich of the following events would cause the supply of corn to decrease?a widespread drought across the Midwest, where most corn is grownThe difference between the minimum price that a firm must receive in order to produce a good and the market price is also known asproducer surplusAssume that you are willing to pay as much as $12 to see the remake of "Robocop," which hits theaters later this month. You decide to see the movie with two friends who are willing $10 and $9, respectively, to see the movie. If a ticket to the movie costs $8, what is the total consumer surplus for all three of you?$7Holding supply and demand constant, an increase in the price of a good will tend to ___________ consumer surplus and __________ producer surplusdecrease; increaseWhich of the following is not true when a market is in equilibrium?All consumers are able to purchase as much as they wantWhen the market price is set __________ equilibrium price, firms will experience a ___________, which creates an incentive for them to _________ prices.above; surplus; reduceIf the demand for some good increases, the demand curve will shiftto the rightIf the demand for some increases, this will tend to cause the price of that good to _______ and quantity of that good to _______increase; increaseIf the supply of some decreases, this will tend to cause the price of that good to _________ and quantity of that good to _________increase; decreaseIf the supply of some good decreases, the supply curve will shiftto the leftDuring the fall of each year, starting just after Labor Day, the price of gasoline tends to decrease, and fewer gallons of gasoline are sold. This is most likely due toa decrease in the demand for gasolineIf the supply for cotton increased and price did not adjust accordingly, which of the following would happen as a result?There would be a surplus of cottonIf the actual quantity of some good that is bought and sold is less than the equilibrium quantity, the result isunexploited gains from tradeIf the actual quantity of some good that is bought and sold is greater than the equilibrium quantity, the result iswasted resourcesA change in _________ will cause the quantity demanded of a good to changepriceThe existence of a shortage creates an incentive for firms toraise pricesMicroeconomicsthe study of how households and firms make decisions and how they interact in marketsMacroeconomicsthe study of economywide phenomena, including inflation, unemployment, and economic growthScarcitythe limited nature of society's resourcesOpportunity Costwhatever must be given up to obtain some itemConsumer Surplusthe amount a buyer is willing to pay for a good minus the amount the buyer actually pays for itProducer Surplusthe amount a seller is paid for a good minus the seller's cost of providing itDirect RelationshipTwo variables move in the same direction. It one increases the other increases. If one decreases the other decreases.Inverse RelationshipTwo variables move in opposite directions. If one increases the other decreases; and if one decreases the other increases.Independent Relationship (Zero Relationship)No relationship at all.Price Ceilinga legal maximum on the price at which a good can be soldPrice Floora legal minimum on the price at which a good can be soldPositive EconomicsThe scientific aspect of economics that determines "what is?"Normative EconomicsThe portion of economics that attempts to address "what should be?"Law of Supplythe claim that, other things equal, the quantity supplied of a good rises when the price of the good risesLaw of Demandthe claim that, other things equal, the quantity demanded of a good falls when the price of the good risesEquilibriuma situation in which the market price has reached the level at which quantity supplied equals quantity demandedPrice Elasticity of Supplya measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in priceCross Price Elasticity of Demanda measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second goodIncome Elasticity of Demanda measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in incomeUtility - Definitiona measure of happiness or satisfactionCapitalthe equipment and structures used to produce goods and servicesProduction Possibilities FrontierA graph that shows the various combinations of amounts of two commodities that could be produced using the same fixed total amount of each of the factors of production.GoodsA material that satisfies human wants, and provides utility.Supply Curvesa graph of the relationship between the price of a good and the quantity suppliedDemand Curvesa graph of the relationship between the price of a good and the quantity demandedShortagesa situation in which quantity demanded is greater than quantity suppliedSurplusesa situation in which quantity supplied is greater than quantity demandedSubstitutestwo goods for which an increase in the price of one leads to an increase in the demand for the otherComplementstwo goods for which an increase in the price of one leads to a decrease in the demand for the otherChanges in DemandShifts or pivots in the demand curveChanges in Supplyshifts or pivots in the supply curveMarket EquilibriumSupply and demand are equal.Utility - Concept (What does it mean when we say that something gives us utility?)It is a "good" good.Types of EconomiesSee "Lecture 02, Slide 27"Determinants of Demand1. Income - Money earned over a period of time 2. Wealth - Net Worth 3. Tastes - Changes in Taste 4. Price of Substitutes - Wine 5. Price of Complements - Pizza 6. Future Prices - Memorial DayDeterminants of Supply1. Input Prices - Resources and Raw Materials 2. Technology - More Efficient Use of Resources 3. Number of Sellers 4. Future Prices - Price Expectations 5. Government Policies A. Subsidies B. Taxes C. Restrictions 6. Weather (Agriculture)Cross Price Elasticity of Demand (Between two Products)a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second goodIncome Elasticity of Demanda measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in incomeTax Incidencethe manner in which the burden of a tax is shared among participants in a marketResourcesLabor, Capital, Land, Natural Resources, and EntrepreneurshipLabor ResourcesThe time people spend producing goods and servicesLand Resources (Natural Resources)Gifts of Nature such as physical space and prime materials (timber, arable land, crude oil, iron ore, coal, etc.) Renewable and Exhaustible ResourcesRenewable ResourcesResources that can regenerate themselves so they need never run outExhaustible ResourcesResources that are available in limited amountsEntrepreneurial ResourcesEntrepreneurship and ManagementEntrepreneurshipThe willingness by creative people to take risks to create new and innovative products.ManagementThe ability to combine the other resources (labor, capital, and natural resources) into a productive venture.Capital ResourcesSomething produced that is long-lasting and used to produce other goodsPhysical CapitalLong lasting physical goods that are themselves used to produce other products.Human CapitalSkills and Knowledge possessed by workers, that last for many years, which itself goes into producing other things.Capital StockThe total amount of capital available to a nation, in all forms, for productive use at any given time.Capital GoodCan be used to make other capital goods or consumer goodsFinancial CapitalOwners of the resources of a company or society, most often represented by shares of stock.BadAnything with negative value to the consumer.Inferior Gooda good for which, other things equal, an increase in income leads to a decrease in demandNormal Gooda good for which, other things equal, an increase in income leads to an increase in demandNeutral Goodgoods that have a demand that is not dependent to the income.Price Elasticity of Demanda measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in pricePrice Elasticity of Demand (pEd)A measure of the responsiveness of quantity demanded of a good to a change in the price of that good. Calculated as the Absolute Value of (The Percentage Change in the Quantity Demand of a Good)/(The Percentage Change in the Price of that Good)Inelastic DemandThis occurs when demand is not very responsive to price changes. Specifically, this exists when the percentage change in quantity demanded of a good is less than the percentage change in the price of that good. Equivalently, this exists when pEd < 1.Elastic DemandThis occurs when demand is quite responsive to price changes. Specifically, this exists when the percentage change in quantity demanded of a good is greater than the percentage change in the price of that good. Equivalently, this exists when pEd > 1.Unit Elastic DemandThis exists when the percentage change in quantity demanded of a good is equal to the percentage change in the price of that good. Equivalently, this exists when pEd = 1.Price Elasticity of Supply (pEs)A measure of the responsiveness of quantity supplied of a good to a change in the (selling) price of that good. Calculated as (The Percentage Change in the Quantity Supplied)/(The Percentage Change in the Price of the Good)Inelastic SupplyThis occurs when supply is not very responsive to price changes. Specifically, this exists when the percentage change in quantity supplied of a good is less than the percentage change in the price of that good. Equivalently, this exists when pEs < 1.Elastic SupplyThis occurs when supply is quite responsive to price changes. Specifically, this exists when the percentage change in quantity supplied of a good is greater than the percentage change in the price of that good. Equivalently, this exists when pEs > 1.Unit Elastic SupplyThis exists when the percentage change in quantity supplied of a good is equal to the percentage change in the price of that good. Equivalently, this exists when pEs = 1.Income Elasticity of Demand (yEd)A measure of the responsiveness of demand for a good to a change in consumers' income. Calculated asNormal GoodA good whose demand rises (falls) when buyers' incomes rise (falls). (e.g. nice vacations) Equivalently, a good with yEd > 0 .Necessity GoodA type of "normal good" also called an "income inelastic" good. Equivalently, a good with 0 < yEd < 1 (e.g. food).Luxury GoodA type of "normal good" also called an "income elastic" good. Equivalently, a good with yEd > 1 (e.g. European vacations, financial-planning services, etc.).Inferior GoodA good whose demand falls (rises) when buyers' incomes rise (fall). (e.g. Ramen noodles) Equivalently, a good with yEd < 0 .Income-Neutral GoodA good whose demand does not change when the buyer's incomes changes. Equivalently, a good with yEd = 0 .Engel's LawEconomic "Law" relating to patterns of economic development which states that as incomes rise for a nation, sectors producing "necessity goods" (i.e. "income inelastic" goods) will shrink as a percent of the total economy, while sectors producing "luxury goods" (i.e. "income elastic" goods) will increase as a percent of the total economy. This "law" explains why the U.S. agricultural sector has declined as a percent of the U.S. economy, while sectors like financial services have grown as a percent of the U.S. economy.Cross-Price Elasticity of Demand (xpEd)A measure of the responsiveness of demand for some good X when there is a change in the price of some other good Y. Calculated asSubstitute GoodsGoods/services that serve (at least to some degree) the same purpose to buyers. (e.g. PDQ gas and Kwik Trip gas). If the price of one good/service rises (falls), the demand for the other good/service rises (falls). Equivalently, two goods with a cross-price elasticity of demand, xpEd > 0.Complementary GoodsTwo goods/services which are often consumed together. (e.g. cars and gasoline). If the price of one good/service rises (falls), the demand for the other good/service falls (rises). Equivalently, two goods with a cross-price elasticity of demand, xpEd < 0.Independent GoodsTwo goods/services such that if the price of one good/service changes, the demand for the other good/service is not impacted at all. Equivalently, two goods with a cross-price elasticity of demand xpEd = 0.DemandThe entire relationship between each possible price of a good and the corresponding quantity the consumer would be willing and able to purchase, "ceteris paribus."Ceteris ParibusLatin phrase, meaning "all else held constant" or "all else equal." This modeling assumption allows us to focus only on the relationship between the two variables of interest with all other factors not being allowed to change.Law of DemandIf the price of an item falls (rises), then buyers are willing to buy more (less) of it, ceteris paribus. Graphically, this law means the Demand curve is negatively-sloped (with a few exceptions where the curve is vertical or horizontal).The Income EffectAs the price of a good rises (falls), the purchasing power of your dollars of income falls (rises). This is one explanation of the "Law of Demand."The Substitution EffectAs the price of a good rises (falls), that good becomes more (less) expensive relative to other goods, whose prices haven't changed. People will substitute toward relatively cheaper goods and away from relatively more expensive goods. This is one explanation of the "Law of Demand."Marginal utilityThe additional utility gained from consuming one additional unit of a good.Law of Diminishing Marginal UtilityAs additional units of a single good are consumed, eventually the additional/marginal utility derived from each additional unit of the good decreases. This is one explanation of the "Law of Demand."SubstitutesTwo goods/services that serve roughly the same purpose to buyers. (e.g. PDQ gas and Kwik Trip gas). If the price of one good/service rises (falls), the demand for the other good/service rises (falls).ComplementsTwo goods/services which are often consumed together. (e.g. cars and gasoline). If the price of one good/service rises (falls), the demand for the other good/service falls (rises).Inferior goodA good whose demand falls (rises) when buyers' incomes rise (fall). (e.g. Ramen noodles).Normal goodA good whose demand rises (falls) when buyers' incomes rise (fall). (e.g. nice vacations)."Increase in Quantity Demanded"This happens ONLY when there is a decrease in the price of the good in question. Graphically, this shows as a movement down and to the right along a given demand curve to a larger quantity as the price goes down."Decrease in Quantity Demanded"This happens ONLY when there is an increase in the price of the good in question. Graphically, this shows as a movement up and to the left along a given demand curve to a smaller quantity as the price goes up."Increase in Demand"This happen when something other than the price of the good itself changes and causes people to be willing to buy more of the good at any given price. Graphically, this is shown as a SHIFT of the whole demand curve to the right. (see the class handouts for examples of what might cause this increase)."Decrease in Demand"This happen when something other than the price of the good itself changes and causes people to be willing to buy less of the good at any given price. Graphically, this is shown as a SHIFT of the whole demand curve to the left. (see the class handouts for examples of what might cause this increase).SupplyThe entire relationship between each possible selling price of a good and the corresponding quantity firms would be willing and able to produce for sale, "ceteris paribus."Law of SupplyIf the selling price of a good rises (falls), the firms/sellers are willing to sell more (less) of that good, ceteris paribus. Graphically, this means the Supply curve is positively-sloped (with a few exceptions where the curve is vertical or horizontal)."Increase in the Quantity Supplied"This happens ONLY when there is an increase in the selling price of the good in question. Graphically, this is shown as a movement up and to the right along a given supply curve to a larger quantity as the selling price goes up."Decrease in the Quantity Supplied"This happens ONLY when there is a decrease in the selling price of the good in question. Graphically, this is shown as a movement down and to the left along a given supply curve to a smaller quantity as the selling price goes down."Increase in Supply"This happen when something other than the selling price of the good itself changes and causes firms/suppliers to be willing to produce more of the good at any given selling price. Graphically, this is shown as a SHIFT of the whole supply curve to the right. (see the class handouts for examples of what might cause this increase)."Decrease in Supply"This happen when something other than the selling price of the good itself changes and causes firms/suppliers to be willing to produce less of the good at any given selling price. Graphically, this is shown as a SHIFT of the whole supply curve to the left. (see the class handouts for examples of what might cause this increase).SubsidyA payment given to firms or individuals when they undertake a particular activity or produce a particular product. This is the opposite of a tax.MarketAn institution or mechanism allowing buyers (demanders) and sellers (suppliers) to make exchanges.Equilibrium Price and Equilibrium QuantityThe price and quantity of a good such that quantity demanded equals the quantity supplied. In equilibrium, there is NO shortage or surplus. Graphically, the market equilibrium price and quantity occur where the Supply and Demand curves cross each other.Price floorA minimum price allowed by law for a given good or service (e.g. minimum wage).Price ceilingA maximum price allowed by law for a given good or service (e.g. rent controls).ShortageWhen quantity demanded exceeds quantity supplied. This typically occurs when the existing price is "too low" (i.e. when the existing price is below the market equilibrium price).SurplusWhen quantity supplied exceeds quantity demanded. This typically occurs when the existing price is "too high" (i.e. when the existing price is above the market equilibrium price).