Final Study Guide Chapter 1 Definitions 1 Tradeoffs producing one good causes you to produce less of the other 2 Opportunity Cost the high valued alternative given up to make something 3 Centrally planned economy government decides how resources are allocated 4 Market economy decisions about the resources are made from the interaction of 5 Mixed economy buyers and sells in markets make decision with government households and markets playing significant role 6 Productivity efficiency a situation in which a good is produced at lowest cost 7 Allocative efficiency marginal benefit and cost are equal in society 8 Equity the fair distributions of economic benefits Chapter 2 Definitions 1 Scarcity unlimited wants exceed the limited resources available to fulfill those wants 2 PPF shows the maximum attainable combinations of two products Final Study Guide 3 Absolute advantage the ability to produce more using the same resources 4 Comparative advantage ability to produce more at a lower opportunity cost than 5 Factors Of Production land labor capital entrepreneurship 6 Property rights the rights to the exclusive use of property including the right to competitors buy or sell it 1 Quantity demanded amount of good wanted at a certain price 2 Demand curve relationship between price of a product and the quantity Chapter 3 3 Law of demand price goes down demand goes up demanded 4 Shifts in Demand a Income b Prices of related goods substitution effect Final Study Guide c Tastes d Population e Expected future prices 5 Quantity supplied the amount of a good a firm will produce at a particular price 6 Supply curve a curve that shows relationship between the price and quantity 7 Law of supply increases in price causes increases in quantity supplied supplied 8 Shifts in supply a Price of inputs b Technological change c Number of firms in the market 1 Price ceiling a legally determined maximum price that sellers may charge 2 Price floor a legally determined minimum price that sellers receive Chapter 4 Final Study Guide 3 Consumer surplus the difference between the highest price a consumer is willing to pay and price they actually pay 4 Marginal benefit the additional benefit to a consumer from consuming one more unit of a good or service 5 Marginal cost the additional cost to a firm of producing one more unit of a good or service to accept and what it receives 6 Producer surplus the difference between the lowest price a firm would be willing 7 Economic surplus the sum of the consumer surplus and producer surplus 8 Deadweight loss the reduction in economic surplus resulting from a market not being in competitive equilibrium 9 Economic efficiency marginal benefit marginal cost 10 Government tax when a good is taxed there is less supply Final Study Guide Chapter 6 I ELASTICITY Elasticity a measure of how much one economic variable responds to changes in another economic variable Price Elasticity of Demand P E D The responsiveness of the quantity demanded Final Study Guide Elastic demand percentage change in quantity demanded is greater than percentage change in price absolute the value P E D 1 Inelastic demand percentage change in quantity demanded is less than the percentage change in price absolute value P E D 1 Unit Elasticity demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change absolute value P E D 1 Perfectly Inelastic Demand quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero P E D 0 Perfectly Elastic Demand the quantity demanded is infinitely responsive to price P E D Infinity Final Study Guide II Determinants of Elasticity of Demand 1 Available substitutes If a product has more substitutes available it will have more elastic demand If a product has few substitutes available it will have less elastic demand 2 Passage of time The more time that passes the more elastic it becomes because customers take time to adjust to buying habits 3 Luxury vs necessity Luxury is more elastic than necessity 4 Market size The smaller we define a market the more elastic demand it has 5 How much it is of a consumers budget The demand for a good will be more elastic the larger percentage it is of an average consumers budget Final Study Guide III Total Revenue Total amount of funds received by seller Price x units sold total rev IV Cross Price Elasticity of Demand The percentage change in quantity demanded of one good divided by the percentage change in the price of another good If Cross price elasticity calculated number o Positive products are substitutes o Negative products are complements Final Study Guide V Income Elasticity of Demand Measures the responsiveness of quantity demanded to changes in income If I E D is Positive but less than 1 normal good and necessity Positive but more than 1 normal and luxury good Negative inferior good VI Price Elasticity of Supply The responsiveness of quantity supplied to a change in price Same rules as P E D refer to page 1 and 2 VII Summary Final Study Guide Chapter 11 Final Study Guide Short run and Long run Economics Short run the period of time during at least one of a firms input is fixed Long run period time in which all of a firms inputs vary new tech location size 1 Costs Total cost TC the cost of all inputs firms use in production o Total cost variable costs fixed costs TC FC VC Fixed costs FC costs that remain the same o No fixed costs in the long run Average Fixed Costs AFC fixed costs divided by the quantity of output produced Variable costs VC costs that change as output changes o In the long run all costs are variable Average Variable Costs ATC variable cost divided by the quantity of output produced Explicit costs a cost that involves spending money Implicit costs a non monetary opportunity cost Average total cost ATC total cost divided by the quantity of output produced o TC Q ATC of a good or service Marginal Costs MC the change in a firms total cost from producing one more unit o Marginal cost of production falls then rises because the marginal product of labor rises then falls o Marginal cost Change in total cost Change in quantity Final Study Guide Summary of symbols and formulas 2 Product of Labor Marginal product of labor the additional output a firm produces as a result of hiring one more worker o when the marginal product of labor is rising the marginal cost of output is o when the marginal product of labor is falling the marginal cost of production