Final: 1, 2, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 17, 18, 20, 21, 22, - Scarcityo The limited nature of society’s resources- Economicso The study of how society manages its scarce resources- Principle’s o People face trade offs Efficiency- the property of society getting the most it can from its scarce resources Equality- the property of distributing economic prosperity uniformly among the members of societyo The cost of something is what you give up to get it Opportunity cost- whatever must be given up to obtain some itemo Rational people think at the margin Rational people- people who systematically and purposefully do the best they can to achieve their objectives Marginal change- a small incremental adjustment to plan of actiono People respond to incentives Something that induces a person to acto Trade can make everyone better offo Markets are usually a good way to organize economic activity Market economy- an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and serviceso Government can sometimes improve market outcomes Property rights- the ability of an individual to own and exercise control over scarce resources Market failure- a situation in which a market left on its own fails to allocate resources efficiently Externality- the impact of one person’s actions on the well-being of a bystander Market power- the ability of a single economic actor to have a substantial influence on market prices- Circular-flow diagramo A visual model of the economy that shows how dollars flow through markets among households and firms- Production possibilities frontiero A graph that shows the combo of output that the economy can possibly produce given the available factors of production and the available production technology- Positive statementso Claims that attempt to describe the world as it is- Normative statementso Claims that attempt to prescribe how the world should be- Marketo A group of buyers and sellers of a particular good or service- Competitive marketo A market in which there are many buyers and sellers so that each has a negligible impact on the market priceo Perfectly competitive 1. The goods offered for sale are all exactly the same 2. The buyers and sellers are so numerous that no single buyer or seller has any influence over the market price- Quantity demandedo The amount of the good that buyers are willing and able to purchase- Law of demando When the price of a good rises, the quantity demanded of the good falls and when the price falls, the quantity demanded rises- Demand scheduleo A table that shows the relationship between the price of a good and the quantity demanded- Incomeo Normal good Increase in income leads to an increase in demando Inferior good If the demand for a good rises when an income increases- Prices of Related goodso Substitutes When a fall in the price of one good reduces the demand for another goodo Compliments When a fall in the price of one good raises the demand for another good- Quantity suppliedo The amount that sellers are willing and able to sell- Law of supplyo When the price of a good rises, the quantity supplied of the good also rises, and when the price falls, the quantity supplied falls as well- Supply curveo Curve relating to price and quantity supplied- Equilibriumo Surplus The quantity of the good supplied exceeds the quantity demanded Suppliers are unable to sell all the want at the going priceo Shortage A situation in which quantity demanded is greater than quantity supplied- Elasticityo A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinantso Price elasticity of demand Measures how much the quantity demanded responds to a change in priceo Perfectly inelastic No matter the price, people will always buy the good (necessities) o Perfectly elastic If you change the price, there will be a drastic change in quantity demanded (luxuries)o Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that goodo Necessities tend to have inelastic, whereas luxuries have elastic demands o Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goodso Goods tend to have more elastic demand over long time horizonso Computing the price Price elasticity of demand= %change in quantity demanded %change in priceo Total revenue Price x quantity When demand is inelastic (>1), price and total revenue move in the same direction When demand is elastic (<1), price and total revenue move in opposite directions When demand is unit elastic (=1), price and total revenue remains constantwhen the price changeso Income elasticity of demand Measures how the quantity demanded changes as consumer income changes Income elasticity of demand=%change in quantity demand %change in income Inferior goods- higher income lowers the quantity demanded Normal goods- higher income raises the quantity demandedo Cross price elasticity of demand Measures how the quantity demanded of one good responds to a change inprice of another good Cross price elasticity of demand=%change in quantity demand of good 1 %change in quantity demand of good 2o Price elasticity of supply Measures how much the quantity supplied responds to changes in the price Price elasticity of supply=%change in quantity supplied %change in price- Price ceilingo The legislative max, the price of a good is not allowed to rise above this levelo If the equilibrium price is below the ceiling, the price ceiling is not bindingo If the equilibrium price is about the ceiling, the ceiling is a binding constraint- Price flooro Legislation minimum, because the price cannot fall below this levelo If the equilibrium price is above the floor, it is not bindingo If the equilibrium price is below the for, it is a binding constraint o A binding price floor causes a surplus- Taxeso Tax incidence How the burden of a tax is distributed among the various people who make up the economyo How taxes on sellers effect market
View Full Document
Unlocking...