Econ Super Study Guide Chapter 1 Vocab Scarcity Limited nature of society resources Economics Study of how society manages its scarce resources Efficiency the property of society getting the most from its resources Equality The property of distributing economic prosperity uniformly among the members of society Opportunity cost Whatever must be given up to obtain some item Rational people people who systematically and purposefully do the best they can to achieve their objectives Marginal Change A small incremental change to a plan of action Incentive Something induces a person to act Sunk Cost A cost that has already been commited and cannot be recovered First Four Principles of Economics I All People face tradeoffs money or something else Nothing is free II The cost of something is what you give up to get it consider opportunity costs III Rational people think at the margin In order to get something you want you have to give up something else Whether its time To evaluate tradeoffs one must compare costs benefits Costs are not always monetary Rational people calculate what is going to give them the best opportunities and rewards for the lowest cost This is done by comparing marginal costs and benefits Economists assume most people are rational IV People respond to incentives Lecture Notes P Rational people look for the maximum difference between benefits and costs Individuals and firms can make better decisions by thinking at the margin A rational decision maker continues to take an action if and only if the marginal benefit is at least as large as the marginal cost In order to find the best total difference between cost and benefits Profit think at the margin and make small incremental changes as long as marginal benefit marginal cost Marginal Cost Marginal Benefit Q Continue producing until you reach the equilibrium star Chapter 4 Supply and Demand Vocab Market A group of buyers and sellers of a particular good or service Competitive market a market in which there are many buyers and sellers so that each has a Tiny impact on the market price The demand curve the relationship between price and quantity demanded The lower price the more demanded Quantity demand the amount of a good that buyers are willing to purchase Law of demand When other things are held equal the quantity demanded of a good falls when price rises Change in Quantity Demanded change in price of a good Represents a movement along the demand curve Change in demand causes a shift in the demand curve Demand schedule a table that shows the relationship between price and quantity Market Demand The horizontal sum of all of the individual demands for the product Quantity supplied The amount of a good that sellers are able and willing to sell Law of supply Quantity of a good rises when the price rises Equilibrium the point where supply and demand intersect Surplus when market price is greater than the equilibrium price the quantity demanded may be lower than what is supplied Shortage Too little supply to match the demand Shifts in demand curve Income the less income you have the lower your demand may be Normal good Increase in income causes an increase in demand Inferior good Increase in income causes a decrease in demand Prices of related goods When the price of one good falls the demand for another good may rise or fall if they are related Substitutes two goods for which an increase in the price of one good leads to an Increase in the demand for another Compliments two goods for which a decrease in the price of one good leads to an increase in the demand for another Tastes Your desire for a good may rise or lower based on taste Expectations Your predictions of your income price or other factors may lead you to buy more or less Number of buyers More buyers larger market demand Shifts in Supply Curve Input prices price of what goes into the good Technology better technology reduces costs Prices of other goods if other goods are cheaper you should lower price P Notes Supply increase in supply Demand Increase in demand Old Equilibrium New equilibrium Q Equilibrium Price Equilibrium Quantity Demand Increase Supply increase rises falls rises rises If supply and demand both shift then you will know happens to either the price or the quantity but not to both whichever shift is greater will change the unknown factor An increase in Quantity demanded is not the same as an increase in demand price affects quantity demanded and not demand If the prices in one city are lower than another people may be induced to move into the city with lower prices Chapter 5 Elasticity and its application Vocab Elasticity How much buyers and sellers respond to changes in market conditions Price Elasticity of Demand A measure of how much the quantity demanded of a good responds to a change in the price Qty Price Elastic goods respond substantially to a change in price Inelastic goods respond very little to changes in price Total Revenue The amount paid by buyers and receiver by sellers P Q TR Inelastic demands have higher revenue than elastic demands Income Elasticity of Demand Measures how the quantity of demanded of a good responds to a change in income Cross Price Elasticity How much the Quantity demanded of one good responds to the change in price of another Qty Income Qty good 1 good 2 Price Elasticity of Supply How much the quantity supplied responds to a change in price Qty Price Notes Inelastic E 1 Elastic E 1 Perfectly Inelastic E 0 Unit Elastic E 1 Midpoint Method Qty Average Qty Price Average Price When demand is inelastic price and Total revenue move in the same direction When demand is elastic price and Total revenue move in opposite directions If demand is unit elastic total revenue remains constant when price changes Chapter 6 Supply Demand and Government Policies Vocab Price Ceiling A legal maximum on a price for a good Price floor a legal minimum on a price for a good Tax Incidence The manner in which the burden of a tax is shared Prices should generally be left to the market The government can help but by changing prices it often hurts the economy more than helping it The tax burden falls more heavily on the side of the market that is less elastic Taxes levied on sellers and buyers lead to the same market outcomes Lecture Notes Vocab Chapter 7 Markets Welfare and efficiency Positive What the situation currently is Normative What you would like the situation to be Welfare Economics The study of how the allocation of resources
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