Exam 1 Chapters 1 3 opportunity cost what you give up to do an activity explicit cost implicit cost Explicit cost out of pocket cost Implicit cost cost of time and energy If B x C x will continue activity If B x C x will not continue Cost Benefit Do an activity if and only if the benefit is greater than or equal to the cost MB MC marginal benefit and marginal cost the extra Economic Surplus Benefit Cost Law of Scarcity there is a limit of resources available trade offs Absolute Advantage being able to perform a task in fewer hours than someone else Comparative Advantage being able to perform a task at a lower opportunity cost than someone else Ex outsourcing service work performed overseas for cheaper Production Possibility Curve PPC shows scarcity and choice opportunity cost Law of Increasing opportunity cost using the resources that have the lowest opportunity cost first low hanging fruit Points on graph different combinations using limited resources Unattainable points cannot use that combo of resources because resources are limited and you cannot use more than you have Attainable points combos that can be used with limited resources Efficient point uses all available resources point is on demand curve Inefficient point doesn t use all available resources point falls under demand curve Y axis price X axis quantity Supply and Demand Law of Demand when price of good increases quantity demanded decreases people willing to buy more at low price demand curve a graph showing the quantity of a good that buyers wish to buy at each price Negative slope Buyers want to benefit from the good Law of Supply when price of good increases quantity supply also increases sellers want to sell more at higher prices Supply curve a graph or schedule showing the quantity of a good that sellers wish to sell at each price Positive slope Sellers want to make a profit Complements two goods that go together move the same way Ex Butter and Bread If the price of bread goes up the demand for bread will decrease and the demand for butter will also decrease Substitutes Goods that can be interchangeable depending on price Ex oranges and bananas If the price of oranges increases the demand decreases therefore the demand for bananas increases Goods Normal good when income increases demand for that good increases also Ex apple laptop Inferior good when income increases demand for that good decreases Ex ramen noodles when you make more money you will buy better foods therefore demand for ramen noodles will go down Equilibrium when quantity demanded quantity supply Movement Price of good movement on demand or supply curve depending on price Price good Shifting all other factors except price of the original good Price of substitute factors income price of another product weather etc When demand curve shifts left inward decreased demand price goes down When demand curve shifts right outward increased demand price goes up When supply curve shifts to the left upwards decreased supply price goes up When supply curve shifts right downwards increase supply price goes down quantity goes down quantity goes up quantity goes down quantity goes up Only know for sure one factor if you know what way quantity moves then you don t know for sure how price moves and vise versa CANNOT be sure about the changes in both Excess supply surplus when the price is higher than the demand Excess demand shortage when the supply is less than the demand Buyer reservation price the highest price you are willing to pay for a good Seller reservation price the lowest they are willing and able to sell a good for
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