106 Cards in this Set
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3 core choices
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what, how, for whom
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Factors of Production
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land, labor, capital, entrepreneurship
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consumer should chose the good that
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delivers the most mu per dollar
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Land
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factor of production. all natural resources
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Labor
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labor as factor of production, quantity and quality
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Capital
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final goods produced for use in production of other goods
ex. machines
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Entrepreneurship
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assembling of resources to produce new or improved products and technologies
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economices
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study of how to allocate scarce resources among competing uses
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opportunity cost
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whats given up to get something else
measured in terms of alternative activity
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guns vs butter
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opportunity cost
ex. war- FOB used for war materials forego civilian needs
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Production Possibility Curve
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alternative combinations of final goods and services at given time with available resources and technology
potential output, not actual
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Scarce resources
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PPC
limit to amount we can output we can produce in period with resources and tech
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Law of increasing opp cost
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as we transfer labor and goods from one industry to another, get less back
must give up ever increasing quantities of other goods and services to get more of a particular good
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Efficiency
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every point on ppc is efficient...using resources best way we know
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Points outside PPC
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unattainable with resources and technology
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Points inside PPC
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inefficient use of resources
ex. unemployment
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Economic Growth
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more resources and technology= production possibilities increase
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The Invisible Hand
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adam smith
market decides what/how much to produce
what we demand, they will produce
*market mechanism
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Market Mechanism
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use of market prices and sales to signal outputs
invisible hand
INDIRECT
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conservatives
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LAISSEZ FAIR- ADAM SMITH
minimal government interaction
resist regulation and control and minimum wages
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Liberals
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government interaction is needed to improve market
price controls, regulation promote equality and efficiency
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greatest economic freedom
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hong kong
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least economic freedom
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north korea
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mixed economy
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market signals and government directives
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market failure
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market signals didn't give best answer to what, how, for whom
fail to achieve best possible outcome
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government failure
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government decisions fail to improve market outcomes or make them worse
ex. imposing too high of costs
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economic balance
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finding right mix of market signals and government directives
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normative analysis
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subjective judgements about what ought to be done
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positive analysis
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how things might be done without subjective judgement of what is best
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Macroeconomics
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behavior of entire economy, worry about whole not individual or group concerns
ex. how much consumers spend in total on goods and services
AGGREGATE
affected by micro behavior
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Microeconomics
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details of the big picture, individual behavior in relation to the big picture
ex. how much we will spend on a specific good or service
INDIVIDUAL
affected by macro outcomes
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centeris paribus
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assumption that nothing else is changing
failure is inevitable though
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politics- economic policy
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decisions on economic trade offs and social values
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Maximize Behavior- consumers
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UTILITY MAX
max satisfaction, utility from available incomes and options
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Maximize Behavior- businesses
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PROFIT MAX
difference between sales receipts and total costs
produce desired products at cheapest cost
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PROFIT MAX
difference between sales receipts and total costs
produce desired products at cheapest cost
Maximize Behavior- government
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WELFARE MAX
max general welfare of society
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economic interaction constraints
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inability to produce all things desired and needed
limited about of time, energy and resources
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specialization
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produce a product and trade
efficiency
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factor markets
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where factors of production are bought and sold
ex. land labor capital
ex. lookoing for work
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product markets
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any place where finished goods and services are sold and bought
ex. imports and exports
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Circular Flow
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consumers, factor markets, product markets, firms, government, international
pic. page 47
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Opportunity Cost
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most desired goods or services that are forgone in order to obtain something else
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market
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a place or situation where an economic exchange occors
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market transaction
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exchange of dollars in product parkets and resources in factor market
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supply
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ability and willingness to sell specific quantitites of a good ar given price in time period
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demand
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ability and willingness to but specific quanitity of goods ar alternative prices
not actual...just intentions
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law of demand
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as price increases, demand decreases
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Determinants of Demand
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taste (desire), income, other goods, expectations, number of buyers
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substitute good
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purchased instead of another
when price of good x rises, demand for y does as well
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complementary goods
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goods consumed in combination
when price of x raises, demand for y falls
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demand curve
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how changes in price alter consumer behavior
determinant of demands stay constant
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Movements along the demand curve are changes in_______________.
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quantity demanded
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market supply
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total quantities of goods that sillers are willing and able to sell at alternative prices in given time period, cp
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determinants of market supply
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technology
factor costs
other goods
taxes and subsidies
expectations
number of sellers
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law of supply
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tendency of suppliers to offer more of a good at a higher price.
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market supply
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intentions to sell, not statement of actual
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the equilibrium price
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the price at which the quantity demanded is equal to the quantity supplied
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Invisible Hand
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describes the self-regulating nature of the marketplace
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market mechanism
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A mechanism whereby social choice results from choices of all members of the collectivity rather than from a decision made by the central governing unit.
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Price Floor
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Above equilibrium
Not binding if below
Problem- RESULTS IN A SURPLUS
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Market Surplus
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The amount by which the quantity supplied exceeds the quantity demanded at a given price
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Market Shortage
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the amount by which the quantity demanded exceeds the quantity supplied at a given price
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Price Ceiling
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maximum selling price - to try and keep the price below equilibrium
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equilibrium price
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no further adjustments needed
never permanent
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price ceiling
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increase quantity demanded
decrease quantity supplied
create market shortage
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determinants of demand
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taste
income
expectations (future)
other goods (price, available)
number of consumers
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utility
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the satisfaction, or pleasure, that people receive from consuming a good or service
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Total Utility
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The total satisfaction you derive from consumption; this could refer to either your total utility of consuming a particular good or your total utility form all consumption
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Marginal Utility
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The additional utility you get from consuming 1 more unit of a thing...
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marginal utility equation
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MU= change in utility/ change in quantity
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total vs marginal utility
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total utility up
marginal utility down
as long as marginal u is positive, total utility is inc
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price and utility
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price holds us back
reconcile taste with income
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the more marginal utility a person has...
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the more someone is willing to pay for it
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because marginal utility declines, people will buy more if
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price falls (demand curve)
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Consumer Surplus, producer surplus
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CS: The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.
PS: The amount a seller has paid for a good minus the sellers cost
-Allocative efficiency is when sum of CS and PS are max.
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consumer surplus
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max price willing to pay-actual price paid
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total revenue
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p x q
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price discrimination
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sale of individual goods at different prices to different consumers
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opportunity cost
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the most desired goods or services that are forgone in order to obtain something else
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optimal consumption
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mix of consumer purchases that maximizes the utility attainable from available income
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utility max equation
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MUx/Px=MUy/Py
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independent goods
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goods that are unrelated
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E
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%change in quantity demanded/% change in price
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% change in...
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x2-x1/(x1+x2/2)
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E larger than 1
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elastic
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E less than 1
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inelastic
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E is 1
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unitary elastic
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horizontal demand curve
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perfectly elastic
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vertical demand curve
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perfectly inelastic
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elasticity of necessities and luxuries
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necessities inelastic
luxuries elastic
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elasticity with subsitutes
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greater availability of substitutes = higher price elasticity of demand
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price elasticity of demand declines as price moves down the demand curve
elasticity over time
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long run elasticity of demand higher than short term
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price hike increases total revenue if demand is.....
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inelastic
E less than 1
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price hike reduces total revenue if demand is.....
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elastic
E more than 1
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price hike does not change total revenue if demand is.....
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unitary elastic
E=1
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demand curve shift
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underlying determinants of demand change
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subsitute
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when price of x rises, demand for y increases
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complementary
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when price of x rises demand for y falls
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cross price elasticity of demand
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% change in quantity demanded of good x/% change in price of good y
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% change
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change in price/average price
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positive cross price elasticity
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subsitutes
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negatice cross price elasticity
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complementary
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income elasticity of demand
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% change in quantity demanded/ % change in income
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normal good- income elasticity
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demand increases with income
positive
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inferior good- income elasticity
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demand decreases when income rises....can get better things
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price elasticity of supply
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% change in quantity supplied/ percentage change in price
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ECON 202: STUDY GUIDE