81 Cards in this Set
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Scientific Method in Economics
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1. Develop a model
2. Design experiment to test theory
3. Collect data
4. The model is supported, or revise theory
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Optimize
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when the benefit is greater than the cost
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Marginal Cost
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the cost of producing one more unit of a good
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Marginal Benefits
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additional benefits you receive from consuming one more unit of a good, marginal benefit decreases as you consume more
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Absolute Advantage
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being able to produce more of a good using the same amount of resources as others
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Comparative Advantage
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being able to produce a good at a lower cost than others
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Production Possibilities Curve
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a graph showing the possible combinations of two goods an individual, firm, or economy can produce
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Law of Demand
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all else being equal, as the price of a product increases (↑), quantity demanded falls (↓); or, as the price of a product decreases (↓), quantity demanded increases (↑), slope of demand is always negative
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Law of Supply
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all else equal, an increase in price results in an increase in quantity supplied; there is a direct relationship between price and quantity: quantities respond in the same direction as price changes, slope is always positive
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Market
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a group of buyers and sellers of a particular product
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Competitive Market
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many buyers and sellers, products are similar but not alike
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Perfectly Competitive Market
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all goods are exactly the same, so many buyers and sellers that they have no effect on price, products are alike
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Quantity Demanded
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the quantity a person wants and it able to purchase at a certain price, changes
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Demand Schedule
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a table that shows the relationship between the price of a good and the quantity demanded
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Intercept Value
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when the y - value is equal to 0
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Marginal Benefit Curve
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another name for the demand curve, a graph of how much someone is willing to pay
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Diminishing Marginal Benefit
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as more is consumed the willingness to pay goes down
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Market Demand
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the sum of the quantity demanded by individual buyers at each price
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Individual Demand
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the amount demanded by a single person at a certain price
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Demand Curve Shifters
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decrease - left, increase - right; number of buyers, income, price of related goods, expectations, tastes and preferences
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Number of Buyers
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increase - more is demanded, decreases - less if demanded
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Income
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increase in demand causes increase in demand and vice versa; normal good - demand and income are directly related, inferior good - demand and income are inversely related
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Price of Related Goods
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substitute goods - can be used in place of another good
complementary good - goods that go together
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Income Expectations
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if you know you will have a higher income in the future you will buy less inferior goods and more normal goods
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Price Expectations
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if consumers know the price will increase in the future the demand will increase now and vice versa
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Tastes and Preferences
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fads, something that is in style
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Quantity Supplied
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the amount that sellers are able and willing to sell at a given price
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Supply Schedule
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shows the relationship between the price of a good and the quantity supplied
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Marginal Cost Curve
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another name for the supply curve, the lowest price a seller is willing to receive
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Increasing Marginal Cost
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as more of a good is produced the willingness to accept (MC) increases
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Supply Shifters
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increase - left, decrease - right; input prices, technology, number of sellers, expectations
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Input Prices
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if the price of inputs go up the price of the product goes up and vice versa
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Technology
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determines the amount of inputs that are needed
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Number of Sellers
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increase in the number of sellers increases the supply curve and vice versa
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Market Expectations
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wait to supply more when it can be sold at the higher price, decreases current supply
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Price Expectations (supply)
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higher expected price, sell less now and supply more when price increases
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Equilibrium
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the point where supply and demand curve intersect
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Equilibrium Market Price
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when quantity supplied is equal to quantity demanded
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Surplus
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excess supply, above equilibrium
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Shortage
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excess demand, below equilibrium
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Elasticity
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responsiveness to buyers and sellers to a change in a particular market condition, measures size of change in supply/demand
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Price Elasticity of Demand
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measures consumer demand due to change in price
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Inelastic
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between 0 - 1, denominator is larger than the numerator, unresponsive to price change
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Unit Elastic
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elasticity is equal to 1, when revenue is maximized
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Elastic
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greater than 1, numerator is larger than denominator, consumers are very responsive
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High Elasticity
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flatter curve
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Smaller Elasticity
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steeper curve
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Perfectly Inelastic Demand
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no matter price the same quantity demanded, completely vertical slope, elasticity is 0
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Perfectly Elastic
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no price change, people want to buy more, horizontal slop, elasticity infinity
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Determinants of Elasticity
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- availability of substitutes, more substitutes = more elastic, less substitutes = less elastic
- high proportion of income, spend less, more elastic
- small proportion income, less elastic
-more time to make decision, more elastic
-less time, less elastic
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Total Revenue
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price x quantity sold
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Cross Price Elasticity
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substitutes - always positive
complements - always negative
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Income Elasticity of Demand
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normal goods - same direction, positive
inferior goods - opposite direction, negative
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Price Elasticity of Supply
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same as demand, determinants are flexibility of producers and length of time to make decision
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Allocative Efficiency
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resources are used to produce the highest value possible for society, total surplus is maximized
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Consumer Surplus
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the difference between the value (MB) and the price price paid for a good
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Total Consumer Surplus
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the sum of each individual's consumer surplus
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Producer Surplus
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difference between the price and the marginal cost of production
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Total Producer Surplus
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sum of all the producers' surplus
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Excise Tax
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tax on a specific good
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Tax Incidence
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refers to who, consumers or producers, bears the biggest lost/loses the most surplus because of taxes
-more elastic = less burden
-less elastic = more burden
-perfectly inelastic = entire burden
-perfectly elastic = no burden
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Subsidies
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a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive, can cause overproduction
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Quotas
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upper limit on production quantity of a good, causes shortages
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Price Ceilings
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-normally imposed in times of crisis
-can't charge more than a certain price
-below equilibrium is effective
-above equilibrium is ineffective
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Price Floor
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-minimum price that can be legally charged
-above equilibrium price is effective, can cause surplus
-below equilibrium is ineffective
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Utility
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benefit received from consumption of a good
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Consumption Bundle
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combination of all goods and services a person consumes
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Utility Function
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says what utility was from consumption of a good
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Total Utility
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overall happiness from all consumption
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Marginal Utility
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additional happiness of consuming one more unit of a good or service; positive
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Optimal Consumer Choice
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combination of goods which maximized total utility for a given income and price
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Utility Divided by Price
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amount of utility we get for and extra $
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Optimal Consumption Rule
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in equilibrium, maximize utility subject to the constraint of how much they can afford
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Paradox of Value
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total utility and marginal utility do not always correspond
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Budget Line
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can only by amounts that spend all of income
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Budget Line Constraint
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-slope in linear, always negative
-if income changes it is a direct relationship
-if price changes it is an inverse relationship
-slope = -(price of x / price of y)
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Indifference Curves
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combinations of two goods you can buy that give the same utility
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Properties of Indifference Curves
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1. downward slope
2. higher indifference curves > lower; more utility
3. indifference curves cannot cross
4. always bowed inward
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Marginal Rate of Substitution
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rate at which a consumer is willing to trade one good for another, equal to slope of budget line
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Income Effect
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buy more of both x and y good
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Substitution Effect
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substitute one good, x or y, for the other
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ECON 201: Exam 1