ECON 142: EXAM 1
76 Cards in this Set
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economics
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choices people make to attain their goals, given their scarce resources
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microeconomics
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the study of how individuals, households, and firms make choices, how they interact in markets, and how the government attempts to influence their choices
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macroeconomics
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the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth
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equity
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fair distribution of economic benefits (fairness)
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efficiency
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no waste
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scarcity
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a situation in which unlimited wants exceed the limited resources available to fulfill those wants (choices depend of scarcity)
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three key economic ideas
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1. people are rational
2. people respond to economic incentives
3. optimal decisions are made at the margin
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people are rational
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individuals that weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the costs
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marginal
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extra or additional
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optimal decision
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marginal benefit (MB) = marginal cost (MC)
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trade-offs
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the idea that b/c of scarcity, producing more of one good or service means producing less of another good or service
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trade-offs force society to answer three fundamental questions
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1. WHAT goods and services will be produced?
2. HOW will the goods and services be produced?
3. WHO will receive the goods and services produced?
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centrally planned economy
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economy in which the government decides how economic resources will be allocated (north korea)
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market economy
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economy in which the decisions of households and firms interacting in markets allocate economic resources (all by demand & supply) - none exist
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mixed economy
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economy in which most economic decisions result from the interaction of buys and sellers in markets along with the government playing a significant role in the allocation of resources
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opportunity cost
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the value of the thing you didn't do (or the next best alternative)
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market
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a set of buys and sellers whose actions effect the price of a product or service
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productive efficiency
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situation in which a good or service is produced at the lowest possible cost (usually a result of competition among firms)
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allocative efficiency
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state of the economy that occurs when the production is in accordance with consumer preferences (every good or service is produced up to the point where the last unit provides a marginal benefit to society = to the marginal cost of producing it)
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voluntary exchange
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situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction
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positive analysis
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analysis concerned with what is (a factual and testable statement (no time limit))
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normative analysis
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analysis concerned with what ought to be (an opinion : use of "too" "usually" "should")
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economics is about...
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positive analysis, which measures the costs and benefits of different courses of action
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law of demand
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(the inverse relationship between price of a product and the quantity) the rule that when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded will decrease
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substitution effect
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the change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes
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quantity demanded
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the amount of a good or service that a consumer is willing and able to purchase at a given price
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demand curve
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a curve that shows the relationship between the price of a product and the quantity of the product demanded (slopes down \ )
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market demand
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demand by all the consumers of a given good or service
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"change in the quantity demanded"
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the movement alone the demand curve as a result of a change in the product's price
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"change in demand"
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a shift of the demand curve, occurs if there is a change in one of the variables - other than the price - that affects the willingness of consumers to buy the product (increase = right/decrease = left)
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demand shift factors
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1. income
2. prices of related goods
3. tastes
4. population and demographics
5. expected future prices
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change in income shift
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the income that consumers have available to spend affects their willingness and ability to buy a good (shown with normal and inferior goods)
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ceteris paribus
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the condition to where all else is equal or held constant
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normal good
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a good for which the demand increases as income rises and decreases as income falls (meat, pasta)
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inferior good
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a good for which the demand increases as income falls and decreases as income rises (ramen noodles)
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change in the prices of related goods
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is shown through the two concepts of substitutes and complements
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substitutes
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things we buy instead of each other, can be used for the same purpose - the more you buy of one, the less you will buy of the other (Coke and Pepsi)
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complements
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things we buy and use together - the more consumers buy of one, the more they will buy of the other (hot dog and hot dog buns)
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change in tastes (or preferences)
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refers to the many subjective elements that can enter into a consumer's decision to buy a product - consumers can be influenced by an advertising campaign or trends for a product (taste increases = shift of demand right, taste decreases = shift of demand curve left)
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change in population and demographics
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the number or buyers, as overall population increases, demand increases/ as regions change the demand for particular goods will increase or decrease because of different preferences in different regions
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change in expectations (demand)
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-expect price to be higher in the future, demand increases now (buy more today to avoid the higher price later) and shifts right
-expect price to be lower in the future, demand decreases now (as they wait) and shifts left
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supply curve
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a curve that shows the relationship between the price of a product and the quantity of the product supplied (slopes up / )
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law of supply
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holding everything else constant) the rule that increases in price cause increase in the quantity supplied, and decreases in price cause decreases in the quantity supplied
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"change in quantity supplied"
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when you change the price and
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"change in supply"
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a shift of the supply curve if the price changes (increase = right/decrease = left)
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quantity supplied
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the amount of a good or service that a firm is willing and able to supple at a given price
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supply shift factors
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1. price inputs
2. technological change
3. prices of substitutes in production
4. number of firms in the market
5. expected future prices
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change in the price of inputs
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anything used in the production of a good or service, price goes up, supply of the product goes down (shifts left)
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change in technology
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a positive and negative change in the ability of a firm to produce a given level of output with a given quantity of inputs, new way of making something
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change in expectation (supply)
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-if a price is expected to go up in the future, it has an incentive to decrease supply now - shift left and increase it in the future- shift right
- if price is expected to go down in the future, one would supply more today - shift right (affect supply in the exact opposite way of demand)
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change in the number of firms (sellers)
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increase in firms will increase the supply - shift right
- decrease in firms will decrease supply - shift left
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change in price of substitutes in production
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the change to alternative products for a firm to produce (apple with iPhones and iPads)
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market equilibrium
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when the quantity demanded equals the quantity supplied and gives the equilibrium price and quantity (the place the market tends toward)
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surplus
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situation in which the quantity supplied is greater than the quantity demanded
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shortage
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situation in which the quantity demanded is greater than the quantity supplied
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inverse demand function
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P = a - b (Q) , the equation shown in the graph
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inverse supply function
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P = a + b (Q) , the equation shown in the graph
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variable meanings
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P - price
a - where the line intercepts Q = 0
b - slope
Q - quantity
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equilibrium quantity and price
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set the supply and demand inverse functions to each other
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demand or supply function
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when the equation is equal to Q not P, the equation shown through table data
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consumer surplus
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difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays (benefit to consumer, measured in $ from area)
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marginal benefit
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the additional benefit to a consumer from consuming one more unit of good or service
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producer surplus
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difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives (measures benefit to company though area)
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marginal cost
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the additional cost to a firm of producing one more unit of a good or service
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economic surplus
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the sum of consumer and producer surplus
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price ceiling
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a legally determined maximum price that sellers may charge (rent control)
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price floor
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a legally determined minimum price that sellers may receive (minimum wage)
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dead weight loss
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reduction in economic surplus that results when the market isn't efficient
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net benefit
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amount that one triangle is reduced < amount 2 triangle increases
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price ceiling above the equilibrium...
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does nothing to distort the market
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price floor below the equilibrium...
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does not distort the market
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imposing tax
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supply curve shifts up by the amount of the tax (nothing happens to the demand curve)
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pre-tax
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original equilibrium price and quantity
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post-tax
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equilibrium price and quantity after the tax
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tax incidence
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the actual division of the burden of a tax between buyers and sellers in a market (vertical differences)
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revenue to government
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the gap between consumer surplus and producer surplus
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ECON 142: Exam 2