ECON 1113: FINAL EXAM
91 Cards in this Set
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economics
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the study of how people, individually and collectively, manage resources
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microeconomics
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the study of how individuals and firms manage resources
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macroeconomics
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the study of the economy on a regional,national, and international scale
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rational behavior
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making choices to achieve goals in the most effective way possible
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scarcity
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the condition of wanting more than we can get with available resources
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opportunity costs
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the value of what you have to give up in order to get something; the value of your next best alternative
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marginal decision making
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comparison of additional benefits of a choice against the additional costs it would bring, without considering related benefits and costs of past choices
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sunk costs
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cost that have already been incurred and can not be recovered or refunded
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incentive
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something that causes people to behave a certain way by changing the trade-offs they face
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efficiency
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uses the resources in the most productive way possible to produce the goods and services that have the greatest total economic value to society
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model
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a simplified representation of the important parts of a complicated situtation
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circular flow model
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a simplified representation of how the economy's transactions work together
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positive statement
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the factual claim about how the world actually works
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normative statement
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a claim about how the world should be
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Production Possibility Frontier (PPF)
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a line or curve that shows all the possible combinations of two outputs that can be produced using ALL available resources (model analyses who produces which good)
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Invisible hand
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production does not have to be organized by one central planner
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trade-off
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between producing more of one good and less of another is the opportunity cost
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Production Possibility Frontier (PPF) points
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-point inside of curve : not efficient, not using all resources. no opportunity cost
-point outside of curve : not attainable
-point on the curve : efficient. producing more but giving up more of another
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Productivity
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how much of a good can be made
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absolute advantage
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when a producer has a higher productivity for a good
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comparative advantage
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the ability to produce a good or service at a lower opportunity cost then others
(someone always has a comparative advantage)
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Gains from trade
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the improvement in outcomes that occurs when producers specialize and exchange goods and services
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specialization
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spending all of your time producing a particular good
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WITH Trade
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consumption possibilities increase (good)
-By opening up to trade gains more than it could on its own PPF
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without trade
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consumption = production (bad)
-if a country does not specialize and trade its production and consumption are both limited to point along its PPF. By specializing and achieving gain from trading.
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market
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buyers and sellers who trade a particular good or service
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competitive market
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a market which is fully informed, price-taking buyers are sellers easily trade a standardized good or services
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standardized good
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a good in which two units have the same features and are interchangeable (all goods are the same)
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transaction costs
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the costs incurred by a buyer and seller in agreeing to and executing a sale of goods and services (no costs participate)
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price taker
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a buyer or seller who CANNOT affect the market price
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Quantity demanded
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the amount of particular good that buyers will purchase at a given price during a specified period
--Must be willing and able to buy and afford it !
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Law of Demand
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All else equal,
Quantity demanded RISES as Price FALLS
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Demand curve
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shows the relationship between Price and Quantity demanded, holding all else constant
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NON-price determinants of demand
(theres 5)
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1. PREFERENCES : as preference increases, demand decreases (d-curve shifts to right)
2. INCOME : more income equals more willing to spend on some goods
3. PRICE OF RELATED GOODS : a change in price of one good can effect demand on another good
4. NUMBER OF BUYERS for a good
5. EXPECT…
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substitute
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when you buy more of one, you buy less than another
redbull vs. coffee
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compliment
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goods used together
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-normal good:
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-income increases, demand increase
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What does not change the demand curve?
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price; it moves ALONG the curve
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Supply
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amount of a good or service producers offer at a given price
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Law of Supply
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Higher the price, the higher the quantity
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Non-price determents of Supply:
(5)
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1. TECHNOLOGY : influences cost of production. if price goes, cost goes up, shifts right
2. NUMBER OF PRODUCERS : more producers=more supply. less prod=less supply'
3. PRICE OF INPUTS
4. PRICE OF RELATED GOODS : price of another good effects the opportunity cost of the good you are pr…
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inputs
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a good or service used to produce a good or service
"input cost decreases then production cost decreases then supply increases"
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market equilibrium
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where supply and demand intersect
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disequilibrium
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if the market price doesnt equal equilibrium then demand doesnt equal supply
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surplus (excess supply)
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a situation in which the quantity of a good that is supplied is higher than the quantity demanded
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CONSUMER surplus
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a net benefit that a consumer received from purchasing a good or service, measured by the difference between willingness to pay and the actual price
(consumers buying at a market price below willingness to pay creates value)*difference between demand curve and price
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shortage (excess demand)
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situation in which the quantity of a good that is demanded is higher than the quantity supplied
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PRODUCER surplus
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a net benefit that a producer receives from the scale of a good or service, measured by the difference between the producers willingness to pay and the actual price
--(selling at market price above willingness to create value)
*difference between market price and supply curve
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Total Market Surplus
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is the sum of consumer and producer surplus
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Dead Weight Loss
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loss of total surplus that results when the quantity of a good bought/sold is below market equalibrium
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price floor
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a minimum legal price at which a good can be sold
-quantity supplied and quantity demanded move in opposite directions
*protects producers income
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price ceiling
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a maximum legal price at which a good can be sold
-producers supply lower quantity
-consumers demand more quantity
*keeps cost low for consumers
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2 reasons for taxes?
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1. discourages consumption/production of a good
2. raise government revenue
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tax wedge
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difference between price paid by buyers and price receivers by seller
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Effects of tax paid by sellers
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**shift supply curve UP by amount of tax
1. Supply decreases
2. Demand stays the same
3. Equilibrium price rises, and quantity demanded falls
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Effects of tax - paid by Buyers
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**shift demand curve DOWN by amount of the tax
1. supply stays the same
2. demand increases
3. equilibrium price and Q both fall
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How to find effects of tax
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2 . Find seller and buyer prices
3. Find new equilibrium
4. Use tax wedge and new xnew *Q = tax revenue
5. look for what happens with consumer and producer surplus
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elasticity
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slope of supply/demand curve
-More Vertical = larger slope (Q less responsive to price changes)
-Horizontal = smaller slope= more elastic (Q more responsive to price)
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Profit
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=total revenue - total cost
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Total Revenue
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= quantity sold x price
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Total Cost
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amount a firm pays for inputs used to produce a good or service
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Firm's total Cost
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a firms total cost is the sum of fixed and variable costs
total cost= fixed cost + variable cost
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Fixed Cost
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+costs that don't depend on quantity produced by firms
-one time upfront cost
-are constant (does not change with Q. if firm produces nothing still incurs fixed cost)
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Variable Cost
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+depend on quantity produced
-total variable costs increase with production of addition units
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production function
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characterized the relationship between the quantity of inputs and quantity of outputs
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Marginal Product
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increase of output gained by one unit increase in inputs
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Marginal Revenue (MR)
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the additional revenue that will be generated by increasing product sales by one unit
MR= change in revenue/change in quantity
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Marginal Cost (MC)
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the change in the total cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good *MC=change in total cost/change in quanity
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Characteristics of a Perfect Competitive market
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1. Full Information
2. Buyers/Sellers are price takers
3. Goods are Standardized
4. Firms can freely enter/ exit the market
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What can producers do in a PC Market?
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-producers may sell as much as they want without affecting price
-because firm is a small relative market size
-do not produce infinite quantity because of diminishing marginal product
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Where do firms produce?
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where profit is maximized
where Quantity*= (MR = MC)
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Marginal Cost Curve Production
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Produce where MC=ATC
-U-shaped.
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Short-run shut down rule?
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Produce if Price is higher than AVC .....P>AVC
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Long-run Shut down rule?
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Produce when Price > ATC
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Monopoly
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-many firms
-differentiated but similar products
*-about variety of products
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Monopolistic Competition in Short-run
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MR = MC
-set P where that Q is demanded
- Profit > 0
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Monopolistic comp. in Long-run
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-firm entry causes of substitutes
-existing firm demand shifts left
-entry continued until economic profit = 0
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Where to produce in monopoly?
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Set where P = ATC > MC
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Oligopoly
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-few firms
-some barriers to entry
-firms have significant market power
-individual firm price and quantity effect the market and other firms
*- all about number of firms
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Factors of Production
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Land
Labor
Capitol
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Demand for Labor
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Maximize profit where revenue generated by last worker equals MC of labor
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horizontal line at price level?
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represents marginal Revenue
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Labor Supply
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Choice between work and leisure
ex) wage increases, labor supply increases
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Gross Domestic Product (GDP)
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the sum of all market values of all final goods and services produced in a country
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Determinates of Demand
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-Determined by the value of the marginal product of labor
Three kinds:
1.Supply of other factors used in production process
2. Technology
3.Output prices
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Supply Determinates
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-Determined by the number of workers and their opportunity cost of providing labor
Three:
1. Culture
2.Population
3. Other opportunities
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GDP 4 Components to Measure
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1.Market Value
2.Final Goods and Services
3.Produced within Country
4.Given Period of time
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Gross National Product (GNP)
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an estimate of total value of all the final products and services produced in a given period by the means of production owned by a country's residents.
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Nominal GDP
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output valued at a current price
Formula: Q of a good in a given year x P in the same year
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Real GDP
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output valued at constant prices
Formula: Q of good x P in base year
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GDP Deflator
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measures overall change in prices in an economy; uses ratio of real and nominal GDP
Formula: GDP Deflator = (nominal/real) x 100
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ECON 1113: FINAL EXAM