Micro test 1 review

what is the difference between a shift of a curve and a movement along a curve

a shift of a curve is caused by a non price factor, whole curve moves left or right. a movement along a curve is a change in quantity demanded due to price variation

what causes a shift? what causes a movement along a curve?

something other than price changes, income, prices of goods, # of buyers. there is a price change

Was did smith believe?

that the price of a good should equal its necessity

What is diamond and water paradox, and why could smith not get this to work in reality?

the idea that the price of a good should equal its necessity. it lead economists to marginal utility which is the additional pleasure you receive from additional unit of good

what importance does price play in the allocation of resources? what happens if the price is not right?

Prices act as the core signaling that determines scarcity. results in disequilibrium, creating shortage or surplus

why are traditional economists against price floors and ceilings

price floor can create surplus. price ceilings can create shortage.

can indifference curves intersect?

no

what is a budget constraint?

maximum combination of things you buy regarding the limit your money gives you

what is an indifference curve?

a graph showing different combinations of two goods that give a consumer the same amount of total utility

what is meant by price elasticity of demand?

measures how much consumer buying habits change when the price of a product or service changes

why is price elasticity important when deciding whether or not to change price?

it directly dictates whether a price adjustment will increase or destroy total revenue

what does it mean to have perfectly elastic demand? what about perfectly inelastic?

you have more time to adjust and find alternative. perfect inelastic demand means that as you change price quanitity demanded does not change at all.

what factors effect the magnitude of the price elasticity of demand?

type of good, % income spent on the good, time period to adjust, availability of substitutes.

what is meant by a proprietorship?

a business owned and operated by one person.

what are proprietorship advantages and disadvantages?

profit is all yours, u make all the decisions, make your own hours. disadvantages: unlimited liability, no help, long hours, limited capital.

what is meant by a partnership/

firm that has a limited amount of partners

what are the advantages and disadvantages of partnership?

shared responsibility, more capital, profit taxed once as income. disadvantages is unlimited liability, disagreements, shared profit