Econ 102 Dilanni Final

Four Starting Points of Economics

1. Scarcity

2. Unlimited Desires

3. Methodological Individualism

4. Rational Choice

Scarcity

The amount of goods available is not sufficient to satisfy all human desires

Unlimited Desires

No matter what one's current circumstances, it is always possible to imagine and achieve a more desirable state of affairs

Methodological Individualism

-The principle that the individual human being is the basic unit of research in the social sciences

Gets violated when talking about groups-"Rich and poor"

Rational Choice

-means that people pursue their values

-rational people still make mistakes

-difference between rational and moral

Price System

-A network of interrelated prices of goods and services

-if economy is a symphony orchestra, the conductor is the price system

Exchange of Equivalents Theory

The theory that people exchange one good for another when both parties value the goods equally

*Wrong because no one would trade if they did not gain anything

Just Price Theory

the theory that there is a single just price at which each good should be sold

*Wrong because seller will say price is too low, buyer will say price is too high

Mercantilism: 4 ideas

1. Social order requires government planning

2. Money constitutes real wealth for a nation

3. Exchange is a zero-sum Game

4. There is a "public interest" separate from the interests of actual individuals

Invisible Hand

Adam Smith's metaphor for the power of individual self-interest to create spontaneous order

Subjective Theory of Price

The theory that the price of a good is determined by its utility(usefulness in satisfying human desires)

Water-Diamonds Paradox (The Paradox of Value)

Water is very useful but has a low price, while a diamond is not very useful but has a high price

The Labor Theory of Value

Theory that the price of any produced good or service is equal to the amount of labor used, directly or indirectly, to produce it.

Four problems with the labor theory of value

1. How do you measure labor?

2. Labor itself has a price(Iron law of Wages)

3. It is a theory of intrinsic value(theory that the value of an object is in the object itself)

4. It ignores the context of the exchange(don't propose with water)

Marginal Revolution

The discovery of the theory of marginal utility in the early 1870s

Carl Menger

Wrote the General theory of the good

Menger's 4 requirements for something to be a good

1. A human need must exist

2. The object must have properties that allow it to satisfy this need

3. Humans must know of this casual connection

4. Humans must have sufficient control over the object to make use of it

Consumer Good (First Order Good)

a good that directly provides utility to consumers

Producer Good(Higher order good)

a good that is used in the production of another good

Structure of Production

the set of steps by which producer goods are used to produce a consumer good

Theory of Derived Demand

the value of goods of higher order is derived from that of the corresponding goods of lower order

Marginal

At the edge, the next one

Marginal Utility

additional satisfaction or usefulness obtained from acquiring or consuming one more unit of a product

Theory of Marginal Utility

The theory that the price of a good is determined by its marginal utility

Ordinal Ranking

A list in order of preference

Opportunity Cost

The next best alternative given up when making a choice

Diminishing Marginal Utility

as a person acquires more units of a good, the satisfaction they derive from each new unit is lower than the previous uni

Increasing Marginal Opportunity Cost

As a person gives up more units of a good, the satisfaction they give up with each new unit is higher than the previous unit

Range of Indeterminacy

the range of potential prices

Market Clearing Price

the price at which the amount supplied is equal to the amount demanded

Quantity Demanded

the amount of a good that buyers are willing and able to purchase

demand curve

a curve that shows the relationship between the price of a product and the quantity of the product demanded

Law of Demand

consumers buy more of a good when its price decreases and less when its price increases

Ceteris Paribus

a Latin phrase that means "all other things held constant"

Quantity Supplied

the amount a supplier is willing and able to sell at a certain price

Supply Curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied.

Law of Supply

producers offer more of a good as its price increases and less as its price falls

Comparative Statistics

the comparison of economic outcomes before and after some economic variable is changed

Elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

income elasticity of demand

-a measure of how much the quantity demanded of a good responds to a change in consumers' income

-computed as the percentage change in quantity demanded divided by the percentage change in income

Normal Good

a good that consumers demand more of when their incomes increase

Inferior Good

a good that consumers demand less of when their incomes increase

Elastic

when a given change in price causes a relatively larger change in quantity demanded(Greater than 1)

Inelastic

Describes demand that is not very sensitive to a change in price (Less than 1)

cross-price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

Substitutes

-Goods that perform similar functions

-Butter and Margarine

-Two goods for which an increase in the price of one leads to an increase in the demand for the other

Complements

-Goods that are more valuable when consumer together

-Coffee and Cream

-two goods for which an increase in the price of one leads to a decrease in the demand for the other

Consumer Surplus

A measure of the gain that the buyer experiences from an exchange

Producer Surplus

a measure of the gain that the seller experiences from an exchange

Total Gain from Trade

the sum of consumer surplus and producer surplus

Equilibrium

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

Shortage

A situation in which quantity demanded is greater than quantity supplied

Surplus

A situation in which quantity supplied is greater than quantity demanded

Dead Weight Loss

gains from trade that are not being made

economic efficiency

A situation in which all of the potential gains from trade have been realized. An action is efficient only if it creates more benefit than cost. With well-defined property rights and competition, market equilibrium is efficient.

Entrepreneur

A person who takes advantage of a profit opportunity in the market

Direction of Causation

the causal relationship between one event and another

Price Control Law

A law that mandates what price buyers and sellers must trade at

Effective Price Control

A price control law that keeps the price above or below the market-clearing price

Maximum Price Control Law (Price Ceiling)

-A law that prohibits people from trading at a price above a legal maximum

-Will cause a shortage if price below market clearing price

Minimum Price Control Law (Price Floor)

-A law that prohibits people from trading at a price below a legal minimum

-will cause a surplus if above market clearing price

rent control

a price ceiling placed on rent

Specialization

We do what we do best, and trade for all the rest (AKA division of labor)

Theory of Absolute Advantage

The theory that a person will specialize in producing the good for which they have the lowest RESOURCE cost.

-FALSE

Theory of Comparative Advantage

The theory that a person will specialize in producing the goods for which they have the lowest OPPORTUNITY cost

Export

A good or service produced in the home country and sold in another country.

Import

good or service sold within a country that is produced in another country

Free Trade

trade that is without government restrictions

Trade Barrier

Any government policy or restriction that limits trade

Protectionism

support for trade barriers

Tariff

A tax on imported goods

Total Cost

the sum of fixed and variable costs

Total Fixed Cost

the sum of those costs that are fixed in total - no matter how much is produced

Total Variable Cost

the total of all costs that vary with output

Marginal Cost

the cost of producing one more unit of a good

Law of Diminishing Marginal Returns

With a fixed input, and an increasing variable input, at some point the marginal product of the variable input must decline

Marginal Product (MP)

The additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resource employed.

Increasing Marginal Returns

range of input usage over which marginal product increases

Diminishing Marginal Returns

The range of input usage over which marginal product decreases

Average Fixed Costs

fixed cost divided by the quantity of units produced

Average Total Cost (ATC)

total costs divided by quantity of units products (AKA cost per unit)

Short Run

a time horizon during which at least one of the firm's inputs cannot be varied

Long Run

The time horizon where all inputs (and costs) are variable

economies of scale

long-run average total cost falls as the quantity of output increases

diseconomies of scale

long-run average total cost rises as the quantity of output increases

Optimal Firm Size(Minimum Efficient Scale)

The quantity of production that minimizes long run average total costs

Transaction Costs-

any costs of going through with an exchange transaction, other than the price of the good itself

Coercive Barrier to Entry

the use or threat of force to prevent others from offering their products for sale to the same customers

total revenue

the total amount of money a firm receives by selling goods or services

marginal revenue

the additional income from selling one more unit of a good; sometimes equal to price

Profit

the difference between total revenue and total cost

Accounting Profit

total revenue minus total explicit cost

Explicit Cost

the amount of money spent on all inputs to a production process

economic profit

total revenue minus total cost, including both explicit and implicit costs

implicit costs

the opportunity costs of the resources supplied by the firm's owners

intermediary

a person who facilitates an exchange

Externality

an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume

positive externality

beneficial side effect that affects an uninvolved third party

negative externality

harmful side effect that affects an uninvolved third party

private marginal cost

the cost to the producer of an additional unit of a good or service