ECN 212 Exam 1- Ramirez De La Vina

What is economics?

the study of how people make decisions with limited resources

Microeconomics

the study of how households and firms make decisions and how they interact in markets

Macroeconomics

the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth

Marginal Benefit

the additional or extra benefit associated with an action

Marginal Cost

the cost of producing one more unit of a good

Trade Offs

Alternatives that must be given up when one is chosen rather than another

Opportunity Cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another (total cost included)

Trade can make everyone better off

Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods or services.

Incentives

a positive or negative environmental stimulus that motivates behavior

Self-Interest

That which each firm, property owner, worker, and consumer believes is best for itself and seeks to obtain.

Social Interest

The theory that regulation achieves an efficient allocation of resources.

Production Possibilities Curve (PPC)

A curve representing all possible combinations of maximum outputs that could be produced, assuming a fixed amount of productive resources of a given quality.

Law of Increasing Opportunity Cost (see graph and table)

to produce more of one good, a successively larger amount of the other good must be sacrificed

Economic Growth Shifts PPC (sources of economic growth)

an increase (or decrease) in the amount of goods and services produced per head of the population over a period of time.

Unemployment on PPC

Law of Demand

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

Individual Demand

the relation between the price of a good and the quantity purchased by an individual consumer per period, other things constant

Market Demand

the sum of all the individual demands for a particular good or service

Determinants of Demand (What makes the curve move?)

Tastes

Related Goods (Price of)

Income of Buyers

Buyers (Numbers of)

Expectations of the Future

Normal Goods

Goods that consumers demand more of when their income rise and then demand less when their income falls

Inferior Goods

Goods that consumers demand less of when their incomes rises

Complementary Goods

Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely). When the price of toothpaste drops the demand for toothbrushes rise.

Law of Supply

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

Individual Supply

The relationship between the price of a good and the quantity supplied by one producer

Market Supply

The sum of the quantities supplied by each seller in the market at each price

Determinants of Supply (What makes the curve move?)

Resources-cost and availability (land,labor,capital)

Other goods' prices-substitutes/complements

Taxes, subsidies, government regulation

Technology and Productivity

Expectations of the Producer

Number of firms in the industry

Market Equilibrium

A situation in which quantity demanded equals quantity supplied

Equilibrium Price (P*)

The price at which the quantity demanded equals the quantity supplied

Equilibrium Quantity (Q*)

The quantity bought and sold at the equilibrium price

Disequilibrium

Describes any price or quantity not at equilibrium; when quantity supplied is not equal to quantity demanded in a market

Surplus

A situation in which quantity supplied is greater than quantity demanded

Shortage

A situation in which quantity demanded is greater than quantity supplied

Changes in Supply, Demand or both and the effect in the Equilibrium market

(equilibrium P and equilibrium Q) (e.g., If S↑and D↑what happens to P* and

Q*?)

Efficiency

using resources in such a way as to maximize the production of goods and services

Consumer Surplus

The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Demand and Supply equations, denote on graph

Producer Surplus

The amount a seller is paid for a good minus the seller's cost of providing it

Demand and Supply equations, denote on graph

Total Surplus

The sum of consumer surplus and producer surplus

Demand and Supply equations, denote on graph

Price Elasticity of Demand (Ed)

The percentage change in quantity demanded relative to a percentage change in price

Calculate, Interpret

Determinants of Price Elasticity of Demand

Availability of substitutes, degree of necessity, cost relative to income, adjustment time, scope of the market

Price Elasticity of Demand

The percentage change in quantity demanded relative to a percentage change in price

Total Revenue

The amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

Demand Elasticity

% change in quantity demanded / % change in price

Income Elasticity of Demand

The percent change in the quantity of a good demanded when a consumer's income changes divided by the percent change in the consumer's income (normal and inferior goods)

Cross Price Elasticity of Demand

The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good (substitutes, complements)

Price Elasticity of Supply (Es)

% change in quantity supplied / % change in price

Budget Constraint (changes in prices vs changes in income)

The limited amount of income available to consumers to spend on goods and services

Indifferent Curves

(identify bundles that are indifferent or preferred to other)

Optimization

Making the best or most efficient use of a situation, product, or resource

Slope of Indifference Curve

MUx/MUy, marginal rate of substitution

Slope of Budget Constraint

Px/Py

Effects of Changes in Px on Qx (Law of Demand)

When supply changes:

-The demand curve does not shift.

-There is a change in quantity demanded.

Effects of Changes in Px on Qy:

Substitution Effect

When consumers react to an increase in a good's price by consuming less of that good and more of other goods

Income Effect

The change in consumption resulting from a change in real income

Giffen Good

A good for which an increase in the price raises the quantity demanded