Econ Exam 1

Macroeconomics

Microeconomics

study of economy at small-scale level

• examine individuals and specific markets

Macroeconomics

study of economy at large-scale level

• examine total output, price level, other aggregate measures of economy

Resources

items used to produce goods/services

Resources include

land, labor, capital, and entrepreneurial talent (ability)

Land

natural resources and whatever land contain

Labor

human work contribution → physical and mental

Capital

anything produced used to make other goods/services etc

Entrepreneurial talent (ability)

identify need and form business plan

• goal to make money by producing goods and services

Physical Capital

include building, machines, electronics, tools, etc

Human capital

training, education, etc

• goal to make productive employees

Scarcity

desires for item exceed items available

• “all resources are scarce”

Relative scarcity

comparison of scarcity of 1 good, service, or resource to another

Opportunity cost

lose next best alternative as result of making decision when you have more than 1 option

self-interest

idea that ppl chose to do things that interest them

Rational Decision Making

maximizing well-being or happiness; based on self-interest, marginal decision making, optimization

• When MB ≥ MC keep doing it

• When MB < MC don’t do it

Marginal Benefit (MB)

additional benefit associated w/ 1 more unit of an activity

• MB = ΔTB/ΔQ

Marginal Cost (MC)

additional cost associated w/ 1 more unit of an activity

• MC = ΔTC/ΔQ

Optimization

idea that ppl make choices in order to maximize overall benefit or utility of an action subject to its cost

Marginal decision making

Process of making choices in increments by evaluating additional or marginal benefit against the addition or marginal cost of an action

Decreasing marginal benefit

negative relationship between marginal benefit associated w/ use of good or service and quantity consumed

• ex: more pizza consumed, less satisfaction → don’t want to buy more

Increasing marginal cost

additional cost associated when each successive unit of an activity increases

Optimal level of output

marginal benefit of last unit produced and consumed is equal to its marginal cost of unit

• MB=MC

• no incentive to increase or decrease level of activity performed

Production possibilities schedule

table that shows possible combinations of 2 different goods or services that can be produced w/ fixed resources and technology

Production Possibilities Frontier (PPF)

graph that shows possible combinations of 2 different goods or services that can be produced w/ fixed resources and technology

Point under PPF line =

possible but inefficient

Point above PPF line =

impossible

Point on PPF line =

attainable and efficient

Constant Opportunity Cost

characteristic of production whereby opportunity cost associated w/ increasing or decreasing production of 1 good or service, in terms of another is constant at every level of production

• ex: make 1 more taco, also make 1 less pizza

Comparative Advantage

ability to produce good or service at lower relative opportunity cost than that of another producer

• producer able to sell at lower price than competitors

• cannot have comparative advantage in 2 goods

Specialization

using available resources to produce a single good or service rather than multiple goods and services

• increase productivity and standard of living

• individuals and nation become interdependent relying on trade

• country produce good/service they have a comparative advantage in

Terms of trade

price of 1 good, service, or resource in terms of another

• must satisfy both buyer and seller

“Formula” for terms of trade

seller opportunity cost < price < buyer’s opportunity cost

Gains from trade

benefit or wealth that accrues to a buyer or seller as a result of trading 1 good, service, or resource for another

• achieve impossible on PPF

• measured by comparing levels of consumption available before and after trade

Increasing opportunity cost

some resources better suited to producing 1 good or service than another, as production of good or service increases, opportunity cost of each additional unit rises

Market

buyers and sellers interact to trade goods, services, or resources

• competition between suppliers drive prices down

• competition between buyers drive prices up

Law of Demand

as price of good, service, or resource rises, quantity demanded decrease (vice versa) all else held constant

3 reasons that shape demand

income effect, substitution effect, diminishing marginal utility

Income effect

change in price of good, service, or resource have effect on purchasing power of income

Substitution effect

change in price of good, service, or resource effect demand for another good

Change/shift in demand

change in quantity of good, service, or resource demanded at every price due to nonprice determinants

Movement along demand curve

change in quantity of good, service, or resource demanded at every price due to its change in price

Non-price determinants of demand

Income, tastes and preferences, number of buyers, expectations

Normal goods

• increase income, increase demand

• decrease income, decrease demand

Inferior goods

• increase income, decrease demand

• decrease income, increase demand

Tastes and preferences

• preferences increase for specific good, demand increase

• preferences decrease for specific good, demand decreases

Number of buyers

• individuals in market increase, demand increase

• individuals in market decrease, demand decrease

Future price expectations (demand)

expect price increase then buy more, increasing demand

Future availability

expect product to not be available then buy more, increasing demand

Future finances

anticipated economic changes influencing economic decision in present

• expect income increase, buy specific good

Law of supply

as price of good, service, or resource rises, quantity supplied will increase, and vice versa, all else held constant

Diminishing marginal utility

if at least 1 input of production is fixed, marginal productivity of additional variable resources will eventually fall, all else held constant

Quantity supplied

quantity of good, service, or resource producers are willing and able to supply over fixed time period (all else held constant)

Quantity demanded

quantity of good, service, or resource consumers are willing and able to buy over fixed time period (all else held constant)

Change/shift in supply

change in quantity of good, service, or resource supplied at every price due to nonprice determinants

Movement along supply curve

change in quantity of good, service, or resource supplied at every price due to change in its price

Non-price determinants of supply

Resource cost, technology, taxes, subsidies, number of sellers price expectations

Resource cost

• increase resource cost, supply decrease

• decrease resource cost, supply increase

Technology

• increase tech, increase supply

• decrease tech, decrease supply

Taxes

• increase tax, supply decrease

• decrease tax, supply increase

Subsidies

• increase subsidies, supply increase

• decrease subsidies, supply decrease

Expectations of future price (supply)

• expect future price increase, supply decrease

• expect future price decrease, supply increase

Equilibrium price

price at which quantity supplied of good, service, or resource equals quantity demanded

• demand and supply curves intersect

Equilibrium quantity

quantity traded when quantity supplied of good, service, or resource equals to quantity demanded

Shortage

situation where quantity demanded is greater than quantity supplied at current market price

• excess demand

• quantity supplied < quantity demanded

  • below equilibrium

Shortage =

quantity supplied - quantity demanded < 0

Surplus

situation where quantity supplied is greater than quantity demanded at current market price

• excess supply

• quantity supplied > quantity demanded

  • above equilibrium

Surplus =

quantity supplied - quantity demanded > 0

A shortage signals ____

sellers to raises prices in order to increase supply

A surplus signals ____

sellers to lower prices to decrease supply

Price ceiling

max legal price at which good, service, or resource can be sold

Non-binding price ceiling

max legal price set above existing equilibrium price

• no effect on market

Binding price ceiling

max legal price set below existing equilibrium price

• restrict trade and result in shortages

Price floor

minimum legal price at which good, service, or resource can be sold

Non-binding price floor

minimum legal price set below existing equilibrium price

• no effect on market

Binding price floor

minimum legal price set above existing equilibrium price

• restrict trade and result in surplus

Excise tax

tax based on number of units purchased, not on price paid for good/service

Tax revenue (TR) =

tax * quantity traded

Governments collect taxes to

to fund operations that ensure markets function properly or discourage a specific behavior

Excise taxes result in

• buyers paying more for good

• sellers receiving less for good

• overall quantity demanded decrease