ECON100 Quiz 1

Fundamentals, Supply, and Demand

Microeconomics

• The study of economy at the economy at the small-scale level, examining individuals and specific markets

• Concerns itself with choices from consumers, firms, and government 

• Also investigates factors how bad weather, technology, and government chances the prices in the goods we consume everyday

Macroeconomics

• The study of the economy at the large-scale level, examining total output, the price level, and other aggregate measures of the economy

• So instead of price tag, they examine price level(average price)

resource

• Any item, whether a gift of nature, the result of production, or the result of human effort, that is used to produce goods and services

• Land, labor, capital, entrepreneurial ability

land

All natural resources used in production; sometimes referred to gifts of nature

labor

• All physical and mental activity devoted to producing goods and services

capital

• The tools, machinery, infrastructure, and knowledge used to produce goods and services. Capital is sometimes divided into “physical” and “human” capital.

• Physical Capital

• Human capital

physical capital

refers to tangible items that are created to increase productivity

Human capital

• refers to the knowledge and skills that people acquire in order to increase productivity

entrepreneurial ability

• The talent or ability to combine land, labor, and capital to produce goods and services.

• It is different form human capital in that it primarily involves assuming risk and organizing resources into a productive process

Scarcity

• A condition that results from the inability of limited resources to satisfy unlimited wants

• Because your time is subject to scarcity, you have to decide whether you're better off studying for you econ exam or going to movie with friends

• Similarly, due to the scarcity of natural resources, we can’t have all the housing and all the forests we may want because cutting down a tree to build a house means less forest

relative scarcity

• The comparison of the scarcity of one good, service, or resource to that of another

A major problem faced by developing countries is the relative scarcity of the drinkable water as compared to water in general

allocation

• The process of assigning a good, service, or resource to one use instead of another

• At a local town council, people debated a proposal that would change the allocation of public space for recreational use by demolishing a skating park and building an arboretum

Opportunity Cost

The value of the next-best forgotten alternative; the value of the opportunity that you gave up when you choose one activity, or opportunity, instead of another. OC exist because of scarcity

marginal benefit

• The additional benefit associated with one more unit of an activity

• MB=change in total benefit (TB)/change in quantity(Q)

marginal decision making

• The process of making choices in increments by evaluating the additional, or marginal, benefit against the additional, or marginal, cost of an action

• When you decide to turn off the bedroom light on your way to the kitchen so that you can save a little money on your electric bill, your engaging in marginal decision making

• Similarly, when your decide after studying for 3 hours that another hour of sleep is more beneficial to you than a fourth house studying, that’s marginal decision making

optimization

• The idea that people make choices in order to maximize the overall, benefit, or utility, of an action subject to its cost; people will engage in an activity as long is greater than or equal to its marginal cost

  • If MB >=MC, do it

  • If MB<, don't do it

marginal cost

The additional cost associated with one more unit of activity

MC=change in total cost (TC)/change in quantity (Q)

decreasing marginal benefit

• The negative relationship between the marginal benefit associated with the use of a good or service and the quantity consumed; the more of a good or service that is consumed, in a given period of time, the lower the marginal benefit associated with each additional unit

• Suppose it's late at night and you're studying for an exam early the next morning. You’ll experience decreasing marginal benefit with each additional hour of sleep lost of studying is more important than the previous hour

increasing marginal cost

• A condition in which the additional cost with each successive unit of an activity increases.

Suppose it's late at night and you're studying for an exam early the next morning. You’ll experience increasing marginal benefit with each additional hour of sleep lost of studying is more important than the previous hour

comparative advantage

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

If in the time it takes you to iron one shirt, you could wash 10 dishes, but in the time it takes your roommate to iron one shirt, she could wash 20 dishes, you have the comparative advantage in ironing shirts: You give up only 10 dishes, while she gives up 2

specialization

• The practice of using available resources to produce a single good or service rather than producing multiple goods or services

You and your roommate agree to a specialization of chores-you will specialize in ironing shirts while your roommate specializes in vacuuming the floor. With this plan, it is likely that you each will spend less time doing household chores

gains from trade

• The benefit, or wealth, that accrues to a buyer or seller as a result of trading one good, service, or resource from another. The wealth, or additional well-being, created by trade does not have to be monetary.

market

Any place where, or mechanism by which, buyers and sellers interact to trade goods, services, or resources

good

• A tangible product that consumers, firms, or governments wish to purchase

service

An intangible product or action that consumers, firms, or governments wish to purchase

law of demand

• A principle in economics that states that as the price of a good, service, or resource rises, the quantity demanded will decrease, and vice versa, all else held constant

• If you lower the price of a cup of lemonade, the law of demand tells you that people will be more willing and able to buy a cup of lemonade and quantity will increase

demand schedule

A tabular representation of the relationship between the price of a good, service, or resource and the quantities consumers are willing and able to buy over a fixed time period, all held constant

demand curve

A graphical representation of the relationship between the price of a good, service, or resource and the quantities consumers are willing and able to buy over a fixed time period, all else held constant

quantity demanded

The quantity of a good, service, or resource that consumers are willing and able to buy at a given place

income effect

• The effect that a change in the price of a good, service, or resource has on the purchasing power of income. For example, when prices decrease, the purchasing power of income increases and consumers are able to purchase more goods, services, or resources

• Suppose you only have $20 to spend on gasoline each week, WHen the price of gasoline rises $2 per gallon to $4 per gallon, the purchasing power of that $20 falls from 10 to 5 gallons of gasoline. The result decrease in the quantity of gasoline demanded is due to the income effect

substitution effect

• The effect that a change in the price of one good,service, or resource has on the demand for another. For example, an increase in the price of one good will increase the demand for its substitutes, and vice versa

• Victor usually eats an orange or an apple every day with his lunch. The substitution effect explains why, when he sees the price of oranges increase one week, he substitutes away form oranges and buys more apples instead

diminishing marginal utility

• Negative relationship between the quantity of a good, service, or resource and the marginal utility obtained form each additional time unit consumer in a given period of time

• For Monica, the first cup of coffee in the morning is worth $3; the second cup of coffee is worth only $1. So, if the price of coffee is $2 per cup, she buys one cup of coffee. Her first cup of coffee gives her a lot of satisfaction and is worth the price. She doesn't buy a second cup because of the diminishing marginal utility: the second cup is worth only $1 to her, so she can’t justify paying $2 to buy it

market demand

The overall, or total demand for a good, service, or resource. It represents the horizontal summation of the quantities demanded by individuals, firms, states, or even nations at each price over a fixed time period, all else held constant

change (shift) in demand

• A change in quantity of a good, service, or resource demanded at every price. Graphically, an increase in demand is represented by a rightward shift of the demand curve, while a decrease in demand is represented by a leftward shift of the demand curve. 

• A particularly rainy fall season is likely to cause an  increase in demand for umbrellas, as consumers will be more willing to buy them. A rainy fall season is also likely to result in a decrease in demand for shorts and T-shirts because fewer people will be willing to wear them in wet fall weather

movement along the demand curve

A change in quantity of a good, serve, or resource demanded due to a change in its price. Graphically, this change is represented as a movement along an existing demand curve.

normal good

• A good for which there is a direct relationship between the demand for the good and income. For normal goods, an increase in income increases demand, and a decrease in income demand; a good with a positive income elasticity of demand

• Ex. When Clara was a college student, her financial resources were limited, and she only owned two pairs of shoes. After she graduated and landed a high-paying job, Clara used her income to buy several new pairs of shoes and an entirely new wardrobe. For Clara, we know that clothing items, such as shoes, are normal goods because when her income increased, her demand for clothing increase and she bought more

inferior good

• A good for which there is an inverse relationship between the demand for the good and income. For inferior goods, an increase in income decreases demand, and a decrease in income increases demand; a good with a negative income elasticity of demand

• When Clara was a college student, her financial resources were limited, and she had to eat macaroni and cheese almost every night. After she graduated and landed a high-paying job, she stopped eating mac and cheese and, instead, added favorites like lobster bisque to her menu. For Clara, we know that mac and cheese must be an inferior good because when her income increased, the demand for mac and cheese decreased.

substitutes

• Goods, services, or resources that are viewed as replacements for one another

• In cooking, margarine is often a substitute for butter. If margarine goes on sale, you’re likely to buy less butter and instead buy more margarine

complements

• Goods, services, or resources that are used or consumed with another

• because they are often eaten together, tortilla chips and salsa are complements. If you decide to buy a jar of salsa because it’s on sale, you’ll likely pick up a bag of tortilla chips too.

law of supply

• A principle in economics that states that as the price of a good, service, or resource rises, the quantity supplied will increase, and vice versa, all else held constant

• All else held constant, if the price of oranges rise, the law of supply indicates that producers will be willing and able to increase the quantity of oranges they supply to the market

Diminishing marginal productivity

The principle that at least one input of production is fixed, the marginal productivity of additional resources will eventually fall, all else held constant

supply schedule

• A tabular representation of the relationship between the price of a good, service, or resource and the quantities producers are willing and able to supply over a fixed time period, all else held constant

market supply

The overall, or total, supply of a good, service, or resource. It represents the horizontal summation of the quantities supplied by individuals, firms, states, or even nations at each price over a fixed time period, all else held constant

subsidy

• A payment made by the government that does not necessarily require an exchange of economic activity in return. Subsidies most often take the form of payments to businesses

• The federal gov often provides subsidies to producers of renewable energy in an effort to encourage increased production, with a goal of lowering the price of renewable energy

Three Reasons Demand Curves Slope Downward

• Income Effect

• Diminishing Marginal Utility

• Substitution Effect

6 non price determinants of supply

• Taxes

• Subsidies

• Resource of cost

• Use of technology

• Number of sellers

• Expectation of future price