ECO 165 MSU Exam 1 Flannery

microeconomic statement

Macro Statements

normative economic statement

A statement that reflects an opinion, which cannot be proved or disproved by reference to the facts; "what ought to be"

positive economic statement

A statement that can be proved one way or another (not necessarily true); "what is"

3 questions of economics

1. What to produce?

2. How to produce?

3. For whom to produce?

opportunity cost

the most desirable alternative given up as the result of a decision

absolute advantage

the ability to produce a good using fewer inputs than another producer (can have in both goods)

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer (can only have in one of the goods)

surplus

quantity supplied is greater than quantity demanded; price too high; prices fall as sellers lower them to PE

shortage

quantity demanded is greater than quantity supplied; price too low; buyers bid up prices or sellers raise prices until price is PE

market equilibrium (market clearing price)

quantity supplied = quantity demeanded

SSSSS method

1. Start

2. Search

3. Shift

4. Slide

5. Settle

Elastic demand curve

tend to be flatter

consumers are responsive t price changes

greater than 1

inelastic demand curve

steep

consumers not very responsive to price changes

less than 1

unitary elastic demand

The percentage change in quantity demanded is equal to the percentage change in price. Therefore, the elasticity of demand is equal to 1.

perfectly inelastic demand

demand in which quantity demanded does not respond at all to a change in price

-straight up and down

perfectly elastic demand curve

a horizontal line reflecting a situation in which all prices are the same

-horizontal line

Total Revenue (TR)

=Price x Quantity

(area of box at different prices)

Total Revenue Test

if you raise prices demand goes down

-measures elasticity by comparing total revenues

If D is inelastic raising prices causes

Total Revenue to increase and cost to decrease = profit increase

If D is elastic lowering prices causes

Total revenue to increase but cost increase then cost is unchanged and profit increases

inelastic supply curve

<1, relatively steep, sellers' price sensitivity is relatively low.

elastic supply curve

>1, relatively flat, sellers' price sensitivity relatively high.

perfectly inelastic supply

"Mona Lisa supply curve"

straight up and down

perfectly elastic supply curve

a horizontal line reflecting a situation in which any price decrease drops the quantity supplied to zero; the elasticity value is infinity

Determinants of Demand

1. Substitutes (few=inelastic; many=elastic)

2. Habit/Need vs Want (H/N=inelastic; W=elastic)

3. Income % (small=inelastic; large=elastic)

4. Time (short=inelastic; long=elastic)

Determinants of Supply

1. Ease/cost of additional unit of production (easy=elastic; difficult=inelastic)

2. Time (short=inelastic; long=elastic)

price ceiling

gov sets price BELOW market equilibrium

-max legal price

-shortage

consequences of price ceilings

1. Shortages

2. Black markets

3. fewer market transactions

4. increased search costs

5. allocation not based on price

Price floor

gov sets price ABOVE market equilibrium

-minimum legal price

-surplus

consequences of price floors

1. Surplus

2. Illegal Hiring

3. Fewer market transactions

4. increased search cost

5. Allocation not based only on price (discrimination/favoritism)

profit maximization

firm must produce at a level where marginal revenue = marginal cost

-MR=MC

Revenue maximisation

point where the extra revenue from selling the last marginal unit

-MR=0

Income Elasticity

% change in quantity demanded / % change in income

income elasticity < 0

inferior good

income elasticity > 0

normal good

income elasticity > 1

luxury good

income elasticity < 1 but > 0

necessity

Cross Price Elasticity

% change in quantity demanded for good A/ % change in price for good B

if cross price elasticity > 0

goods are substitutes

if cross price elasticity < 0

goods are complements

if cross price elasticity = 0

goods are unrelated