econ 101 midterm 1

capitalism

• enforceable property rights

• items are traded in a market

• firms are the primary organization for production

competitive market model

analyzes: quantity being demanded, quantity supplied, market price

demand curve

qd=a-bp

downwards sloping

demand-->dirt

law of demand

if the price goes up demand goes down

factors that shift the demand curve

income

price of related goods

taste (trends; styles)

expectations of future prices

substitution effect

consumers will ALWAYS substitute for the cheaper good

income effect

when the price of items goes up, consumer purrchasing power goes down

normal goods

when your income goes up, you buy MORE of it

inferior goods

when your income goes up, you buy LESS of it

supply curve

qs=c+dp

upward sloping

supply-->sky

factors that shift the supply curve

production price

profitability of alternative goods

productive capacity

expectations of future prices

law of supply

when the price of items goes up, firms will be willing to produce more of it

market equilibrium

market clearing

qs=qd=q star

p star

price at which the market clears

q star

quantity at which the market clears

price floor

set minimum price (ex. minimum wage)

price ceiling

set maximum price (ex. ny rent control)

market efficiency

consumer surplus; producer surplus; dead weight loss

positive statement (market efficiency)

objective + measurable

"what is"

normative statement

subjective and relative to a certain norm

"what aught to be"

consumer surplus

the monetary gain from people who were willing to pay more for the good than market price

producer surplus

monetary gain for producers who were willing to accept a lower price than market price

market distortions

create dead weight loss ex. taxes; price controls

dead weight loss

loss in economic surplus

excise tax

per unit tax on goods; based on quantity instead of a fraction of the value

market failures

market fails to produce q star

missing markets

property rights are missing/ill defined

externalities

a benefit or cost that affects someone who is not directly involved in the production/consumption of that good

cost

negative externality ex. pollution; neighbor's yappy dog

benefit

positive externality ex. vaccines; education

elasticity

how changing one variable affects others the 'x elasticity of y"

E qp

price elasticity of demand

greater than or equal to 1 -> elastic

less than 1->inelastic

E qy

income elasticity of demand

greater than 0 -> normal good

less than 0 -> inferior good

E ab

cross-price elasticity of demand

greater than 0 -> substitutes

less than 0 -> complements

perfectly elastic

horizontal

E -> infinity

perfectly inelastic

vertical

E -> 0