Econ Exam 1

Adam Smith

Wealth of Nations

spoke about the specialization of trade and the invisible hand

Marginal

Additional

aggregate

total

equity

fairness

efficiency

least cost

technological efficiency

most units at least cost

allocative efficiency

making desired units at least cost

Ceteris Paribus

everything else equal

Model

mathematical representation

Variables

things that change

positive economics

statement of fact EX: 30* out

normative economics

statement of opinion EX: its too cold out

Opportunity Cost

value of next best alternative

what you had to give up to get it

resource

anything used by people or used by people or used to make something else

Basic Principles

1. people face tradeoffs

2. people respond to incentives

3. rational people think at the margin

4. market are generally a good way to organize economic activity

5. opportunity cost

Okum’s Razor

get rid of extra details

simplify to get to the main point

Microeconomics

small, people, firms, industries

Macroeconomics

big, whole economy, inflation, unemployment, GDP, money supply

Production possibilities Fronteir(PPF)

graph the relates to the different goods that can be produced in a fully employed society

goal is to look at tradeoff from making one good or the other

Law of Increasing Opportunity Cost

cost of production increases to make more of one good if the tradeoff is an equal ratio, the graph will be linear

The points on the graph are the most efficient, outside is unattainable, inside is attainable but unefficient

market

mechanisms where buyers and sellers trade

price

money that must be paid for a product

producers

make profits

consumers

people willing to buy products

output

G and S and amount sold

equilibrium price

selling price

equilibrium quantity

amount exchanged at the price

capitalism

free market

communism

Government controlled

socialism

signifigant portion of income goes to government with redistribution of wealth

Demand

relationship between P and Q

Quantity demanded

how much consumers are willing and able to pay at a particular price during a particular time

law of demand

at lower prices I want more

substitution effect

people substitute out of good that is more expensive and into that which is cheaper

Income effect

lower prices make people feel richer

law of diminishing marginal unity

Additional happiness falls from each consecutive unit

determinants of demand

1. Tastes and preferences

2. Population

3. Income

   • Normal good as I^, d^ EX: clothes

   • Inferior Good as I^, D decreases

4. Prices of related goods

   • Complement - two goods that go together P^ D1 and D2 decrease

   • Substitute - Used in place of each other P^, D1 decreases, D2^

5. expected price

   • as expected price goes up, current demand goes up

6. Taxes

   • excise tax on specific good Tax^, D decreases

7. subsidies

   • reverse tax - because price goes down, D^

Law of supply

Positive relationship between Price and Quantity

When P^, Q^

Rationale

Increase in marginal costs, frims require higher prices to produce more output

Supply determinants

1. price of inputs D^ and supply decreases

2. Technology causes increase in supply

3. Price of other potential output

4. Number of sellers, D^ and P^

5. expected future price, D decrease, supply more now, and when D^, supply^ later

6. excise tax - tax^, S decrease

7. subsidy(reverse tax) - ^subsidy, S^

shortage and surplus

Shortage - excess demand

surplus - excess supply

living wage

the amount that you need to provide for family and live

price floor

lowest price can change

price ceiling

highest price can go

binding

changes equilibrium

consumer surplus

CS - difference between what you are willing to pay and what you had to pay

Producer Surplus

PS - difference between what you are paid amd what you are willing to supply at

oligopoly

a few competitors