Studied by 8 people
Marginal
means “extra” or “additional”
Marginal Analysis
The comparison of marginal benefits and marginal costs, usually for decision making
Basically weighing the pros and cons
For example: Should you buy a 1/2 carat diamond of a 1-carat diamond?
The marginal cost of the larger diamond is the added expense beyond the cost of the smaller diamond.
The marginal benefit is the perceived lifetime pleasure (utility) from the larger stone.
If the marginal benefit of the larger diamond exceeds its marginal cost (and you can afford it), buy the larger stone.
But if the marginal cost is more than the marginal benefit, you should buy the smaller diamond instead- even if you can afford the larger stone.
Marginal Cost
The extra (additional) cost of producing 1 more unit of output
Equal to the change in total cost divided by the change in output
Impacts the producer
It is always downward sloping
Marginal Benefit
A maximum amount a consumer is willing to pay for an additional good or service.
It is also the additional satisfaction or utility that a consumer receives when the additional good or service is purchased.
Tends to decrease as consumption of the good or service increases
When should you consume more?
When its marginal benefit exceeds its marginal cost
When should you consume less?
When the marginal cost exceeds the marginal benefit
When should you not consume?
When the marginal benefit and the marginal cost are equal to one another.
Consumer Surplus
The difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price
The share of the total surplus that is received by a consumer or consumers in a market is called this
On a graph: Triangular area below the demand curve and above the market price
Calculate the area of a triangle: 1/2bh
Producer Surplus
The difference between the actual price a producer receives (or producers receive) and the minimum price that a consumer would have to pay the producer to make a particular unit of output available.
On a graph: the triangular area above supply curve and below the market price
How do you calculate consumer/producer surplus and find your utility (happiness)?
Consumer and producer surpluses are calculated as the areas of the triangle below and above and below and above.
What is the economizing problem all economies/people face?
Individuals: The need to make choices because economic wants exceed economic means
They must decide what to buy and what to forgo
Society: Society has limited or scarce economic resources, meaning all natural, human, and manufactured resources that go into the production of goods and services.
When an economist states you are acting rationally what does that mean?
Simply means that when you make a choice, you will choose the thing you like best.
As long as you’re doing what you want given your situation, you’re acting rationally
What is the invisible hand?
The tendency of competition to cause individuals and firms to unintentionally but quite effectively promote the interests of society even when each individual or firm is only attempting to pursue its own interests.
What does the word “utility” mean in economics?
The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).
Happiness
Opportunity Cost & Use in a Sentence
To obtain more of one thing, society sacrifices the opportunity of getting the next best thing that could have been created with those resources
Sentence: If we got free donuts, it would not be free since we are sacrificing our time.
Characteristics of a Market System?
An economic system in which individuals own most economic resources and in which markets and prices serve as the dominant coordinating mechanism used to allocate those resources; capitalism.
Also known as a mixed economy
Characterized by the private ownership of resources, including capital, and the freedom of individuals to engage in economic activities of their choice to advance their well-being.
Self-interest is the driving force
Specialization, the use of advanced technology, and the extensive use of capital goods are common features.
Circle Flow Model
Illustrates the flows of resources and products from households to businesses and from businesses to households, along with the corresponding monetary flows.
What is an Economic System (define it)?
A particular set of institutional arrangements and a coordinating mechanism for solving the economizing problem
A method of organizing an economy of which the market system and the command system are the two general types.
How do economic systems differ?
Economic systems differ as to (1) who owns the factors of production (2) the method used to motivate, coordinate, and direct economic activity.
What is the primary driver that regulates the market system?
Prices drive the market system
What are the 5 fundamental questions?
What are we going to make
In a market economy - dollar votes will produce what we make
How are we going to make it?
That is up to the business, going to try and make it as cheap as possible in order to increase their profit margin
Who is going to make them?
How will the system consider changes?
Why is the market economy considered efficient?
Not equitable
Because we are trying to maximize our individual utility or individual firm utility.
Invisible hand
Competing for your money
Maximizing their firm utility
We as individuals are trying to maximize our own utility
What was the main problem with the Barter system and how has money fixed it
Coincidence of wants
You need to have the good that the person you are buying from wants.
Under a market system, what does freedom enterprise mean?
It means you have the freedom to start any business you want, even if its dumb as hell
Free will
What do we mean when we say your “dollar votes”?
The “votes” that consumers cast for the production of preferred products when they purchase those products rather than the alternatives that were also available
What is a market?
Any institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of a particular good or service
What is the law of demand?What is the relationship it has with price and quantity?
The principle that, other things equal, an increase in a product’s price will reduce the quantity of it demanded, and conversely for a decrease in price
Inverse Relationship
As price goes up, my quantity demanded goes down
What is the law of supply? What is the relationship it has with price and quantity?
The principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease,
Direct relationship
Complementary Goods
Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely).
Substitute Goods
Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.
Price Floor
A legally established minimum price for a good, or service. Normally set at a price above the equilibrium price.
Know market equilibrium on graph and price floor and ceiling
Price Ceiling
A legally established maximum price for a good, or service. Normally, set at a price below the equilibrium price.
If supply increases and demand stays the same what happens to equilibrium price and quantity?
Equilibrium quantity goes up, and equilibrium price goes down.
If demand increases and supply stays the same what happens to equilibrium price and quantity
Equilibrium quantity goes up, and equilibrium price goes up
If demand increases and supply increases what happens to equilibrium price and quantity
Equilibrium quantity goes up, equilibrium price could go up, down or stay the same.
Normal Good
A good or service whose consumption increases when income increases and falls when income decreases, price remaining constant.
When income goes up, demand goes up for a normal good
Inferior Good
A good or service whose consumption declines as income rises, prices held constant
For an inferior good - income goes down, demand goes up
Income Effects
A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product’s price
As your income goes OR purchasing power goes up (down) your demand goes up (down)
Substitution Effects
A change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the good’s own price.
The reduction in the quantity demanded of the second of a pair of substitute resources that occurs when the price of the first resource falls and causes firms that employ both resources to switch to using more of the first resource (whose price has fallen) and less of the second resource (whose price has remained the same)
What is market failure?
The inability of a market to bring about the allocation of resources best satisfies the wants of society; in particular, the overallocation or under allocation of resources to the production of a particular good or service because of externalities or asymmetric information, or because markets fail to provide desired public goods
When does market failure occur?
Occurs when/Causes:
Externality
Public goods (if a selection of the population that consumes the goods fails to pay but continues using the good as actual payers)
Market control (when the buyer or seller possesses the power to determine the price of goods or services in a market)
Imperfect information in the market (lack of appropriate information among buyers and sellers)
Positive Externalities
A benefit obtained without compensation by third parties from the production or consumption of sellers or buyers.
Ex. A beekeeper benefits when a neighboring farmer plants cover. Also known as an external benefit or a spillover benefit
Negative Externalities
A cost imposed without compensation on third parties by the production or consumption of sellers or buyers.
Ex. A manufacturer dumps toxic chemicals into a river, killing fish prized by sports fishers. Also known as an external cost or spillover cost.
How to correct externalities that cause market failures?
You can tax it or subsidize it to shift the demand or supply curve
positive externalities - subsidize it
negative externalities - tax it
Under Allocation of Resources
Marginal cost < Marginal benefit produce/consume more
Over Allocation of Resources
Marginal cost > Marginal benefit produce/consume less
Positive externalities are generally _____produced and negative externalities are generally ______ produced
Under/Over
Positive externality examples - public schools
Negative externality examples - pollution
Public goods
A good or service that is characterized by nonrivalry and non-excludability.
These characteristics typically imply that no private firm can break even when attempting to provide such products. As a result, they are often provided by governments, who pay for them using general tax revenues
Private good
A good or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude nonpayers from receiving the benefits
Principal-agent problem
When there is adverse selection for a good or service. People that buy insurance are the ones that need it, so they drive worse.
Special Interest Effect
Any political outcome in which a small group (“special interest”) gains substantially at the expense of a much larger number of persons who each individually suffers a small loss
When you lobby to your own special interests
Graph 1
S0 is original, S1 is shifted
moving from 0 to 1, is a decrease because it shifted left, input cost go up from s0 to s1 or taxes went up
two main reasons market systems differ: government involvement and who gets to consume it
Graph 2
dead weight: B and D (lost economic activity) Q3 deadweight loss E & F because of overproduction
Benefit/Cost
Graph 3
surplus
supply/demand
An increase in demand may be caused by
A favorable change in consumer tastes
An increase in the number of buyers
Rising income if the product is a normal good
Falling income if the product is an inferior good
An increase in the price of a substitute good
A decrease in the price of complementary good
A new consumer expectation that either prices or income will be higher in the future
Note 
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