Microeconomics Midterm

What does the marginal principle tell you to do?

To do something as long as the marginal benefit is greater than or equal to the marginal cost.

What is the rational decision rule?

When faced with a choice, evaluate the full set of costs and benefits. Do it if the Benefits > costs.

What is an economic surplus?

Total benefits - total costs

What is the framing effect?

When a decision is affected by how a choice is described or framed.

What is a sunk cost?

A cost that has been incurred and cannot be reversed.

What is a production possibility frontier?

Shows the different sets of outputs that are attainable with your scarce resources

What is an opportunity cost?

The most valuable alternative you had to give up to go after your choice.

What is the marginal benefit?

The extra benefit from one extra unit.

What is the marginal cost?

the cost from one extra unit.

What does the independence principle ask?

It asks the question, how does your decision interact with everything and everyone else around you?

Individual's demand curve

Plots the quantity of a good a person purchases at each price.

Law of demand

The tendency for quantity demanded to be higher when the price lower

Market demand

A graph plotting the total quantity of an item demanded by the entire market, at each price

Change in quantity demanded

The change in quantity associated with movement along a fixed demand curve

Increase in demand

a shift of the demand curve to the right

Six factors shift the demand curve

Income, preferences, prices, expectations, congestion and network effects, the type and number of buyers.

Complementary goods

Goods that go well together

Substitute goods

Goods that replace eachother

Network effect

When a good becomes more useful because other people use it.

Congestion effect

WHen a good becomes less valuable because other people use it

Variable costs

Costs that vary with the quantity of output produced

Fixed costs

Costs that don't vary with quantity of output produced

Marginal product

The increase in output from an additional unit of input

Diminishing marginal product

The marginal product of an input declines as you use more of that input

Market supply curve

A graph of total quantity of an item supplied by the entire market, at each price

Law of supply

A higher price leads businesses to supply a larger quantity

What does a change in price cause?

A movement along a fixed supply curve

Supple curve shifters

Input price, productivity and technology, prices of related outputs, expectations, and the type and number of sellers.

What does an increase in supply do?

A shift of the supply curve to the right

What does a decrease in supply do?

A shift of the supply curve to the left.

Equilibrium

Happens at the price where the quantity supplied and demanded are equal.

Surplus

At prices above equilibrium, the quantity supplied exceeds the quantity demanded. Leads to a decrease in price.

Shortage

At prices below the equilibrium. Leads to an increase in price.

What are the effects of a falling price?

Quantity demanded rises, and quantity provided falls. Price falls till surplus is eliminated.

Plastic elasticity of demand

Measures how responsive buyers are to price changes. It is always an absolute value.

Plastic elasticty of demand formula

| %change in quantity | / | %change in price |

Elastic

When the percent change in quantity is larger than the percent change in price. Means the buyer is responsive to the price.

Inelastic

When the percent change in quantity is smaller than the absolute value of the percent change in price. The buyer is not responsive to the price.

Midpoint formula

(x2 - x1/((x2+x1)/2) )*100

Total revenue

Price x Quantity

Elastic demand

If your demand curve is elastic, then you should lower the price of your good to increase total revenue.

Inelastic demand

If your demand curve is inelastic, then you should raise the price of your good.

Cross-price elasticity demand

A measure of how responsive the demand of one good is to the price changes of another.

Cross-price elasticity of demand formula

% change in quantity demanded / % change in price of another good (is negative for complements and positive for substitutes)

Income elasticity demand

+-% demand for a good / +-% increase in income

Price elasticity of supply

A measure of how responsive sellers are to price change

Price elasticity of supply formula

% change in quantity supplied / % change in price

Statutory burden

The burden of sending the tax payment assigned by the governement

Economic burden

The burden created by the change in after-tax prices faced by buyers and sellers

Tax incidence

The division of economic burden of tax between buyers and sellers

Which party bears more tax burden?

The more inelastic party

Subsidy

A subsidy is a payment made by the government to those who make a specific choice it wishes to encourage. Like a negative tax.

Price ceilings

Sets a maximum price sellers can legally charge

Binding price ceilings

To be binding, a price ceiling must be set below the equilibrium price

Price floors

The gevernment may set a binding floor price in order to raise prices to help sellers, or reduce quantity sold

Binding price floors

It must be set above the equilibrium price

Quantity regulation

A minimum or maximum quantity that can be sold

Mandate

A requirement to buy or sell a minimum amount fo a good

Quota

A limit on the maximum quantity of a good that can be bought or good

Binding mandate

The mandate must be placed at a quantity greater than the equilibrium quantity

Binding quota

The quota must be set at a quantity less than the equilibrium

Positive analysis

Objective analysis that forecasts the effects of a policy

Normative analysis

Prescribes what should happen, which involves value judgements

Economic efficiency

An outcome is more economically efficient if it yields more economic surplus

Equity

An additional criterion for evaluating policies. An outcome yields greater equity if it results in a fairer distribution of economic benefits.

Consumer surplus

The economic surplus you get from buying something. Consumer surplus = marginal benefit - price. Describes the gain from buying something at a price below the highest price you were willing to pay.

Producer surplus

The economic surplus you get from selling something. Producer surplus = price - marginal cost. Describes the gain from selling a good at a price above the marginal cost you incur from producing that good or service.

Economic surplus

Is the consumer surplus added to the producer surplus

Efficient production

Producing a given quantity of an output at the lowest possible cost.

Efficient allocation

Allocating goods to create the largest economic surplus

Sources that lead to market failure

Market power, externalities, information problems, irrationality, and government regulations

Deadweight loss

How far economic surplus falls below the efficient outcome. DWL = economic surplus at efficient outcome - actual economic surplus

When does deadweight loss happen?

It happens anytime we are not at the efficient quantity

Absolute Advantage

The ability to do a task using fewer inputs

Comparative Advantage

The ability to do a task at a lower opportunity cost.

Comparative Advantage Formula

Opportunity cost of task - Time the task takes / Time required to produce the alternative

Prediction Markets

Markets whos payoffs are linked to weather an uncertain event happens

Internal Markets

Markets that are set up in an organization/company to buy and sell scarce resources

World Supply

Total quantity of a good demanded by all buyers around the world at each price.

How is price determined in international trade?

Price is determined by the interactions of all the buyers and sellers around the world.

World Demand

Total quantity of a good demanded by all buyers around the world at each price.

World Price

The price that a product sells for in the global market.

What do imports riase?

Economic surplus.

Free trade outcomes(Import)

Domestic buyers gain consumer surplus.

Domestic sellers lose producer surplus due to foreign competition.

Imports redistributed from producers to consumers.

Overall economic surplus increases.

The gain to the customers offsets the loss to producers.

Free trade outcomes(Export)

Domestic buyers lose consumer surplus due to foreign competition.

Domestic sellers gain producer surplus due to higher-priced exports.

Imports redistribute surplus from consumers to producers.

Overall economic surplus increased by size.

The gain to producers offset the loss to consumers.

Trade costs

The extra costs incurred as a result of buying or selling internationally rather than domestically.

Import a good if:

Foreign price + trade costs < domestic price

Export a good if:

Foreign price - trade costs > domestic price

Globalization

The increasing economic, political, and cultural integration of different countries.

How are declining trade costs the driving force of globalization?

It lowers trade barriers and brings closer political integration. The internet and improving telecommunications help justify. The proliferation of English plays a big role as well.

What are the sources of comparative advantage?

abundant inputs, specialized skills, mass production

What are the benefits of mass production

Makes very specialized production lines and increases bargaining power.

What are the effects of imports

Domestic prices fall.

Domestic quantity rises.

Domestic quantity supplied falls.

Economic surplus rises overall.

What are the effects of exports?

Domestic price rises.

Domestic quantity demanded falls.

Domestic quantity supplied rises.

Economic surplus rises overall.

Why would countries want to restrict international trade?

National security concerns.

Protection of infant industries.

Unfair competition and dumping.

Restricting trade to save jobs.

What are some trade policies to restrict international trade?

Tariffs: a tax on imported products.

Red Tape: Reduces international trade but does not raise revenue for domestic governments.

Import Quotas: Limits the quantity of a good that can be imported.

Exchange Rate Manipulation: A country can use this tool to increase its exports and reduce its imports.

Externality

A side effect of an economic activity on others whose interests are not taken into account.

Negative Externality

A side effect that imposes harm/cost on others.

Private Interests

Costs and benefits to one individual/company.

Society's Interest

All costs and benefits, whether to the individual or others.