ECC1000: Test #1

Production Possibility Frontier (PPF)

a graphical representation showing the maximum possible output combinations of two goods an economy can produce, assuming fixed resources and technology

Opportunity Cost

value of the next-best alternative forgone when making a decision

Absolute Advantage

Who can make the most of a good?

Comparative advantage

Who can make the good with the least opportunity cost?

Sunk cost

Costs which have already been incurred & cannot be removed through structural changes

Marginal benefit

the maximum amount a consumer is willing to pay for an additional unit of a good or service

marginal cost

change in the total cost that arises when the quantity produced is increased

Utility

An index that measures an individual's subjective satisfaction from consuming goods & services

Indifference Curve

downward-sloping, convex graph plotting different combinations of two goods that yield the same total satisfaction (utility) to a consumer

Marginal Rate of transformation (MRT)

Rate you can transform one good to another

Non-Linear budget constraints

Enhanced income management & smartcard (x amount must be spent on food)

Properties of consumer preferences: Complete

Able to rank any 2 bundles

Properties of consumer preferences: Transitive

If a consumer prefers A to B & B to C, they will prefer A to C

Properties of consumer preferences: Continuous

bundle very close to another, difference in utility can only be small

Properties of consumer preferences: Monotonic

More is better

Properties of consumer preferences: Convex

Satisfies the diminishing marginal rate of substitution

Income Effect

As a result of a price increase, the consumer's real purchasing power decreases

substitution effect

Because of the higher price of a good, that good is now relatively more expensive & than another good

Deadweight Area

loss of economic efficiency when there is a floor ceiling price that distorts market equilibrium.

law of demand

As the price increases, demand will fall

Non-price factors of demand

Change in price of related goods / consumer income / taste & preferences / future expectation / number of consumers

Law of Supply

As the price increases, suppliers are willing to produce more

Non-Price factors impacting supply

Change in Substitute prices / complements / tech / future expectation / number of producers

Equilibrium on the demand side

The maximum consumers are willing to pay

Equilibrium on the supply side

The minimum suppliers are willing to sell for

PED Formula

Quantity Demanded % change / Price % Change