Principles of Microeconomics Exam 1

Consumer Surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Producer Surplus

the amount a seller is paid for a good minus the seller's cost of providing it

Price Ceiling

a legal maximum on the price at which a good can be sold

Price Floor

a legal minimum on the price at which a good can be sold

Positive Economics

The scientific aspect of economics that determines "what is?"

Normative Economics

The portion of economics that attempts to address "what should be?"

Law of Supply

the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises

Law of Demand

the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises

Equilibrium

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

Price Elasticity of Supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

Cross Price Elasticity of Demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

Income Elasticity of Demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

Utility - Definition

a measure of happiness or satisfaction

Capital

the equipment and structures used to produce goods and services

Production Possibilities Frontier

A graph that shows the various combinations of amounts of two commodities that could be produced using the same fixed total amount of each of the factors of production.

Goods

A material that satisfies human wants, and provides utility.

Supply Curves

a graph of the relationship

between the price of a good and

the quantity supplied

Demand Curves

a graph of the relationship

between the price of a good and

the quantity demanded

Shortages

a situation in which quantity

demanded is greater than quantity

supplied

Surpluses

a situation in which quantity

supplied is greater than quantity

demanded

Substitutes

two goods for which an

increase in the price of one leads to an

increase in the demand for the other

Complements

two goods for which an

increase in the price of

one leads to a decrease in

the demand for the other

Changes in Demand

Shifts or pivots in the demand curve

Changes in Supply

shifts or pivots in the supply curve

Market Equilibrium

Supply and demand are equal.

Utility - Concept (What does it mean when we say that something gives us utility?)

It is a "good" good.

Types of Economies

See "Lecture 02, Slide 27"

Determinants of Demand

1. Income - Money earned over a period of time

2. Wealth - Net Worth

3. Tastes - Changes in Taste

4. Price of Substitutes - Wine

5. Price of Complements - Pizza

6. Future Prices - Memorial Day

Determinants of Supply

1. Input Prices - Resources and Raw Materials

2. Technology - More Efficient Use of Resources

3. Number of Sellers

4. Future Prices - Price Expectations

5. Government Policies A. Subsidies B. Taxes C. Restrictions

6. Weather (Agriculture)

Cross Price Elasticity of Demand (Between two Products)

a measure of how much

the quantity demanded

of one good responds to

a change in the price of

another good, computed as

the percentage change in

quantity demanded of the

first good divided by the

percentage change in the

price of the second good

Income Elasticity of Demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

Tax Incidence

the manner in which the burden of a tax is shared among participants in a market

Resources

Labor, Capital, Land, Natural Resources, and Entrepreneurship

Labor Resources

The time people spend producing goods and services

Land Resources (Natural Resources)

Gifts of Nature such as physical space and prime materials (timber, arable land, crude oil, iron ore, coal, etc.)

Renewable and Exhaustible Resources

Entrepreneurial Resources

Entrepreneurship and Management

Entrepreneurship

The willingness by creative people to take risks to create new and innovative products.

Management

The ability to combine the other resources (labor, capital, and natural resources) into a productive venture.

Capital Resources

Something produced that is long-lasting and used to produce other goods

Physical Capital

Long lasting physical goods that are themselves used to produce other products.

Human Capital

Skills and Knowledge possessed by workers, that last for many years, which itself goes into producing other things.

Capital Stock

The total amount of capital available to a nation, in all forms, for productive use at any given time.

Capital Good

Can be used to make other capital goods or consumer goods

Financial Capital

Owners of the resources of a company or society, most often represented by shares of stock.

Inferior Good

a good for which, other

things equal, an increase

in income leads to a

decrease in demand

Normal Good

a good for which, other

things equal, an increase

in income leads to an

increase in demand

Neutral Good

goods that have a demand that is not dependent to the income.

Price Elasticity of Demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price