ECN 212 EXAM 1

incentives

rewards and penalties that motivate behavior

-focus on what will entice them to do something (cause and effect)

good institutions align __ with __

self-interests with social interest

we cannot buy everything, which forces us to

ration our spending

we cannot do everything we want, which forces us to

ration our time

scarcity

the availability of resources is insufficient for individuals to satisfy all desires at zero price

*forces us to make decisions and choose among available alternatives

absence of scarcity

implies that all of our desires for goods are fully satisfied

price

used to ration goods and resources in a market setting

market organization (capitalism)

a method of organization that allows for unregulated prices and the decentralized decisions of private property owners to resolve the basic economic problems

market

the interaction between all of the potential buyers and sellers of good or service

economize

individuals _______, meaning they gain a specific benefit at the least possible cost

rational behavior

behavior is based on a careful, deliberate process that

weighs expected benefits and costs.

People do not make decisions that

make themselves worse of.

subjective

the value of goods is _____, meaning that goods (and services) are appreciated in very different ways by different people

Information

______ is helpful but not free

the process of gathering it is not costless;

it is scarce

opportunity cost

requires us to look at the full cost of making choices, including the value of the next best alternative.

explicit costs

money used in the pursuit of a goal that could otherwise have been spent on an alternative objective.

implicit costs

costs associated with the individual's use of his or her own time and other resources (aka "opportunity cost").

economic cost

the combination of explicit costs and implicit costs - the cost of all resources used to produce the good

accounting costs

costs reported in companies' net income statements

generated by accountants

sunk costs

costs that have already been incurred and are beyond recovery

normative analysis

when we let our opinion into our analysis - "what should or ought to be." It becomes objective - belongs to the mind of the subject

positive analysis

being able to describe what is around us - "what is. "(not influenced by personal feelings) This is objective

theories

judged first and foremost on their ability to predict future consequences of economic action

they are attempts to discover the principles that drive the world (need confirmation but no justification)

can help us understand the concept of

causation

models

metaphors that compare the object of their attention to something else that it resembles

necessarily simplify things and reduce the dimensions of the world

middlemen

a person who buys and sells, or arranges trades

reduce transaction costs

ex- local grocer reduces costs from food manufacturer's

transactions costs

the time, effort, and other resources needed to search out, negotiate and consummate an exchange (trade)

reduce our ability to produce gains from potential trades

production possibilities frontier

1. An increase in the economy's resource base would expand our ability to produce goods and services.

2. Advancements in technology can expand the economy's production possibilities.

3. An improvement in the rules (laws, institutions, and policies) of the economy can increase output.

4. By working harder and giving up current leisure, we could also increase our production of goods and services. This requires us to give up something else we value : leisure

capital

One of the factors of production that are used to create goods or services and are not themselves in the process.

entrepreneurship

the process of starting a business

labor

One of the factors of production; Study of economic behavior of employers and employees in response to changing prices, profits, wages, and working conditions

land

One of the factors of production; land comprises all naturally occurring resources whose supply is inherently fixed

comparative advantage

the proposition that the joint output of trading partners will be greatest when each good is produced by the low opportunity cost producer

absolute advantage

the ability to produce the same good fewer inputs than another producer

division of labor (specialization)

increase output for three reasons:

1. Specialization permits individuals to take

advantage of their existing skills.

2. Specialized workers become more skilled

with time.

3. Division of labor allows for the adoption

of mass-production technology.

ceteris paribus

the concept of holding all else equal

real price

adjusted for price inflation, and/or tax and/or ancillary charges

marginal cost

cost of producing one more unit of a good

marginal benefit

the additional satisfaction that a person receives from consuming an additional unit of good or service

law of demand

-As the price of a good increases,

people will choose to buy less of it.

- As the price of a good decreases,

people will choose to buy more of it.

*price determines quantity demanded

change in quantity/change in price < 0

slopes downward on a graph

Normal Goods

the goods for which an increase in income leads to a greater consumption of the good in question

(most goods are this kind) (when you get more money you buy more of them)

Inferior Goods

the good for which an increase in income leads to a lesser consumption of the good in question

(these goods are rare) (when you get more money, you buy less of them)

substitutes

goods that can replace one another in consumption

The price of one substitute and the shift in demand for the other move in the same direction (positive or negative).

complements

goods which are consumed together

The price of one complement and the shift in demand for the other move in the opposite direction (positive or negative).

tastes and preferences

when desire for a good increases, the demand for the good shifts right

when desire for a good decreases, the demand for the good shifts left

consumer expectations of price

If people expect the price of something to rise in the future, their demand today will shift to the right

if they expect the price to fall, demand will shift to the

left)

consumer expectations of income

if people expect their incomes to increase or decrease in the future, they will act as if these changes have already occurred.

population and demography

If your population or a certain portion of your population increases, demand for goods related to these groups will shift to the right (and if these populations decrease, demand will shift to the left).

derived demand

If the demand for a good shifts, then inputs used to make that good will also see a demand shift in the same direction (holding all else equal).

i.e.- if demand for leather couches increases, demand for leather will also increase

elasticity of demand

The actual burden of a tax depends on the

elasticity of supply relative to demand. As supply becomes more inelastic, more of the burden will fall on sellers and resource suppliers. As demand becomes more inelastic, more of the burden will fall on buyers.

elastic demand

a change in price leads to a relatively large change in quantity demanded

this will happen when close substitutes for the good are readily available

unit elastic demand

A type of price elasticity that assumes a move higher in prices will cause a proportional decrease in demand

inelastic demand

a change in price leads to only a small change in quantity demanded

this will happen when close substitutes are not readily available

law of supply

As the price of a good increases, the more firms will choose to offer it at this price. Conversely, as the price of a good decreases, the less firms will choose to offer it at this price.

change in quantity/change in price > 0

slopes upward

state of (production) technology

As time goes on, we get better and better at using the resources around us efficiently.

As that efficiency increases, we can make goods by using fewer resources. Fewer resources mean a lower cost. This causes supply to shift rightward (or outward).

Prices of Inputs

When you require resources to produce your product, you care very much about the price of these resources. As the price of any input resource increases, your willingness to supply the final good at any given price decreases. This is a leftward (or inward) shift of the supply curve.

Producer Expectations

If firms expect the price of something to rise in the future, they will be less willing to supply the good today at any given price. Supply will shift to the left (inward).

Taxes and Subsidies

If the government increases taxes on a good, the supply available of that good at any given price levels will be lower than it was previously. Supply will shift to the left (inward).

Number of Sellers

If the number of firms willing to sell something increases, the supply available of this good at any given price will be greater than it was before. Supply will shift to the right (outward).

elastic supply

the quantity supplied is sensitive to changes in price. Thus a change in price leads to a relatively large change in quantity supplied.

inelastic supply

the quantity supplied is not very sensitive to changes in price. Thus, a change in price leads to only a relatively small change in quantity supplied.

equilibrium

occurs at the intersection of supply and demand

economic efficiency

1. All activities that provide individuals with more benefits than costs must be undertaken.

2. No activities that provide benefits less than costs should be undertaken.

producer surplus

Producer surplus is the difference between

the amount producers are willing to sell for

and the amount they do sell a good for (Producer surplus is the area below the the actual price paid but above the supply curve)

consumer surplus

Consumer surplus is the difference between the amount consumers are willing to pay and the amount they have to pay for a good (Consumer surplus is the area below the demand curve but above the actual price paid)

total surplus

equals the total area for the consumer surplus plus the total area for the producer surplus

positive externalities

is a benefit that is enjoyed by a third-party as a result of an economic transaction

negative externalities

is a cost that is suffered by a third party as a result of an economic transaction

price ceilings

The government sets a price at which suppliers cannot sell above. (Rent Control)

price floors

The government sets a price at which buyers cannot pay below (Minimum Wage)

black markets

a market that operates outside the legal system

have higher incidence of defective products, higher profit rates, and greater use of violence to resolve disputes

primary reasons for them:

evasion of a price control

evasion of a tax

legal prohibition on the production and exchange of a good

deadweight loss

the loss of the gains from trade as a result of the imposition of a tax

composed of losses to both buyers and sellers

shortages

is a situation in which the quantity demanded is greater than the quantity supplied.

surpluses

is a situation in which the quantity supplied is greater than the quantity demanded.

statutory tax incidence

the legal assignment of who pays a tax

-the actual burden does not depend on who legally pays the tax

actual tax incidence (tax burden)

depends on the elasticity of supply relative to demand

taxes and elasticity

The actual burden of a tax depends on the

elasticity of supply relative to demand.

- As supply becomes more inelastic,

more of the burden will fall on sellers

and resource suppliers.

- As demand becomes more inelastic,

more of the burden will fall on buyers.

average tax rate

tax liability/taxable income

marginal tax rate

the change in tax liability/ the change in taxable income

important because it determines how much of an additional dollar earned must be paid in taxes

tax rate

the rate (%) at which an activity is taxed

tax base

the amount of the activity that is taxed

tax revenues

tax rate multiplied by tax base

the laffer curve

illustrates the relationship between tax rates and tax revenues

--as tax rates increase, tax revenues will also increase even though tax base is shrinking

--as rates continue to increase, the shrinkage in the tax base will dominate and the higher rates will lead to a reduction in tax revenues

--this curve shows that tax revenues are low for both high and low tax rates

market effects of tax and subsidies

As in the case of a tax, the division of the benefit from a subsidy is determined by the relative elasticities of demand and supply rather than to whom the subsidy is actually paid

When supply is highly inelastic relative to

demand, sellers will derive most of the benefits

of a subsidy.

• When demand is highly inelastic relative to

supply, the buyers will reap most of the

benefits of a subsidy.