ECO 2023 Exam 1

Scarcity

unlimited wants but limited resources

what is produced?

economic question "what"

How will goods and services be produced?

economic question "how"

Who will get the goods and services?

economic question "who"

Traditional approach

do what we have always done. Inflexible

Command approach

government dictates what to produce

market-based approach

let prices, property right and markets answer the questions (this class) (capitalism)

market

any arrangement that allows buyers and sells to transact business

prices

determined in markets

property rights

socially determined legal rights that govern the ownership, use of, and disposal of property

Adam Smith's invisible hand theory

in a market economy with property rights, people acting in their own self-interest will do whats best for society

Production possibilities frontier (PPF)

shows the maximum feasible combinations of goods a society can produce, given current resources and technology

production efficient

points on the PPF (attainable)

inefficient, attainable

points with the PPF

unattainable

points outside the PPF

allocatively efficient

All combinations of goods along the PPF are production efficient. only one combination is..

opportunity cost

the cost of the next best alternative foregone Loss/Gain

law of increasing opportunity cost

the opportunity cost of producing a good increases as more of it is produced (PPF is bowed outward because of this)

shift in

PPF shifts due to disease, natural disaster, act.

shift out

PPF shifts due to major innovation

1) change in "factors of production" 2) change in technology

PPF changes happen for one of two possible reason (or both)

factors of production

land, capital (machinery), entrepreneurial effort

money price

the actual price of the good (i.e. the money that you could have saved if you didn't buy the good).

relative price

the price of a product expressed relative to the price of another product

law of demand

quantity demanded falls as price rises

law of supply

quantity supplied rises as price rises

demand curve

\

..... \ down

.......... \

...............\

supply curve

............../

........./

.../

/

quantity demanded (supplied)

occurs when there is a change in price of that good. We see this as a different point along the horizontal axis.

demand (supply)

represents a shift in the curve. (left is less)

A change in expected future price

only factor that shifts both curves at the same time

change in price

does not cause a shift of either curve; rather, it causes a movement along them

Equilibrium Price

price at which the supply and demand curves intersect. At this price, quantity demanded equals quantity supplied and there is neither a shortage nor a surplus.

normal goods

goods for which an increase in income causes an increase in demand (most goods)

Inferior goods

goods for which an increase in income causes a decrease in demand (ramen noodles)

substitutes

two goods that can be used in place of one another (coke, pepsi)

complements

two goods that are bought separately and used together, such as hot dogs and hot dog buns.

substitues in production

goods that can be produced using the same inputs (leather belts, leather shoes)

complements in production

goods that are always produced together (gasoline and diesel fuel.

surplus

price above equilibrium, quantity supplied will exceed the quantity demanded

shortage

price below equilibrium, the quantity demanded will exceed the quantity supplied

Elasticity

measure os responsiveness to change

price of elasticity of demand (interval)

reflects how quantity demanded responds to changes in price. The percent change in quantity divided by percent change in price

|__%change in quantity__|

| %change in price |

Price of elasticity of demand (at a point)

|___1___| X __P__

| Slope | Q

total revenue test

can be used to predict whether demand is elastic, unit elastic, or inelastic over an interval based on how a change in price affects total revenue

elastic

if a demand is ________, raising price will decrease total revenue

inelastic

if a demand is ________, raising price will increase total revenue

unit elastic

if a demand is ________, raising price will not change the total revenue

marginal benefit

benefit of one more unit or action

marginal cost

cost associated with one more unit or action

marginal analysis

compares the additional benefit of an action (marginal benefit) to the additional cost of the action (marginal cost).

marginal

additional

marginal (social) benefit curve

The demand curve is also called the ______. representation of the willingness to pay for everyone in society. As we consume more our ______falls.

marginal (social) cost curve

the supply curve is also called the ______. representation of the willingness to sell. (at a specific price how much will a seller want to sell?) _____ rises as quantity increases.

DO IT

Marginal benefit > marginal cost

DO NOT DO IT

Marginal benefit < marginal cost

Consumer Surplus

willingness to pay

Value - Amount Paid (willingness to pay-price)

area above the price, below the demand curve, out to the quantity transacted (demanded)

Producer Surplus

willingness to produce, willingness to sell

Price received- minimum price they would sell

area under the price, above the supply curve, out to the quantity transacted (produced)

Total Surplus

Consumer Surplus + Producer Surplus

Efficiency happens when we maximize total surplus

deadweight loss

if the quantity lies above or below equilibrium, there is _____ (a loss in surplus) to society

TRUE

consumer and producer surplus are not necessarily equal. these amounts depend upon the relative elasticities

government price controls

price ceilings and price floors. result in inefficiency, deadweight loss, but remain in place because those who stand to gain from them lobby the gov. strongly

price celling

highest price that can be legally charged for a good or service

only 'matters' if it is BELOW equilibrium price

winners- demanders who pay the lower price

losers- all suppliers; demanders who get 'shut out'

(rent ceiling)

creates shortages, increases search activity and results in a black market

price floor

lowest price that can be legally charged and paid for a good or service

only 'matters' if it is ABOVE the equilibrium price

winners- suppliers who receive the higher price

Losers- All the demanders; suppliers who get 'shut out'

(minimum wage)

creates surplus of labor and unemployment

True

imposing a tax on producers of a good shifts the supply curve to the left

true

the vertical distance between the two supply curves is equal to the amount of the tax.

tax revenues; deadweight loss

taxations generates ______ for the government, but it also results in a underproduction and thus creates a _______.

tax incidence

refers to how the tax burden is divided among consumers and producers

producers bear most of tax

demand curve is more elastic than the supply curve

consumers bear most of tax

demand curve is more inelastic than the supply curve

supply curve wil shift left

sale of the good illegal

demand curve will shift left

purchase or possession of the good illegal