econ 102 exam 1 austin boyle

scarcity

people want more than is freely available from nature, leads to competition, would still exist is every individual as rich, resources are limited but wants are unlimited

ex) textbooks

microeconomics

focuses on individuals, firms ,industries, households

ex) babies advertising, gas prices, driving

macroeconomics

focuses on industries, countries, and the WORLD

ex) nation unemployment rate, inflation rate, yearly output of goods and services

opportunity cost

the value of the next best alternative that was sacrificed to obtain a good or satisfy a want

incentives

how people allocate their limited resources in an attempt to satisfy unlimited wants

postive incentive

makes you want to do things

ex) end of year bonuses

negative incentives

doesnt make you want to do things

ex)speeding ticket

direct effect of incentives

usually easy to recognize,

ex) if gas station lowers price of its gas, it will attract new customers that normally wouldn't stop at that station

indirect effect of incentives

hard recognize, (unintended consequences)

ex)if gas station lowers the price of its gas, it will encourage consumers to drive more because driving will be less expensive

unintended consequences

unintended actions that result from providing incentives

ex: society wants to help people go through the hard times but it does not want to take away their motivation to work

secondary effect

often overlooked by politicians

ex) killing children with airline safety regulation.

FAA 2015: wanted carseats for plane rides for kids. parents would have to pay for an extra seat which means they may just drive to their destination putting child at risk.

marginal

additional

information is costly but helps make better decision

ex: new car- website made you pay for all car information, although it costed money, it made you make the right decision.

ceteris paribus

all is equal, fixed amount of productive resources

three basic economic questions

1. what and how much will be produced

2. how will items be produced

3. for whom will items be produced

central planning

"centralized command and planing" government is in charge, supreme leader makes the decisions, difficult to obtain information that would be captured by prices

market system

decentralized, individuals and families own the means of production, prices serve as signals that provide information

mixed economic system

some economic decisions are made by firms and households, and some decisions are made by government

3 rationality assumptions

1. interested only in own satisfaction

2, choices always align with long term interest

3. can consider every choice

land(5 types of resources)

location, climate, water, vegetation

labor

humans who work (building something )

physical capital

building, equipment(bulldozers) machines (sewing), canals

human capital

learning by doing-apprenticeship or practice , formal education: college certificate programs, mechanics

entrepreneurship

performed by humans, takes risks, start businesses

production possibilities curve (ppc)

possible combinations of output for 2 goods at a given time, using all resources.

bowed PPC

usually outward, opportunity cost of production increases

straight line PPC

opportunity cost of production is constant

what can PPC easily show

efficient, inefficient, and unattainable points

what kind of cost is most clearly defined in PPC

opportunity cost

shifting the PPC out

increase in economy's resource book

advancement in technology-how does it work

giving up current leisure and working harder-increase labor

giving up current consumption and investing more: retirement plan..giving it up now so you have it for later

law of increasing additional cost

the more you have of something the more you have to give up of something else.

comparative advantage

whoever has the lowest opportunity cost of producing a good,

absolute advantage

the ability to produce more units of a good or service then the next person

subjective value

after a trade the other side had to feel that they are better off now after making the exchange.

market demand schedule

show how much (quantity) consumers are willing and able to purchase at a given price

law of demand

inverse relationship between the price of a good/ service and the quantity of it that consumers are willing to purchase, partially due to substitutes,

substitutes

products that serve similar purposes

demand curve

shows the willingness to pay at a given quantity, to generate this we must know how much people are willing and able to pay for a good

changes in demand

entire curve shifts:

1. changes in consumer income (if they get richer they are willing to buy more and vice versa)

2. changes in the number of consumers in market

3. changes in the consumption of a related good

4. change in expectation (you think the price will go up so you decide to buy it now)

5. demographic changes (more old people need medical care)

6. changes in consumer tastes and preferences

7. NOT CAUSED BY A PRICE CHANGE

producers convert resources into goods and services by

1. organizing productive inputs and resources like land, labor, capital, and natural resources and intermediate goods (what other companies make that other firms use)

2. transforming and combining these inputs

3. selling final product to consumers

profit

=total revenue- total cost

negative profit

loss

when do firms earn profit

when their product is worth more then the opportunity cost of the resources used to make it

law of supply

direct relationship between the price of a good/service and the quantity of it that suppliers are willing to produce, in order to count toward supply producers must be willing and able to produce some quantity at a given price

supply curve

show how much producers are willing AND able to supplyy at a given price...shows the cost of producing a unit ex)the marginal cost

changes in supply

entire curve shifts

1. changes in resource prices (cost of inputs ex.if price of wood from making pencils goes up then you would make less pencils)

2. changes in number of producers(number of firms in the industry)

3. changes in production technology(just because its better technology doesnt make it more effect or better)

4. natural disaster (earthquake tears apart a factory cant make anything anymore)

5. political disruptions(war breaks out)

6. NOT CAUSES BY AN OWN PRICE

market equilibrium

when supply and demand are "in balance" , quantity supplied=quantity demand, market is always trying to get here

consumer surplus CS

difference between consumers willingness to pay and amount actually paid

producer surplus

difference between amount sellers receive for item and amount they would have been willing to sell for

gains for trade

consumer surplus + producer surplus

dead weight lost

lost potential gains from trade that do not happen, market is not efficient

role of prices

communicate information to decision makers, coordinate/synchronize actions of market participants

price ceiling

legally established maximum price , "binding" if set below market price, causes shortages (non price rationing, discriminate)

price floor

legally established minimum price, "binding" if set above market price, causes surplus, leads to black market

black market

goods traded above legal max and or illegal goods traded, (drugs, prostitution, human organs)

results of rent control

1. shortage and blank markets will develop

2. future supply of rental housing will decline

3. quality of rental housing will deteriorate

4. non price methods of rationing will become more important (maybe might not want a certain religion to move in)

5. inefficient use of housing space (hurts property owners and low income renters the most)

rent control

famous price ceilings, 200+ US cities have some form

minimum wage

lowest hourly rate that firm can legally pay workers, higher in some areas,

life is all about tradeoffs (10 things to think about)

due to scarcity, every decision incurs a cost

ex)going to college vs working right after high school

individuals choose purposefully (10 things to think about)

individuals try to maximize what they get from their limited resources

ex)if two items are the exact same price and one item is better quality, you will but the better quality

incentives matter (10 things to think about)

people will react predictably to changes in incentives

a. positivie incentives encourage actions

b. negative incentives discourage actions

marginal thinking

when decision makers compare the additional benefit of one more unit to the additional cost of one more unit

a. decision are made at the margin

marginal benefit

the extra benefit from an extra unit of activity

marginal cost

extra cost associated with an extra unity of activity

information is costly but helps make better decision

you are able to make better decision with more information, however you need to take into consideration the cost of obtaining that information

ex) if buying a new car and need to get info off the internet for it, you will pay that money for the info to make the better decision

value is subjective

value of something depends upon the situation

ex) riding a rollercoaster is less appealing after you just eat

ex) umbrella is more valuable on a rainy day then when its nice out

the test of theory is its ability to predict

we are looking for economic theories and models to accurate predict behaviors

a. bad predictions come from bad theories

correlation is not causation

just because two things are related to each other does not mean that one caused the other.

ex) football coach realizes that his team won every time the third string was in. thus he decides to always start the third string. IN THIS EXAMPLE THE COACH THOUGHT THE THIRD STRING PLAYING WAS THE REASON WHY THEY WERE WINNING, BUT REALLY BECAUSE HE ONLY PLAYED THEM WHEN THEY WERE BLOWING TEAMS OUT

what is good for the individual is not always good for the group

there are times where a single individual in a group taking an action will benefit the individual, but if everyone takes the action it will hurt the group

fallacy composition

occurs when ones assumes that something is true for the whole group because it is true for one individual in the group

competitive market

market where there are many buyers and sellers so each has only a small impact on the market price and output

ex)farmers market

imperfect market

a market where either the buyer or seller has a large amount of control over the market price

ex) psu football, front row of concert

demand schedule

chart that shows the quantities demanded at different possible prices for a specified period of time

demand curve

a negatively sloped line that shows the inverse relationship of price and quantity

price system

where relative prices are constantly changing to show changes in supply and demand for different commodities