ECO Chapter 1/2/3 review

Chapter 1: 4 core principles of economics review (vocab, words, phrases, examples, etc). Chapter 2: demand/consumer choice. Chapter 3:

Cost benefit principle

When benefit outweighs the cost

Where does willingness to pay come from?

cost benefit principle. willingness to pay - actually paid = surplus

opportunity cost definition

What you give UP in order to get something else

Marginal principle

compare the extra benefit with the extra cost. If marginal benefit exceeds or equal to cost, do it.

Marginal benefit

The additional benefit of one more unit of a particular item

Marginal cost

the additional cost of one more unit

What does the individual demand curve imply?

Implies the QUANTITY DEMANDED at each price

Individual SUPPLY curve

Given the price of our product, what quantity should we supply?

Individual DEMAND curve

a curve that shows how much of a specific product a single person is willing and able to buy at different price points

Holding other things constant (chap 3)

focus on PRICE only, ignore external factors

In supply/demand, when price goes up, what does supply do? (LAW OF SUPPLY)

Supply goes in a upward slope

Law of SUPPLY

price goes up, quantity SUPPLIED goes up

Law of DEMAND

increase of price/good, quantity demanded goes down

Market supply curve

for each possible price, how much of a product all the producers in the market are willing to supply

why is the market supply curve upward sloping?

because when the higher the price, the greater the quantity supplied

substitutes in production

alternative goods that a business can create using the same shared

compliments in productionar

two or more goods derived from the same resource or production process

If MB>MC…

Do it

In marginal principle ____ is irrelevant

sunk costs

What is diminishing marginal benefit?

The less value or satisfaction someone gets from adding another unit/good

network effects

the more something gets used, the more valuable it becomes (instagram)w

congestion effect

a product/service becomes less valuable as more people use it (ex: crowded highway)

what is demand related to?

willingness to pay

Rational purchasing rule

Buy if P<MB or equal to, stop when PM

How do you find market quantity demand?

Add the quantities demanded by each individual at each given price

What shifts demand?

Normal goods: Demand increases when income increases.

Inferior goods: demand decreases when income increases

Substitutes

Ex: coke and pepsi. If coke prices go up, peptide demand increasesom

complements

goods used together. ex: gas and cars, if gas prices go up demand for cars goes downI

rational rule for buyers

buy more if MB>P

network effect

more users, product becomes more valuable, demand can increase

congestion effect

more users, products becomes less valuable, demand can increase

more buyers tentering the market means

market demand increase

change in QUANTITY DEMANDED is caused by what

a change in the products own price. A movement ALONG the demand curve

change in demand is caused by what

non price factors (income, preferences, number of buyers), leading to entire demand curve shifting

rational production rule

produce if P>MC, continue producing until P=MC

variable costs

costs that change based on production inputs (tools, hourly labor)

how do you calculate market supply?

sum of the quantities produced by all individual producers hat w

what shifts supply?

better tech/productivity, complements and substitutions, expectations of future prices and types/number of sellers

if SELLERS expect higher prices in the future, they will

hold back until its time, causing current supply to decreaseuq

quantity supplies vs supply

change in QS is cause by a chance in the goods own price (movement along supply curve), change in supply is caused by external factors (entire supply curve shifts)

equilibrium price is when

QD=QShorts

shortages occur when, and leads to what? + pushes towards what (same thing happens for opposite scenarios)

QD>QS leads to a increase in price, pushes towards equilibrium

when demand increases, where does it shifts to? what increases?

right, prices and quantity increases

when demand decreases, where does it shifts to? what decreases?

left, prices and quantity decrease

total benefit definition

total satisfaction from all units

marginal cost

extra expenses from an additional unit

marginal benefit

extra satisfaction from one more unit

rational rule for sellers

connote producing only if P>MC stop them its equal to

when anaaying trade offs you compare the what and what of doing something

costs, benefits