Unit 1- Basics of economics

Scarcity

desirable items are in limited supply

choice

deciding on how best to use limited resources

opportunity cost

the next-best thing given up

marginal benefit

Benefit gained from one or more items

Marginal cost

Cot incurred from one or more items

Absolute advantage

One side makes/ supply more than trading partner

Comparative advantage

Making goods at a lower opportunity cost with a trading partner

Substitution effect

increase in a good’s price leads to its substitution for a cheaper but similar item

income effect

increase in prices lowers overall purchasing power, leading to decrease in demand

shifts in demand curve

MERIT (market size, expectations, related goods , income, tastes and preferences)

shifts in supply curve

TRICE ( technology, related prices, input prices, competition, expectations)

consumer surplus

the leftover money a consumer has from buying a product they were willing to buy for more

total consumer surplus

the sum of all individuals’ surpluses ( area under demand curve )

producer surplus

the leftover money from the minimum price at which a supplier is willing to sell

total producer surplus

area above supply curve

effects of price ceilings (below equilibrium)

inefficient allocation, wasted resources, low quality, black markets

effect of price floors ( above equilibrium)

surpluses, inefficient allocation, unnecessarily high quality, illegal activity

non-binding/ ineffective ceiling

ceiling placed above equilibrium

non-binding/ ineffective floor

floor based below equilibrium

When demand increases …

…Equilibrium P and Q both increase

When demand decreases…

… equilibrium P and Q both decrease

When supply decreases…

…Equilibrium P increases and Q decreases

When supply increases…

… equilibrium P decreases while Q increases

When S and D both shift simultaneously in the same direction…

… change in price is ambiguous