ECON 2010 Midterm 1 & 2 extended

to be in market equilibrium

1) the amount produced by sellers must be equal to the amount purchased by buyers

2) the costs of making a product must be less than the final price at which the product sells

3) buyers must place a value on the uses of the product that is greater than the cost of buying that product

to optimize...

marginal benefit = marginal cost

supply curve

plots relationship between market price and quantity of good supplied by sellers

competitive equilibrium price

equates the quantity demanded and the quantity supplied

market price

price at which buyers and sellers conduct transactions

quantity demanded

amount of a good that buyers are willing to purchase at given price

shifts of demand curve

tastes and preferences, income and wealth, prices of related goods, number and scale of buyers, buyers expectations about future, taxes and subsidies

movement along curve

change in quantity or price

quantity supplied

amount of a good that sellers are willing to sell at given price

supply schedule

a table that reports the quantity supplied at different prices, holding all else equal

supply curve

plots the quantity supplied at different prices

shifts of supply curve

input prices, technology, sellers' expectations about future, taxes and subsidies

competitive equilibrium

the point at which the market comes to an agreement about what the price will be and how much will be exchanged at that price (intersection of market supply and demand curve)

excess demand

occurs when consumer wants more than suppliers can provide at given price (shortage)

excess supply

occurs when suppliers can provide more than consumers want at a given price (surplus)

decrease price to...

decrease excess supply

increase price to...

give incentive to supply more

leftward shift of supply curve

decrease in quantity, price increases

rightward shift of supply curve

increase in quantity, price decreases (Ex: technological progress)

demand side ex.

price of roses increase right before Valentine's Day (higher demand)

ex. no rise in price of beer during Super Bowl

supply and demand both go up (roses are not as storable as beer)

both demand and supply curve shift right (increase demand and increase supply)

always an increase in quantity, price depending on size of shift can increase or decrease

demand curve shifts right (increase demand) and supply curve shifts left (decrease supply)

increase in equilibrium price always, quantity may increase or decrease

demand curve shifts left (demand decreases) and supply curve shifts right (supply increases)

always a decrease in price, quantity may increase or decrease

both demand and supply curve shift left (demand and supply decrease)

always a decrease in quantity, price may increase or decrease

market

a group of economic agents who are trading a good or service plus the rules and arrangements for trading

law of demand

the quantity demanded rises when the price falls (holding all else equal)

willingness to pay

the highest price that a buyer is willing to pay for an extra unit of a good

diminishing marginal benefit

as you consume more of a good, your willingness to pay for an additional unit declines (donuts)

The height of the demand curve represents

buyer's willingness to pay

normal good

an increase in income shifts the demand curve to the right (holding the good's price fixed), causing buyers to purchase more of the good (Ex: gas)

inferior good

If rising income shifts the demand curve for a good to the left (holding the good's price fixed) (Ex: canned food)

substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other.

Scarcity

there is a limited amount of resources.

Economics

the study of how individuals and society allocate their scarce resources.

What does economics focus on?

the production, distribution, and consumption of goods and services

Microeconomics

The study of the individual units (households, firms, industries, and specific markets) that make up the economy.

Example of microeconomics

how does an increase in oil prices affect Amazon's shipping costs?

Macroeconomics

The study of the overall aspects and working of an economy

Example of macroeconomics

how does an increase in oil prices affect the overall price level?

Incentives

anything that motivates people to act.

Positive incentives

encourage actions by offering rewards or payments in return.

Example of a positive incentive

An entrepreneur starting a firm to make a profit

Example of a positive incentive

Players mine in Minecraft to get diamonds and other resources

Negative Incentives

discourage action by providing undesirable consequences or punishments.

Example of a negative incentive

An increase in gas prices leads people to drive less

Direct incentive

Clear motivator aimed at influencing a specific behavior

Example of a direct incentive

weekly allowance to get teenagers to clean up their rooms.

Indirect Incentive

A secondary change in behavior brought on by the original incentive

Example of an indirect incentive

seat belt laws cause drivers to buckle up and feel safer but drive more carelessly → increase in auto accidents and pedestrian deaths

Trade-offs

doing one thing often means you will not have the time, resources, or energy to do something else.

Why do people face trade-offs?

scarcity

Equity

prosperity is divided uniformly among society's members.

Opportunity Cost

what you must give up in order to get something.

An opportunity cost is...

The next best forgone alternative

The best decision is...

the one that minimizes the opportunity cost

Ex. what is the opportunity cost of going to college?

Time, tuition, effort, freedom, housing

An individual should do an action if...

the marginal benefit is greater than marginal cost.

Marginal thinking

weighing the benefits against the cost of one additional unit of something.

Marginal cost

the cost of producing one more unit of a good.

Marginal benefit

the extra benefit of adding one unit of a good.

Trade

enables specialization and fosters a voluntary exchange of goods and services

Circular-Flow diagram

a visual model of the economy that shows a flow of money and goods (including services) between economic agents.

What are the two types of economic agents in the Circular flow diagram?

Households and firms

What is one exchange market (where buyers and sellers come together)?

Markets for goods and services where Households = buyers & Firms = sellers

An example of markets for goods and services

grocery stores

An example of a firm (sellers)

car dealership

What is another exchange market (inputs used for production)?

Market for resources where Households = sellers & Firms = buyers

What else does the market for resources include?

Labor, land, capital, human capital, entrepreneurship

Labor

physical efforts exerted by workers.

Capital

man-made objects used in production.

Human capital

workers' knowledge and expertise.

Entrepreneurship

organizes other resources to produce goods and services.

Land

geographical site of production and natural resources.

If a firm owns land, do they still have shareholders?

Yes, through ownership in the company they also own shares in the land

Kenny refuses to trade is toy for Erik's other toy. If Kenny was forced into the trade, what could we expect?

the trade would make Kenny worse off but make Erik better off.

What are the Scientific Methods in Economics?

1. Identify or observe.

2. Develop a hypothesis.

3. Construct a model.

4. Gather the data and analyze it.

Natural experiment

a real-life event that happens by chance and serves as an experiment, allowing researchers to study its effects.

Assumptions

premises taken to be true without proof.

Models

simplified representations of a more complicated reality.

What do models rely on?

Assumptions

Ceteris Paribus

one variable is changed while all other things are held constant.

Production Possibility Frontier (PPF)

a model that shows the combinations of two goods and an economy can produce given the available resources and technology.

What does the PPF illustrate?

the combinations of outputs a society can produce if all of its resources are being used efficiently.

Whenever society is producing on the production possibilities frontier (PPF), what must happen to produce more of one good?

the only way to produce more of one good is to reduce the production of another good, representing a trade-off.

What are the assumptions of PPF?

Only produce two goods,

Constant level of resources,

Constant technology,

One economy,

No trade

Allocated efficiency

a state of the economy in which production meets consumer preferences.

Efficiency

occurs when all resources are fully utilized.

Inefficiency

occurs when resources are not fully utilized.

Where are inefficient points on a PPF?

all points inside the PPF.

Where are efficient points on a PPF?

Points that lie on the PPF line.

Recession

a period of economic downturn.

Where are infeasible points on a PPF?

Points above the PPF are infeasible.

A straight PPF

indicates a constant opportunity cost along efficient points.

Bowed-out PPF

shows that resources are not equally suitable for producing all goods.

A production possibilities frontier is bowed outward when...

the rate of a tradeoff between the two goods being produced depends on how much of each good is being produced.

Law of increasing opportunity cost

the opportunity cost of producing a good rises as society produces more of it.

What does a movement from one point to another along the PPF indicate?

a reallocation of resources from one good to another.

How does the PPF change?

a shift in available resources or improved technology

True or False: If society experiences high unemployment, the PPF curve will shift inward.

False