BYU Econ 110 Platt Midterm 1

Mathematical models

Force us to be precise in description

Prevent us from changing our argument midstream

Gives very specific predictions

Positive Claim

Descriptive ; the facts

Normative Claim

Prescriptive ; based on facts but depends on value judgements too.

Resources

Inputs used to create goods:

Labor

Capital (machines, buildings, skills)

Land / Natural Resources

Entrepreneurship

Scarcity

Limited resources + unlimited wants

Feasible

it's possible to produce

Efficient

can't produce more of one good without producing less of another

Specialized

producing only one good

Changes in the PPF

increases/decreases in resources

improvements/loss of technology

General or biased (only one good affected)

Absolute Advantage

the ability to produce a good using fewer inputs than another producer

Comparative Advantage

the ability to produce a good at a lower opportunity cost than another producer

Gains from trade

The increase in consumption or quality of life due to trade

Quantity demanded

number of units that buyers in a market are willing and able to buy

over a set period of time

at a specific price

Demand schedule

a table of prices/demand

Demand curve

graph of demand schedule

Ceteris Paribus

keep the same population, size, consumer income, preferences, and prices of other goods.

Change in quantity demanded

when the good's price changes

movement ALONG the demand curve

Shifts in demand

demand increases because of event

movement OF demand curve

Demand increases when...

Population increases (bigger market)

Tastes change

Substitute increases in price

Complement decreases in price

Buyers' income increases (for normal goods)

Expectation of higher price in future

Quantity supplied

number of units sellers are willing and able to sell over a set time at a specific price

Change in quantity supplied

good's price changes

Movement ALONG supply curve

Supply increases when

More sellers enter market

Technology improves

Price of input decreases

Seller's expect good's price to fall in the future

Shortage

excess demand (below equilibrium)

upward pressure

Surplus

Excess supply (above equilibrium)

downward pressure

When both curves move:

only predict the direction of one variable.

one variable will move consistently in both

Price Elasticity of Demand

(Q1 - Q0)/(Q1 + Q0) // (P1 - P0)/(P1 + P0)

aka difference of Q or P / avg of Q or P

Elasticity

how much quantity changes in response to a fundamental change

(in terms of %)

Perfectly inelastic

0

Perfectly elastic

-∞

Unit elastic

-1

More elastic demand when...

There are close substitutes

Luxury instead of necessity

Defined market = narrow

Measured over a longer period of time

A large fraction of income is spent on that good

Income elasticity of demand

how change in income affects change in quantity demanded

(Q1 - Q0) / (Q1 + Q0) // (Income1-Income0) / (Income1 + Income0)

Cross price elasticity of demand

how increase in price of one good affects quantity demanded of other good

complements: cross price elasticity = -

substitutes: cross price elasticity = +

Price Elasticity of Supply

price increases, by what percent will quantity supplied increase?

Supply more elastic when...

Inputs can be used in many goods (more responsive; more options)

Supply is measured over a longer time period

Market is narrowly defined

Immediate effects of price ceiling

Harms sellers (reduces PS)

Helps some buyers, harms others who can't buy (could raise or lower CS)

Lowers total welfare

Long term effects of price ceiling

Persistent shortages

-rationing

-waiting in line

-lottery

Black market —sold at price > equilibrium price bc of risk

Immediate effects of price floor

Harms buyers (reduced CS)

Helps some sellers, harms others who can no longer sell (could raise or lower PS)

Lowers total welfare

Long term effects price floor

Have to get rid of surplus:

-lower the price by back door discounts

-convert discount into unrelated good

-government commits to buy surplus

-government limits production

Hugh profits for those who successfully sell