Economics 1B03 Final Exam Fall 2022

Production Possibilites Frontier (PPF)

A graph of the different combinations of good an economy can produce using all its resources efficiently given its current technology.

Opportunity Cost

How much of one good we have to give up to produce or have more of the other good

The I slope I of a PPF represents...

The opportunity cost of the good on the horizontal axis. ALWAYS

Perfectly Shiftable

When the PPF curves resembles a constant linear line

A rightward shift on a PPF could signal...

- Economic Growth

- Immigration that increases the labour force

- The development of a new technology

- An increase in land converted for industrial development.

A leftward shift on a PPF could signal...

- Economic Contraction

- Could be caused by an event that reduces the amount of productive resources available (natural disaster or mass emigration of labour resources).

Comparative Advantage

Someone has a comparative advantage if he or she can produce a good at a LOWER opportunity cost that anyone else

To specialize in the production of a product essentially means...

Produce only that good and zero of the other good.

If a person gains more of both goods than they could have alone through trade, it is called...

Gains from trade

Absolute Advantage

If an individual is more PRODUCTIVE that anyone else in the production of that good.

Productivity

If an individual can produce a greater quantity of a good using the same quantity of resources as someone else.

To calculate productivity...

(amount of output)/(amount of inputs used)

Resource Endowment

A list of all available resources an economy has at any given time.

Market

A group of buyers and sellers of of a good or service

Perfect Competition

- Many buyers and sellers act independently from each other.

- Firms produce IDENTICAL products.

- Firms can enter or exit the market freely.

- In PC, consumers and firms are PRICE TAKERS: buyers know the price they have to pay and the sellers know the price they will receive.

Quantity Demanded (Qd)

The amount of a good consumers are willing and able to buy at a given price

Law of Demand

As price increases, the quantity demanded decreases, and vice-versa.

A Demand Schedule

A table that shows the relationship between price and quantity demanded.

Demand Curve

A graph of the demand schedule. It shows the relationship between price and quantity demanded.

Change in Quantity Demanded

- Movement along a demand curve when the price of the good changes.

- The curve itself DOES NOT move.

A Change in Demand is...

A shift of the demand curve.

A Change in Demand

- A shift in the demand cure when something other than the price of the good changes.

- The demand curve itself DOES MOVE.

What will shift the demand curve?

- Income: the higher the income the demand curve USUALLY shifts right depending on the type of good.

- Normal Good: If income rises, an individual demands more of a good. Most goods are normal.

- Inferior Good: If income rises, you demand less of a good.

Prices of Related Consumption Goods

Goods can be substitutes for each other, they can complement each other, or they can have no relation to one another.

Substitutes

Are goods that can replace each other because they are so close to each other in characteristics.

Complements

Are good that you tend to use together.

Consumer Expectations

If consumers expect a price to rise in the future, current demand increases. If consumers expect a price to fall in the future, current demand decreases.

Tastes

a consumer's likes and dislikes (can shift the demand curve either right or left)

Population

More people -> more consumers -> more demand at any given price. An increase in population shifts the demand curve right and vice-versa

Quantity Supplied (Qs)

Amount of a good producers are willing and able to produce and sell at a given price

Law Of Supply

as price increases, quantity supplied increases.

Supply Schedule

a table that shows the relationship between the price of a good and the quantity supplied

Supply Curve

a graph of the relationship between the price of a good and the quantity supplied

A Change in Quantity Supplied

- Movement along a supply curve when the price of the good changes

- The supply curve itself DOES NOT move

A change in supply is...

A shift in the supply curve

Input Prices

when the price of an input into production (a factor of production, a resource) like labour costs, raw materials, machinery, energy, etc increases, producing the good becomes less profitable and firms will offer fewer goods for sale at any price and vice versa.

- Supply curve shifts left and vice-versa

Price of Related Goods in Production

Goods can be substitutes in production, complements in production or not related at all

Substitutes in production

Are goods where if the selling price of one good increases, the quantity supplied of that good will increase and the supply of the other good will decrease.

Compliments of Production

Are goods that are produced together.

Technological Advancements

Advancements that ultimately make an item cheaper to produce will likely increase supply and shift the supply curve right

Producer Expectations

The amount of product producers are willing and able to supply may be influenced by whether they believe prices will go up or down.

Number of Firms

More firms means more is produced overall, so an increase in the number of sellers will increase supply and shift the curve to the right (and vice-versa)

Equilibrium

A situation where there is no incentive for anyone individually to change what they're doing because they can't make themselves any better off

Market Clears

when quantity demanded equals quantity supplied and there is no surplus or shortage

The market is in equilibrium when...

Qs = Qd

A shortage

A situation in which quantity demanded is greater than quantity supplied (below equilibrium)

A surplus

A situation in which quantity supplied is greater than quantity demanded (above equlibrium)

A free market

a market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed

Short side of the market

the smaller of quantity supplied and quantity demanded at a particular price

Economic Shock

An unexpected event hitting the economy. Economic shocks can be demand-side or supply-side shocks (and sometimes both) and unfavourable or favourable.

Elasticity

A measure of how quantity demanded or supplied responds when of their determinants change

Own-Price Elasticity of Demand (Ep)

(%change in Qd) / (%change in Price).

- Measures how Qd responds when the selling price of a good changes

Income Elasticity of Demand (En)

(%change in Qd) / (%change of income)

- Measures how Qd responds when the income of consumers of the good changes.

- If value is (+) -> normal good

- If value is (-) -> inferior good

Cross Price Elasticity of Demand (Ea,b)

(%change in Qd of one good, a) / (%change in the price of another related good, b)

- Measures how the Qd of one good responds when the selling price of another related good changes.

-If value is (+) -> goods are substitutes

-If value is (-) -> goods are compliments

Price Elasticity of Supply, (Es):

(%change in Qs) / (%change in price)

- Measures how Qs responds when the selling price of that good changes.

-Should always be a positive value when calculating

Perfectly Inelastic

Q has no response whatsoever when a determinant changes.

- The curve is perfectly vertical

- Coefficient of elasticity = 0

Inelastic

Q responds only slightly when a determinant changes.

- The curve is fairly steep

- Coefficient of elasticity between 0 and 1

Elastic

Q responds a good deal when a determinant changes.

- The curve is relatively flat

- Coefficient of elasticity > 1

Perfectly Elastic

Q responds so much to a change in a determinant that we cannot measure the change.

- The curve is horizontal

- Coefficient of elasticity approaches infinity.

Unit Elastic

The coefficient of elasticity = 1

What kinds of goods tend to have ELASTIC demand

- luxury goods

- goods that have close substitutes

- goods for which you spend a large proportion of your budget

- goods that are very narrowly defined

What kinds of goods tend to have INELASTIC demand?

- Necessities

- Goods with no close substitutes

-Goods for which you spend a small proportion of your budget

-Goods that are broadly defined

what kinds id goods tend to have ELASTIC SUPPLY?

- Goods whose factors of production are readily available

- Goods whose factors of production are mobile

-Goods that can be easily stored

-Goods with short, non-complicated production processes

What kinds of goods have INELASTIC SUPPLY?

-Goods whose factors of production are difficult to obtain

- Goods whose factors of production are limited in mobility

- Goods that cannot be easily stored

- Goods that take a long time, and have a complicated production process.

Economic Welfare

Benefits consumers and firms receive by participating in the market

Consumer Surplus

the benefit consumers receive when the price they pay for a good is less than the dollar amount they place on the good.

Reservation Price

The highest price a consumer is willing to pay for a good.

Producer Surplus

the benefit sellers receive when the price they receive is more than the bottom-dollar price they need to produce and offer their good for sale

Total Surplus

consumer surplus + producer surplus

Deadweight Loss

A loss in total surplus when the quantity traded is less than the competitive equilibrium quantity

Positive Externality

beneficial side effect that affects an uninvolved third party

Positive Externality in Consumption

A positive externality caused by consumption activities, ex. your neighbour buys a big tree and you enjoy the shade it casts in your yard

Positive Externality in Production

A positive externality caused by production activities, ex. a bee pollinates the flowers that enjoy in the park next door.

Negative Externality

A cost suffered by individuals for which they are not compensated

Negative Externality in Consumption

A negative externality caused by consumption activities, ex. your neighbours dog's barking keeps you awake

Negative Externality in production

A negative externality caused by production activities, ex. a factory dumps chemicals into a lake so you can't swim in it anymore

Marginal Private Benefit, MPB

The max price someone would pay to consume ONE MORE unit of the good.

- Is the demand curve

Marginal Private Cost, MPC

Its the addition to the firm's total cost from producing one more good

- is the supply curve (MC for short)

internalizing the externality

altering incentives so that people take account of the external effects of their actions

The Coase theroem states that...

If transaction costs are low, private bargaining will lead to an efficient solution to externalities

free rider problem

someone who enjoys the benefit of a good but avoids paying for it

Public Good

a shared good or service for which it would be impractical to make consumers pay individually and to exclude nonpayers

- non excludable

- non rival

Excludability

the property of a good whereby a person can be prevented from using it

rivarly

if someone is using a good, others' ability to use that same good diminishes.

Private Good

excludable and rival

Common Good

non-excludable and rival

Club Goods

excludable and non-rival

Tragedy of the Commons

situation in which people acting individually and in their own interest use up commonly available but limited resources, creating disaster for the entire community

Price Ceiling

A legal maximum on the price at which a good can be sold

Price Floor

A legal minimum on the price at which a good can be sold

Tax Incidence

the manner in which the burden of a tax is shared among participants in a market

Subsidy

A government payment that supports a business or market

Quota

A limit placed on the quantities of a product that can be sold

Quota Rent

extra profit producers make when supply is artificially limited by an import quota

Profit

= Total revenue - Total Costs

Maximizing profit means...

Minimizing costs

Positive Economic Profit

Super high, unexpected profits for firms in that industry

Economic Losses

negative economic profits

Normal Economic Profits

zero economic profits

Production Function

the relationship between the quantity of inputs a firm uses and the quantity of output it produces