econ micro terms

deadweight loss

decrease in total surplus compared to economically efficient outcome

elasticity

measure of how much q.d/q.s responds to change in price (responsiveness); DOES NOT EQUAL SLOPE ON GRAPH

inelastic

little response to change in price , ev<1

elastic

large response to change in price ev>1

price elasticity of demand

% change in q.d/% change in price

price elasticity of supply

% change in q.s / % change in price

perfectly inelastic

ev = 0

perfectly elastic

ev = infinity

willingness to shop w elasticity if price increases

elastic: consumers have high willingness to shop elsewhere; inelastic: consumers have low willingness to shop elsewhere

influences on elasticity of demand

1. available subs (+subs=+elasticity)

2. time to adjust (+time=+elasticity)

3. roportion of income spent on prod (+proportion = +elasticity)

inelastic supply means its what

difficult and expensive to increase production

elastic supply means its what

easy and inexpensive to increase production

influences on inelasticity of supply

1. availability of inputs (+availability = +elasticity)

2. time to produce (-time=+elasticity)

what does elasticity do on a graph

neg quadratic curve; changes dwn a straight line demand curve from elastic to unit elastic to inelastic; it reaches max total revenue at unit elastic and then decreases from there

unit elastic

ev = 1 = max total rev

when demand increases

equilib prices + and q.s+ but supply constant

when supply increases

equiib price - and q.d + but demand constant

when demand decrease

equilib price - and q.s. - and supply constant

when supply decrease

equilib price + and q.d. - and demand constant

when both demand n supply increase

unknown equilib price but increase equilib quantity

when both demand n supply decrease

unknown equilib price but decrease equilib quantity

demand decrease and supply increase

unknown equilib quantity and decrease equilib price

demand increase and supply decrease

unknown equilib quantity and increase equilib price

comp statics

comparison of 2 equilib outcomes; allows us to predict change in price/quantity despite complexities

market demand curve shows what

willingness and ability to pay of all customers in the market

market supply curve shows what

willingness and ability of all businesses to supply ; min prices they are all willing to accept that covers all marg opp costs in order to supply product

total surplus

consumer + producer surplus; quantifies the extent that producers and consumers benefit from trade

miracle of markets

free markets coord choices of businesses and consumers to make products ppl want w out govt control and uses price signals to steer people. mb>mc; self interest of consumers and producers increases output and sales until quantity and price reaches equilib; NEED PRIcE ADJUSTMENTS

inefficiency in markets

when mb doesnt equal mc, self interest decreases output and sales until quanitity and price increase or decrease to equilib; no mutually beneficial trade can be done

efficient market outcomes

outcome @ mb=mc, always consumer and producer surplus, total surplus is at equilib quantity, consumers buy prod when mb>price and producer produce at lowest cost and price that covers all opp costs of product

market clearing price

name for price that equalizes q.d and q.s no ones frustrated'/ interchangeable with equilib price

equilib price

balance forces of coop and comp; no tendency for change and no incentives for ppl to change their self interest smart decisisons

consumer surplus

diff btwn amount customer willing and able to pay and the amount they actually paid; add benefit. above eq line and belwo demand line; extra benefit

producer surplus

diff btwn the minimum amount producers are the price suppliers are able to charge and the add cost of producing that good; extra rev ; below eq above supply

shortage/excess demand

qd>qs; occurs when price too low; frustrates consumers; comp btwn consumers for scarce products which makes price +

surplus/excess supply

qs>qd; suppliers compete for scarce consumers and price decreases; frustrated sellers

if theres a high price, what happens with businesses and consumers

for businesses: signals higher profits and incentivizes them to produce more so qs+
for consumers: rethink smart choices and their qd -

eliminates hsortage

falling prices what happens businesses and consumers

businesses: signals lower profits so qs -, go find more profitable opportunities

consumers: incentive to buy more, switch from subs thqat havent had price change so qd+
eliminates surplus

businesses have what market power

over the price (usually); they pick price that they believe will bring most profit

they typically adjust quantity more than they adjust price tho

mutually beneficial exchange entails

mb>mc and covers profitable businesses mc.

invisible hand

markets chanel self interest so society produces the prod we want w out the govt

supply shifts bc of factors

tech + = supply +
price of related + = supply -

price of inputs + = supply -
expected price + = supply -
# of businesses + = supply +
environmental hamrful change = supply -
environmental change aids = supply +

2 patterns of mc

1. increasing: not equally productive inputs in all activities

2. constant: equally productive inputs in all activities and thus opp cost is constant

market

interacts btwn buyers and sellers; xists wherever there is a process of competing bids (buyers + demanders) and offers (sellers + suppliers)

cooperation and negtion btwn buyer and seller for exchange

competition btwn sellers/buyers

volunatary exchange

cooperative selling and buying

businesses are better off when

they satisfy customers wants and maker money when they suppluy prod that customers want

customers are better off when

they getsupplied prod that provides satisfaction that is mb to price or more

govt defines what

property rights and enforces constracts btwn buyers and sellers which facilitates free and voluntary exchange in the market

property rights

rules that ensure you own smth and no one can take away by force; rules of the game; without them our time and energy would go into protecting our property rather than producing products for exchange

successful exchange

buyer and seller deliver what they agreed to and egal referee for disputes

prices

outcomes of market process of competing bids and offers; business owners pau price that best match best opp cost of input

what does mc do as outputs +

when you produce more, its more expensive bc business is operating near capacity and there are diminishing returns and inputs may become slowly less equally productive due to degrading so the mc + as outputs +

cross elasticity of demand

measures responsiveness of demand for product to a change in price of a sub or complement; % change in qd/% change in sub/complement

sub cross elasticity of demand

+#; larger # = closer product is to a perf sub since larger change in demand

complement cross elasticity of demand

-#; larger # = closer product is to a perf complement since larger change in demand of og prod

income elasticity of demand

measures reponsiveness of demand for product to a change in income;

%change in qd/ % change in income

normal good income elasticity

+ income elasticity; inelastic demand
inelastic demand = income elasticity 0<x<1; increase income, % demand change is small and it generally has a inelastic demand
elastic demand = 1<

what income elasticity value does necessities have

0<x<1

inferiro good income elasticity

- income elasticity

increase income, less q.d

tax incidence

division of taxes btwn buyers and sellers; dependent on elasticiites of demand and suppluy; apart of opp cost

when does govt want to tax prod more

for inelastic demand and supplies to get max rev

tax distribution with elasticities

perf inelastic demand: buyers ALL ; inelastic: buyers more ; elastic: sellers more ; perf elastic: sellers ALL
perf inelastic supply: sellers ALL ; inelastic : sellers more ; elastic: buyers more ; perf elastic: buyers ALL

fall in price with elasticity

inelastic: decreases total rev

elastic: increases total rev

rise in price elasticity

inelastic: increases total rev

elastic: decreases total rev

price ceiling

prices fixes BELOW market clearing so customers frustrated, qd>qs (rent control); max price set by govt that makes it illegal to charge higher price

price floor

price fixed ABOVE market clearing so businesses frustrated qs>qd (min wage); min price set by govt that makes illegal to pay a lwoer price

what happens when prices are fixes

quantitiy adjustments: so whichever of qs/qd is lowest
too low: businesses reduce output or relocate production/employees

too high: customers wont buy/decide to buy other prod

rent control probs

1. housing shortages

2. landlords gain upperhand over tenants

3. landlords can discriminate bc of the excess demand for apts

4. key money

5. prevents marjet from clrarning and reduces efficiency of housing market

6. the unsatisfied demand from controlled markets spills into the contorlled markets whcih makes their rent increase

robin hood principle

take from rich to give to the poor

alt choice to rent control

income subsidies for those who cant afford

subsidized housing

this all allows for market clearning prices that allow landlords and renters to coord choices

min wage probs

surplus in labour market = unemployment; layoffs

only helps wrking poor if wage increase compensates for the loss of emplouments

if demand for labour is inelastic w min wage

then there are fewer subs for labour so when min wage increases, they cant afford to lay off ppl; businesses q.d doenst decrease much so there isnt additional unemployment; increase total income

if demand for labour is elastic w min wage

many subs for labour; if wage increases then they switch to other methods of employees or lay off tons; increased unemployment; decrease total income

alternatives to increasing min wage

1. trianing programs to give ppl hirable skill set

2. direct wage supplments

total rev

quantiy x price

total income

quantitiy of labour x wage rate

all policies have opp csts and unintended consequences; this is example of what concept

theres always a trade off btwn efficiency and equity

efficient markets

1. efficient but not necessarily equitable

2. output goes to those who are MOST willing and bale to pay

3. prices cover all opp costs of production

4. consumers buy prod that gives most benefits

5. mc=mb

ppf

slope = opp costs

max combos of production

inputs not on graph but they are assumented

trade allows you to produce outside of ppf bc of specialization

scarcity

inability to satisfy all of our wants which is why you have to make choices —> arises from lim time, money and energy

opportunity cost

the cost of giving up the BEST alternative; every choice has opp cost

incentives

rewards (pos) and penalties (neg)

trade

everyone gains smth from it when they specialize in product they have comp adv in

absolute adv

ability to produce a prod at lower absolute cost than another; even if one individ has absute adv in production, as long as there are diffs in comp adv, there are mutually beneficial gains from specialization trading.

comp adv

ability to produce a prod at lower OPP COST than other

straight line ppf

inputs are equally productive and opp costs are constant

concave ppf

inputs are not equally productive

input markets (ex. labour)

household = sellers (they own all the inputs of the econ)

businesses = buyers

output markets

households = buyers

businesses = sellers (prod)

inputs

productive resources that are used to produce products (labour, natural resources, capital equip, entrep… ability)

law of demand

when price of product increases, the quantity demanded decreases

positive statements

facts

normative statements

value judgements, opinions

3 key model

1. choose only when the additional benefits outweigh the additional opp costs

2. count only the additional benefits and opp costs

3. make sure you count ALL opp costs and benefits, including implicit costs and externalities

negative externalities

costs you create and dont pay for directly (environmental damage)

positive externalities

benefits that affect others who are extern to choice or trade (vaxx)

implicit costs

opp costs of using resources that the business alr owns

demand

consumers willingness and ability to pay for prod; summarizes all influences in consumer choice

preferences

all of your wants and how intensely you want them

when maybe choices, you compare expected benefits and cost and how do yiu do this

ask:

1. how badly you want

2. what are subs

3. how much can you afford