Studied by 1 person
scarcity
limitations on what we purchase, how much time we have, what we can focus on
cost-benefit principle
costs and befits that are considered when making a decision.
revealed preference
actual behavior
stated prefernce
what people say they want/do
economic surplus
total benefits - total costs
Measures improvement of wellbeing
willingness to pay + revealed preferences
= reveal true economic preferences
According to the Cost-Benefit principle, you should
evaluate the full sets of costs and benefits, and pursue the choice only if the benefits outweigh the costs
framing effect
when a decision is affected by how a choice is described
Opportunity Cost Principle
The true cost of something is the next best alternative that you are forced to give up.
Calculating opportunity costs:
what happens if you purse your choice?
what happens under your next best alternative?
True or False: Not all out of pocket costs are real opportunity costs.
True
Sunk costs
a cost that has already been incurred and cannot be reversed.
Are sunk costs opportunity costs?
No.
Production Possibility Fronteir
Shows different sets of outputs that are attainable with your scarce resources
Marginal Principle
Decisions about quantities are best made incrementally. Decisions should be broken into smaller (marginal) decisions to weigh the marginal benefits and costs.
Marginal benefit
extra benefit from one extra unit
Marginal cost
extra cost from one extra unit
You should only make a decision if
Marginal Benefit is bigger then the Marginal Cost
Rational Rule
If something is worth doing, keep doing it until MB = MC
Max Economic Surplus
MC = MB
If MC > MB,
Choices will lower economic surplus
If MB > MC,
Choices will raise economic surplus.
Interdependence principle
Your best choice depends on your other choices, the choices made by others, development in other markets, and expectations about the future.
Dependencies between your own choices
every choice you make affects resources available for other decsions.
Dependencies between economic actors
choices other make affects what is available to you
dependencies between markets
changes in one market affect choices you make in other markets
dependencies over time
the best choice may be different today then it is tomorrow
individual demand curve
a graph that plots the the quantity of an item that someone plans to buy at each price.
Economic graphing convention
x → quantity
y → price
law of demand
the tendency for quantity demanded to be higher when price is lower.
rational rule for buyers
buy more of an item if the MB of one more is greater than or equal to the price
diminishing marginal benefit
each additional item leads to a smaller MB then the previous one
Market demand curve
a graph plotting the total quantity of an item demanded by the entire market at each price
steps to create a market demand curve
survey customers to find out what quantity they will buy at each price
For each price, add up total quantity demanded by customers
scale up quantities demanded by survey responders so that they represent the full market
plot total quantity demanded by the market at each price to draw the market demand curve.
movement along demand curve
price changes = movement from one point on a fixed demand curce to another point on the same curve.
Shift in demand curve
a movement of the demand curve as a whole
Rightward shift in Demand curve
increase in demand
Leftward shift in Demand curve
decrease in demand
Factors that increase shift demand curves
Income
preferences
price of related good
expectations
congestion + network effects
type + # of buyers
normal goods
a good for which increased income = increased demand
inferior goods
a good for which increased income = decreased demand
complementary goods
goods that go together. Demand decreases if price of complementary good increases
Substitute goods
Goods that replace each other. Demand increases if price of substitute good increases, vise versa
network effect
goods become more useful because others use it. If more people buy it, demand increases
congestion effect
goods become less useful because others use it. If more people buy, demand goes down
price elasticity of demand
a measure of how responsive buyers are to price changes. it measures the percent change in quantity demanded that follows from a 1% chnage
equation for Price Elasticity of Demand
% change in demand / % change in price
elastic demand
when absolute value of price elasticity is 1 or greater
when quantity is very responsive
demand is elastic
when quantity is very unresponsive,
demand is inelastic
inelastic demand
when absolute value of price elasticity is less then 1.
elastic demand curves are _____ then inelastic demand curves
relatively flatter
% change in quantity demanded
price elasticity of demand X 5 change of price
equation for Total Reveue
price X quantity
higher prices + elastic demand
decreasing total revenue
higher prices + inelastic demand
increasing total revenue
If demand is inelastic, sellers should
raise their prices
Cross price elasticity of Demand
a measure of how responsive the demand of one good is to price changes of another. It measures % change in quantity demanded that follows from a 1% change in price of another good
equation for Cross Price Elasticity of Demand
% change in quantity demanded / % change in price of another good
Cross Price Elasticity of Demand is ____ for substitues
positive
Cross Price Elasticity of Demand ____ for complements
negative
income elasticity of demand
measures of how responsive the demand for a good is to change in income.
Cross Price Elasticity of Demand ____ for independent goods
near zero
equation for income elasticity of demand
% change in quantity / % change in income
Income elasticity of demand is ____ for normal goods
positive
income elasticity of demand is ___ for inferior goods
negative
Price elasticity of supply
a measure of how responsive sellers are to price changes. It measures % change in quantity supplies that follows from a 1% price change.
equation for Price Elasticity of Supply
% change in quantity supplied / % change in price
Price Elasticity of supply is ____ when supply is inelastic
relatively unresponsive
Price Elasticity of supply is ____ when supply is elastic
relatively responsive
Factors that make supply more elastic
Inventories
Easily available variable inputs
Extra capacity
Easy entry + exit into market
Over time supply becomes more elastic
Shift of supply curves
movement of supply curves
rightward shift means
increase in supply
leftward shift
decrease in supply
factors that shift supply curves
input prices
productivity
prices of related outputs
expectations
type + # of sellers
Factors that do NOT shift supply curves
Price changes
input prices
rise in Marginal Prices = price associated with any price point tor rise bc marginal cost curve = supply curve
productivity shifts supply curve because
increased productivity = increased supply = supply curve to right
technology shifts supply curves because
new technology = prices decrease = supply curve to right
Substitutes in production
alternative use of your resources
complement in production
goods that are made together
when substitutes in production decreases, or complements in production increase
supply increases and shifts right
when substitutes in production increase, or complements in production decrease
supply decreases and shifts left
when price is expected to be too high
supply decreases and shifts left
when price is expected to be too low
supply increases and shifts right
when there are a low amount of sellers,
supply decreases and shifts left
when there are a high amount of sellers
supply increases and shifts right
movement along a supply curve
change in quantity supplies due to a change in price
shift of supply curve
= shift in marginal costs
price elasticity of supply
measures how responsive sellers are to price changes.
equation for Price Elasticity of Supply
% change in quantity supplied / % change in price
Price elasticity of supply is always
positive
Factors that make Price Elasticity of Supply elastic
inventories
easily available variable inputs
extra capacity
easy entry and exit into market
overtime supplies become more elastic
Equilibrium
point at which there’s no tendency for change
market equilibrium
quantity supplied = quantity demanded
equilibrium price
the price at which the quantity demanded = quantity supplied
equilibrium quantity
quantity supplied + demanded
Where are prices determined
at the margin
shortages mean
prices increase
why do prices increase during a shortage
because quantity demanded > quantity supplied
Note 
Flashcard (110)