Econ Midterm 1

Production possibilities frontier (PPF)

A graph that shows the various combinations (bundles) of outputs that the economy or individual can possibly produce with the available

Opportunity cost

what you give up by choosing one alternative instead of another, slope of the PPF is opportunity cost

Autarky

state of no trade, consume what you produce

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, Cannot have a comparative advantage in producing both goods

Markets

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

Supply and Demand

the behavior of people as they engage in transactions of goods/services

Demand

determined by the buyers as a group

Supply

determined by the sellers as a group

Competitive market

Market in which there are many buyers and many sellers, buyers can buy all they want and sellers can sell all they want

Quantity demanded

Amount of a good that buyers are willing and able to purchase

Demand schedule

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

Demand curve

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

demanded

Market demand

The sum of all the individual demands for a particular good or service

Market demand curve

Shows how the total quantity demanded of a good varies as its price changes, holding constant all the other factors that affect consumer purchases

Law of Demand

when the price rises, the quantity demanded falls, when the price falls, the quantity demanded rises

Normal good

A good for which an increase in income leads to an increase in demand

Inferior good

A good for which an increase in income leads to a decrease in demand

Substitutes

Pairs of goods that are used in place of each other, increase in the price of one leads to an increase in the demand for the other

Complements

Pairs of goods that are used together, increase in the price of one leads to a decrease in the demand for the other

Quantity supplied

Amount of a good that sellers are willing and able to sell, which differs at each price

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

Market supply

The sum of the supplies of all sellers

Market supply curve

Shows how the total quantity supplied varies as the price varies, holding constant all other factors that influence producers’ decisions about how much to sell

Law of supply and demand

when the price rises, the quantity supplied rises, when the price falls, the quantity supplied falls

Equilibrium

Quantity of the good that buyers are willing and able to buy exactly balances quantity that sellers are willing and able to sell

Equilibrium price

Balances the quantity supplied and quantity demanded

Equilibrium quantity

Quantity supplied and quantity demanded at the equilibrium price

Surplus

Quantity supplied is greater than quantity demanded

Shortage

Quantity demanded is greater than quantity supplied

Elasticity

Measure of how much buyers and seller respond to changes in market conditions, the responsiveness of QD or QS to a change in one of its determinants

Price Elasticity of Demand

Measures how much the quantity demanded responds to a change in

prices

Determinants of the elasticity of demand

Availability of close substitutes, Necessities vs luxuries, Narrowly defined markets vs broadly defined markets, Short run vs long run

total revenue (TR)

price X quantity

Income elasticity of demand

A measure of how much the quantity demanded of a good responds to a change in consumers’ income, (% change in QD) / (% change in Income)

Normal goods

income elasticity > 0

Luxury good

income elasticity >1

Inferior goods

income elasticity < 0

Cross price elasticity of demand

A measure of how much the quantity demanded of one good responds to a change in the price of another good, Cross-price ED relative to Good B= (% change in QD) / (% change in PB)

Substitutes

cross price elasticity > 0

Complements

cross price elasticity < 0

Price Elasticity of Supply

Measures how much the quantity supplied responds to a change in

prices

price ceiling

Legal maximum on the price at which a good can be sold

Price floor

Legal minimum on the price at which a good can be sold

Effects of a binding price ceiling on a competitive market

Shortages, Rationing, Long lines, Seller bias, Buyers who can buy, benefit, Buyers who cannot buy, will be in line for a long time

Effects of a binding price floor on a competitive market

surpluses, Ineffective allocation of resources, Sellers who can sell, benefit, Sellers who cannot sell, will be waiting a long time to sell

Welfare Economics

The study of how the allocation of resources affects economic well-being

Willingness to pay (WTP)

The maximum amount that a buyer will pay for a good, How much the buyer values the good

Consumer surplus

Amount a buyer is willing to pay minus the amount the buyer actually pays, Benefits buyers receive from participating in a market

Marginal buyer

the buyer who would leave the market first if the price were

any higher

Consumer surplus

Measure of how much consumers gain from this market transaction, Area below the demand curve and above the price

Cost

The value of everything a seller must give up to produce a good

Willingness to sell (WTS)

The minimum amount that a seller will accept for a good

Producer surplus

Amount seller actually receives minus amount seller is willing to accept

Marginal seller

The seller who would leave the market first if the price were any lower (the

seller whose cost equals the current prices)

Producer surplus

Area below the price and above the supply curve

midpoint method

𝐸𝑑 =(𝑄2−𝑄1)/[(𝑄1+𝑄2)/2] / (𝑃2−𝑃1)/[(𝑃1+𝑃2)/2]