UCSD Econ 1 Mid-term 1:

Opportunity cost (OC)

The value of the NEXT BEST alternative that must be forehone in order to undertakr the activity

OC of x-axis

[slope]

OC of y-axis

1 divided by [slope]

Production possibilities curve

(PPC)

Graph that describes the maximum amount of one GOOD that can be produced for every possible level of production of the other good

Efficient & attainable points

These points lie along PPC

The Principle of Increasing opportunity cost

(Low-hanging fruit principle)

In expanding the production of any good, first Emily those resources with the lowest OC, and only afterward turn to resources with higher opportunity costs:

DOWNWARD SLOPING (think of tangents)

Factors that affect PPC

Economic growth: increases in productive resources & improvements in knowledge or technology

Comparative advantage

Everyone does the best when each person (or country) specializes in the activities for which his or her opportunity cost is the LOWEST

Absolute vs. comparative advantage

Absolute refers to who can do the most in less time: opportunity costs in Comp. Advantage refers to the individual economy. OC is not related to absolute advantage

Free trade?

Comparative advantage implies that free trade will increase the total value of goods and services; however, some people in specific areas may lose jobs in which they specialize in, if that specific specialization is given to a different country.

Law of demand

The higher is the price of a good, the lower is the quantity demanded

Substitution effect

The change in the quantity demanded of a good THAT results from buyers substituting into other good when the price of that good changes

Income effect

The change in the quantity demanded of a good THAT results from the reduction in purchasing power when the price of a good increases

Increasing demand

The quantity demanded is higher at every price

Decreasing demand

The quantity demanded is lower at every price

Factors that increase demand

•Increased preference for the good or service

•an increase in income (normal goods)

•a decrease in income (inferior goods)

•a decrease in the price of a complement

•an increase in the price of a substitute food or service

•increase in population

•increase in expected future prices

Law of supply

The higher the price of a good, the higher in the quantity supplied.

Increasing supply

The quantity supplied is higher at every price

Decreasing supply

The quantity supplied is lower at every price

Factors that increase supply

•reduction in the price of inputs used in the production process (land, labor, capital)

•improvement in technology that reduces production costs

•improvement in weather

•increase in the number of suppliers

•decreases in expected future prices

Market equilibrium

Price = quantity supplied & quantity demanded

Supply shifts right/increases (in E)

Equilibrium price falls, equilibrium quantity increases

Supply shifts left/decreases (in E)

Equilibrium price rises, equilibrium quantity decreases

Demand shifts right/increases (in E)

Equilibrium price rises, equilibrium quantity rises

Demand shifts left/decreases (in E)

Equilibrium prices falls, equilibrium quantity falls

Supply and demand shifts right/increase

Equilibrium quantity increases, but no definite predictions about equilibrium price.

Supply and demand shifts left/decrease

Equilibrium quantity decreases, but no definite predictions about equilibrium price.

Supply increases and demand decreases

Equilibrium price will decrease, but no definite predictions about equilibrium quantity

Supply decreases and demand increases

Equilibrium price will increase, but no definite prediction about equilibrium quantity

Consumer surplus

The difference between buyer's reservation price for a product and the price actually paid

Producer surplus

The difference between the price a seller receives for a product and the seller's reservation price

Total economic surplus

The sum of CS & PS

Socially optimal & efficiency

The quantity of a good THAT results in the maximum possible economic surplus from producing and consuming the good. Efficiency occurs up to market equilibrium; any more would be bad, and less would be lost potential for surplus

Indirect factors of socially optimal efficiency

•consumption or production that entails benefits to people other than buyers

•consumption or production entails costs not borne by sellers

Immigration

Brings lower prices BUT job-loss for native-born workers

Job gains?

Immigration may decrease employment among native-born workers who have the same skill set as foreign born workers because foreign-born workers will settle for lesser pay, but it may increase employment for others.

Elasticity of demand

Percentage of change for quantity demanded divided by percentage of change in price.

Elasticity of demand (at a point)

(P/Q) x (1/slope)

Midpoint

Unit elastic = elasticity is 1

Inelastic

Elasticity < 1; all the points BEFORE midpoint

Elastic

Elasticity >1; all the points AFTER midpoint

Perfectly

Inelastic - e =0

Elastic - e =infinity