econ chapt 2-4

PPC

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

factors that shift ppc curve outwards (more/better)

increase productive resources (factories, equipment), improve knowledge/technology

substitution effect

as the good becomes more expensive, people switch to substitutes

income effect

change in the price of a good changes the buyer’s purchasing power

market equilibrium

occurs at the price quantity pair for which both buyers sellers are satisfied

excess supply

when price exceeds its equilibrium value, resulting in excess supply/surplus

excess demand

when price lies below its equilibrium value, resulting in excess demand/shortage

complements

when 2 goods are better consumed together, with the decrease in price for one good leading to an increase in the demand for the other

welfare loss formula

½ x (consumer value - producer cost) x (equilibrium quantity - forced quantity)

welfare loss

total economic value wasted because of market rules

how to find equilibrium

quantity demanded = quantity sold

how to find equilibrium for multiple groups

solve for quantity before adding all equations together for total quantity demanded

how to find economic surplus

½ x quantity transacted x (max price people are willing to pay - equilibrium price)

total economic surplus formula

consumer surplus + producer surplus

constrained choice rule

consumers maximize satisfaction until MB of item 1 = MB of item 2

more simple economic surplus formula

total benefit - total cost

opportunity cost calc

explicit cash outlays + value of next best alternative given up

opportunity cost of x calculation

output of Y / output of X ; the lower one is the better option to produce X

consumer surplus formula

willingness to pay - actual price

equilibrium price and quantity when supply decreases and demand is unchanged?

Price rises, quantity falls. (Supply shifts left; you slide up along the fixed demand curve.)

both demand and supply increase simultaneously?

Quantity definitely rises (both push it up), but price is ambiguous (demand pushes up, supply pushes down

What pattern uniquely signals a decrease in supply?

Price rises and quantity falls

What pattern uniquely signals an increase in demand?

Both price and quantity rise

What pattern uniquely signals a decrease in demand?

Both price and quantity fall.

What pattern uniquely signals an increase in supply?

Price falls and quantity rises.

What's the difference between a movement along the supply curve and a shift of the supply curve?

A price change causes movement along the curve (change in quantity supplied). A non-price change (costs, number of sellers, regulation) shifts the curve (change in supply)

absolute advantage

Whoever can produce more of a good outright (with the same resources/time) has the absolute advantage

What's the condition for both parties to gain from trade?

The terms of trade must lie strictly between the two opportunity costs

What does a bowed-outward (concave to origin) PPC represent?

Increasing opportunity cost — resources are not equally suited to both goods.

What does a bowed-inward PPC represent?

decreasing opportunity cost

Why does a joint PPC get steeper as you move toward the horizontal intercept?

Producers are ordered from lowest to highest opportunity cost of the horizontal-axis good. You use the lowest-cost resources first, then switch to higher-cost ones

In a closed economy with no international trade, what's the relationship between the CPC and PPC?

They coincide, aggregate consumption equals aggregate production

In a closed economy, must a person's consumption equal their own production?

No. People can trade domestically.

At any point on a joint PPC with unique opportunity costs, how many people produce both goods?

At most one — everyone else fully specializes.

How do you calculate total economic surplus from a trade?

(buyers value − price paid) + (price received − minimum acceptable price)

formula for consumer surplus (linear)?

½ × Q × (choke price − market price)

formula for producer surplus (linear)?

½ × Q × (market price − minimum supply price)

If income rises, what happens to demand for a normal good?

Demand increases (shifts right)

If income rises, what happens to demand for an inferior good?

Demand decreases (shifts left)