Econ-102 Final SDSU

How do economists work?

as scientists and as policy makers

scientist economist

follow scientific method, theorize, gather data and asses the validity of their theories

circular flow model

A model that shows the flow of goods and services and the interaction among households and firms

production possibility frontier model

shows efficiency, trade-off, opportunity cost, and economic growth

Policy makers

do not theorize or collect data but interpret findings and provide advice

Positive statement

descriptive. they can be checked NOT value based

Normative Statement

Prescriptive. They cannot be check and are value based

Micro vs. Macro

behavior of firms and households vs. economy-wide phenomenon

How can countries/ individuals benefit from specialization and trade

consumption and production gains. it pays off to trade and specialize

principle of absolute advantage

A. Smith, 1776- whoever can produce more or requires fewer inputs should specialize in producing that item

Principle of comparative advantage

D. Ricardo, 1817- whoever has to give up less/ whoever has a lower opportunity cost should specialize in that case

what is a market>

any group of buyers and sellers

perfectly competitive market

A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

Monopoly

A market in which there are many buyers but only one seller.

monopolistic competition

a market structure in which many companies sell products that are similar but not identical

What causes a movement along the demand curve?

a change in the price of the good

What causes a shift in the demand curve?

a change in an area other than price

What causes a movement along the supply curve?

change in price

what causes a shift along the supply curve?

everything other than price

Supply function

the amount of goods and services that firms are willing and able to produce and various prices

Demand function

is given by the amount of goods and services that buyers are willing and able to purchase

quantity demanded

is the amount of a good that buyers are willing and able to buy

Law of demand

dictates the relationship to prices, it states that other things equal the quantity demanded of a good falls when the price of the good rises. Hence, the demand function is upward sloping

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

Law of supply

states that other things equal the quantity supplied of a good rises when the price of the good rises. hence the supply function is upward sloping

three steps for analyzing changes in the equilibrium

1. decide whether the event shifts the supply or demand curve (or both)

2. decide in which direction the curve shifts

3. use the supply and demand diagram to see how the shift changes the equilibrium price and quantity

Normal goods

things that are a luxury, when you have more money you will buy more

Inferior goods

goods that you do not need when you have money

Price elasticity of demand

measure of consumer responsiveness to a change in price

how to calculate elasticity

% change in quantity demanded / % change in price

elastic demand

quantity demanded is greater than price

inelastic demand

Quantity demanded is less than the price

unit elastic

quantity demanded equals price

perfectly inelastic

= 0 (vertical)

perfectly elastic

= infinity (horizontal)f