Microeconomics UConn Prof Svalestad CH 1-6 midterm

Scarcity

a situation in which unlimited wants exceed the limited resources available to fulfill those wants

Economics

study of choices people make to attain their goals, given their scarce resources

Economic Model

a simplified version of reality used to analyze real world economic situations

Market

a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

three key economic ideas

1. people are rational

2. people respond to economic incentives

3. optimal decisions made at the margin

marginal analysis

analysis that involves comparing marginal benefits and marginal costs

trade off

the idea that, because of scarcity, producing more of one good or service means producing less of another good or service

opportunity cost

the highest valued alternative that must be given up to engage in an activity

centrally planned economy

an economy in which the government decides how economic resources will be allocated

market economy

an economy in which the decisions of households and firms interacting in markets allocate economic resources

modern "mixed" economy

economy in which most economic decisions result from the interaction of buyers and sellers but in which the government plays a significant role in the allocation of resources

Equity

fair distribution of economic benefits

positive analysis

concerned with what is

normative analysis

concerned with what ought to be

microeconomics

study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices

PPF Production Possibilities Frontier

curve showing maximum attainable combinations of two products that may be produced with available resources and current technology

opportunity cost

the highest valued alternative that must be given up to engage in an activity

absolute advantage

the ability of an individual, firm, or a country to produce more of a good or service than competitors, using the same amount of resources

comparative advantage

ability of an individual, firm, or a country, to produce a good or service at a lower opportunity cost than competitors

market

group of buyers and sellers of a good and the institution by which they come together

factors of production

inputs used to make goods and services

2 key groups that participate in market

households & firms

circular flow diagram

model that illustrates how participants in markets are linked (51)

free market

market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed

quantity demanded

the amount of a good or service that a consumer is willing and able to purchase at a given price

market demand

the demand by all the consumers of a given good or service

law of demand

the rule that, holding everything else constant, when the price of a product falls, the quantity demanded of a product will increase

and vice versa

substitution effect

the change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes

income effect

change in the quantity demanded of a good that results from the effect of change in the good's price on consumers' purchasing power

ceteris paribus

"all else equal' condition. keeping all of the variables -other than the 2 being studied- constant

normal good

a good for which the demand increases as income rises and decreases when income falls

inferior good

a good for which the demand increases as income falls and decreases as income rises

Change in Demand vs Change in Quantity Demanded

change in demand- shift in demand curve (change in variable other than price)

change in quantity demanded-movement along demand curve (change in price)

an increase in income (and the good is inferior) shifts the demand curve

left because consumer spend less of their higher incomes on the good

an increase in income (and the good is normal) shifts the demand curve

right because consumers spend more of their higher incomes on the good

an increase in the price of a substitute good shifts the demand curve

right because consumers buy less of the complementary good and more of this good

an increase in the price of a complementary good shifts the demand curve

left because the consumers buy less of the complementary good and less of this good

an increase in taste for this good shifts the demand curve

right because consumers are willing to buy a

an increase in population will shift the demand curve

right because addition consumers means that more quantity demanded at every price

an increase in the expected price of the good in the future shifts the demand curve

right because consumers buy more of the good today to avoid paying a higher price in the future

law of supply

the rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied

supply curve

curve that shows the relationship between the price of a product and the quantity of the product supplied

variables that shift market supply

1. prices of inputs

2. technological change

3. prices of substitutes in production

4. number of firms in the market

5. expected future prices

an increase in the price of an input will shift the supply curve

left because the cost of producing the good rise

an increase in productivity will shift the supply curve

right because the cost of producing the good fall

an increase in the price of a substitute in production will shift the demand curve

left because more of the substitute is produced and less of the good is produced

an increase in the number of firms in the market will shift the supply curve

right because additional firms result in a greater quantity supplied at every price

an increase in the expected future price of the product will shift the supply curve

left because less of the good will be offered for sale today to take advantage of the higher price in the future

Change in Supply vs Change in Quantity Supplied

change in supply refers to a shift in the supply curve (change in a variable other than price)

change in quantity supplied refers to a movement along the curve (change in product's price)

market equilibrium

a situation in which quantity demanded equals quantity supplied

competitive market equilibrium

a market equilibrium with many buyers and sellers

surplus

quantity supplied is greater than the quantity demanded

shortage

quantity demanded is greater than the quantity supplied

consumer surplus

difference between the highest price a consumer is willing to pay for a good and the actual price the consumer pays

marginal benefit

the additional benefit to a consumer from consumer one more unit of a good or service

producer surplus

difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives

marginal cost

additional cost to a firm of producing one more unit of a good or service

price ceiling

legally determined maximum price that sellers may charge

price floor

legally determined minimum price that sellers may receive

Equilibrium in a competitive market results in

the economically efficient level of output at which marginal benefit equals marginal cost

economic surplus

consumer surplus+producer surplus

deadweight loss

reduction in economic surplus resulting from a market not being in competitive equilibrium

economic efficiency

a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at maximum

When government imposes price floors/price ceilings, 3 things occur

some people win

some people lose

there is a loss of economic efficiency

tax incidence

actual division of the burden of a tax between buyers and sellers in a market

externality

benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service

private cost

the cost borne by the producer of a good or service

social cost

the total cost of producing a good or service including both the private cost and any external cost

private benefit

the benefit received by the consumer of a good or service

social benefit

the total benefit from consuming a good or service including both the private benefit and any external benefit

market failure

situation in which the market fails to produce the efficient level of output

property rights

rights of individuals or businesses to the exclusive use of their property, including the right to buy or sell it

Coase Theorem

the argument of economist Ronald Coase, that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities

pigovian tax

government tax intended to bring about an efficient level of output in the presence of externalities

command and control approach

policy that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices

rivalry

situation that occurs when one person consuming a unit of a good means no one can consume it

excludability

the situation in which anyone who does not pay for a good cannot consume it

4 Categories of Goods

Private good: excludable & rival

Common resources: rival and non-excludable

Quasi-public goods: excludable & non rival

Public goods: non rival and non excludable

free riding

benefiting from a good without paying for it

Elasticity

a measure of how much one economic variable responds to changes in another economic variable

price elasticity of demand

the responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price (not the same as the slope of the demand curve)

price elasticity of demand (formula)

percentage change in quantity demanded/percentage change in price

elastic demand

demand is elastic when the percentage change in the quantity demanded is greater than the percentage change in price so the price elasticity is greater than 1 in absolute value

inelastic demand

demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price so the price elasticity is less than 1 in absolute value

unit-elastic demand

demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price so the price elasticity is equal to 1 in absolute value

perfectly inelastic demand

the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand = 0

perfectly elastic demand

the case where the quantity demanded is infinitely responsive to price and the price elasticity of demand = infinity

if demand is elastic then the absolute value of price elasticity is

greater than 1

if the demand is inelastic then the absolute value of price elasticity is

less than 1

if the demand is unit elastic then the absolute value of price elasticity is

equal to one

if the demand is perfectly elastic then the absolute value of the price elasticity is

equal to infinity

if the demand is perfectly inelastic then the absolute value of price elasticity is

equal to 0

determinants of the price elasticity of demand (5)

1. the availability of close substitutes to the good

2. the passage of time

3. whether the good is a luxury or a necessity

4. the definition of the market

5. the share of the good in the consumer's budget

total revenue

the total amount of funds a seller receives from selling a good or service, calculated by multiplying the price per unit by the number of units

cross-price elasticity of demand

the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good

if the products are substitutes then the cross price elasticity of demand will be

positive (example: two brands of tablet computers)

if the products are complements then the cross price elasticity of demand will be

negative (example: tablet computers and applications downloaded from online stores)

if the products are unrelated then the cross price elasticity of demand will be

zero (example: table computers and peanut butter)

if the income elasticity of demand is positive but less than 1 then the good is

normal and a necessity

if the income elasticity of demand is positive and greater than 1 then the good is

normal and a luxury