econ 101 umich final study guide

positive economics vs normative economics

pos = what is

norm = what ought to be

framing

how diff alternatives are described/framed

sunk costs

costs youve already incurred, cannot be reversed, ignore these sunk costs

individual demand curve

downward sloping

law of demand

the Q demanded is higher when prices r lower

rational rule for buyers

buy more of an item if its MB is greater than/= to the price -- keep buying til P=MB

correlation between individ. demand and MB curve

they are the same thing

diminishing MB

additional benefit eventually less than the one before as more of a good is produced/consumed

normal good vs inferior

normal = higher income, you buy more

inferior = higher income, you buy less

market demand

slopes downward bc of intensive and extensive margin

intensive vs extensive margin

intensive = lower prices lead ppl to buy more

extensive = lower prices lead more ppl to buy

6 shifters in market demand

income, taste, prices of other goods, expectations, network/congestion effects, # and type of buyers

congestion effects

when a good becomes less useful because other people use it. increased use by others will decrease demand

individual supply curve

just a set of plans holding other things constant

law of supply

producers offer more of a good as its price increases and less as its price falls

rational rule for sellers in competitive markets

sell one more item if the price is greater than (or equal to) the marginal cost

correlation between individ. supply and marginal cost curve

they are the same thing

diminishing marginal product

increases in variable inputs will at some point yield smaller increases in output

rising input costs

buying more of an input increases the opp cost of that input, causes higher prices

increasing marginal costs

At some point, producing each additional item comes at a higher marginal cost than the previous item -- happens bc of rising input costs + diminishing marg product

upward sloping market supply curve

reflects intensive and extensive margin

intensive = the higher the price, the more the seller will produce

extensive: higher the price, the more sellers enter market

5 shifters of supply

input prices, productivity/tech, other ouput prices, expectations, type/# of sellers

equilibrium price and quantity

price and quantity at which the market is in equilibrium

Disequilibrium symptoms

long lines, building to raise the price, secondary market emerges

3 step recipe for predicting market outcomes

1. Is it the supply or demand curve shifting? or both?

2. Is that shift an increase or a decrease?

3. How will prices and quantities change in the new equilibrium?

consequences of shifts

increase in demand : q prices, p falls

decrease in demand: q falls, p falls

inc in supply: q rises, p falls

dec in supply: q falls, p rises

what happens when supply and demand shift @ same time

big small method - depends on which shift is bigger

morning evening method

evaluate which shifts first

what is elasticity?

a measure of responsiveness

price elasticity of demand

% in q demanded / % change in price

% change in quantity

change in Q / ((old q + new Q)/2)

% change in price

change in price/ ((old price + new price) /2)

inelastic

value is less than 1

- increase in price causes large reduction in q demanded

-raising prices lowers rev

elastic

value is greater than 1

-increase in price causes large reduction in q demanded

- raising prices lowers revenue

perfectly elastic demand

%change in quantity is infinite

perfectly inelastic demand

0, vertical line, quantity dosent respond at all

factors that determine price elasticity of demand

1. more competing brands = more elasticity

2. specific brands tend to have more elastic demand than categories of goods

3. necessities have less elastic demand

4. consumer search makes demand more elastic

5. demand gets more elastic over time

price elasticity of supply

% change in quantity supplied / % change in price

perfectly inelastic supply

completely vertical, q doesnt respond at all, =0

inelastic supply

q responds a little bit but not much, less than 1, inelastic curve looks like a capital i

elastic supply

q responds a lot, greater than 1, elastic supply curve looks like a capital E

perfectly elastic supply

horizontal line, % change in Q is infinite, = infinity

what determines price elasticity of supply?

1. inventories make supply more elastic

2. easily available inputs make supply elastic

3. xtra capacity makes supply elastic

4. easy entry/exit make supply more elastic

5. over time supply becomes more elastic

income elasticity of demand

% change in q demanded/% change in income

cross price elasticity of demand

% change in q of this good / % change in price of another good

what does cross price elasticity of demand do

measure of how responsive the demand of one good is to price of another good

cross price of elasticity of demand for substitutes and complements

is positive for subs, negative for comps

tax on sellers

shifts the S curve up by the amount of the tax, equilibrium w tax moves up

statutory burden

whos responsible for paying the tax to the gov

economic burden

the burden created by the change in after-tax prices faced by buyers and sellers

tax on buyers

shifts the D curve down by the amount of the tax, equilibrium moves down

it does NOT matter whether the buyer or seller pays the tax

the quantities bought and sold are the same, and prices paid/received are the same

the relatively elastic factor bears less of the burden

the more elastic you are, the smaller of your share of the economic burden

subsidizing buyers

demand curve shifts up, equilibrium moves up, quantity increases and so does price, benefits are larger for the inelastic factor

price ceiling

max price that sellers can charge

-ex limits on uber surge pricing

-ex rent control apartments

effects of price ceilings

lower prices, decrease in the q supplied, increase in the q demanded, shortages

price floor

a minimum price that sellers can charge

-ex minimum wage, alcoholic drinks

effects of price floors

higher prices, increase q supplied, decrease q demanded, surplus

quota

a max quantity of a good that can be bought/sold

-ex immigration laws, zoning laws (restrict # of houses)

effects of quotas

decreases q supplied, higher prices (competition among buyers drives up price, decreasing q demanded), high cost production, lost customers

mandate

min amount of a good that can be bought/sold

-ex low income housing, health care (requires consumers to purchase)

price regulation

q is determined by market forces, min of quantity demanded and q supplied

quantity regualtion

price is determined by competition among buyers and sellers

economic efficiency

the more econ surplus generated, the better

-everyone made better off

-bigger pie = everyone gets a bigger slice

efficient outcome

the outcome that yields the largest possible economic surplus

equity

an outcome yields greater equity if it results in a fairer distribution of costs and benefits

consumer surplus

mb - price

willingness to pay

max price a customer will pay for a good

total consumer surplus in a market on a graph

is under the demand curve and above price, out to the q sold

producer surplus

price - mc

willingness to accept

min amnt a seller would exchange for a good

total producer surplus in a market on a graph

area above supply curve and below the price, out to the q sold

total econ surplus on a graph

area between demand and supply curves

rational rule for markets

produce until mb = mc

market failure

when forces of S and D lead to inefficient outcome

5 problems = market power, externalities, asymmetric info, irrationality, gov failure

deadweight loss

measures how far econ surplus falls below the efficient outcome

- econ surplus at efficient outcome minus actual econ surplus (this measures cost of inefficiency)

Kim K problem

efficiency means that goods go to the ppl w the highest willingness to pay. Kim K = willing to pay for something more than u, but does not get a greater benefit.

Gains from trade

benefits from reallocating resources to better uses

absolute advantage

ability to carry out a task more efficiently than others

comparative advantage

ability to carry out a task at a lower opp cost than other tasks

3 steps to discovering your comparative advantage

1. determine how long each task would take each person (measures cost in hrs)

2. evaluate the opp costs of each person in each task

3. identify who has a comp advantage in each task

specialization

focusing on specific tasks and spending more time on what you are relatively good at and less time on other stuff

3 central roles of prices

1. price is a messenger

2. price is an incentive

3. a price aggregates information

the knowledge problem

the info needed to make a good choice is so broadly dispersed that its not available to any individual decision maker

to achieve efficient outcomes, decision makers must know

1. MC curves from each good for reach good

2. MBs of each buyer from each good

internal markets

markets that managers set up within a company to buy/sell resources

- help companies reallocate scarce resource to their best uses

-ex feeding america

what determines comparative advantage?

relatively abundant inputs, specialized skills, mass production

relative abundance

lower opp cost -- sell what you have a lot of, buy what you don't have much of

specialized skills

will lead to lower opp cost (OVER TIME), leads to better production

mass production

specialized production lines, bargaining power for buying inputs bc firm is probably the largest purchaser of the inputs

Global Market

determines the world price, the US is small relative to global market

trade costs

xtra costs incurred as a result of buying/selling overseas rather than domestically

3 step recipe for assessing effects of international trade

1. what price will a traded good sell @? -- world price

2. what Qs will domestic suppliers+buyers and demand at this new price? -- check domestic supply+demand curves

3. what Q will be traded? -- the gap btwn domestic supply and domestic demand is made up by intntl trade

when to import and when to export

import when domestic demand > greater than domestic supply

export when domestic supply > domestic demand

Effect of imports

price goes down, domestic Q and demand increases, and domestic Q supplied decreases

effect of exports

price goes up, domestic Q and D decreases, and domestic Q supplied increases

arguments for limiting trade

1. national security concerns

2. infant industry

3. unfair competition/ anti dumping

4. domestic regulations

5. saving jobs

externality

the impact of one person's actions on the well-being of a bystander

positional extrernalities

depend on relative performance

-ex your higher income makes me feel bad, harming me

common resource problem

the more i take the less of it is left for u