ECON 201 Final OSU

production possibilities frontier (PPF)

a line or curve that shows all the possible combinations of two outputs that can be produced using all available resources

efficient points

combinations of production possibilities that squeeze the most output from all available resources

absolute advantage

the ability to produce more of a good or service than others can with a given amount of resources

comparative advantage

the ability to produce a good or service at a lower opportunity cost than others

specialization

spending all of your time producing a particular good

gains from trade

the improvement in outcomes that occurs when producers specialize and exchange goods and services

economics

the study of how people, individually and collectively, manage resources

microeconomics

the study of how individuals and firms manage resources

macroeconomics

the study of the economy on a regional, national, or international scale

rational behavior

making choices to achieve goals in the most effective way possible

scarcity

the condition of wanting more than we can get with available resources

opportunity cost

the value of what you have to give up in order to get something; the value of your next-best alternative

marginal decision making

comparison of additional benefits of a choice against the additional cost it would bring, without considering related benefits and costs of past choices

sunk cost

costs that have already been incurred and cannot be recovered or refunded

incentive

something that causes people to behave in a certain way by changing the trade-offs they face

efficiency

use of resources in the most productive way possible to produce the goods and services that have the greatest total economic value to society

correlation

a consistently observed relationship between two events or variables

causation

a relationship between two events in which one brings about the other

model

a simplified representation of the important parts of a complicated situation

circular flow model

a simplified representation of how the economy's transactions work together

positive statement

a factual claim about how the world actually works

normative statement

a claim about how the world should be

market economy

an economy in which private individuals, rather than a centralized planning authority, make the decisions

market

buyers and sellers who trade a particular good or service

competitive market

a market in which fully informed, price-taking buyers and sellers easily trade a standardized good or service

standardized good

a good for which any two units have the same features and are interchangeable

transaction costs

the costs incurred by buyer and seller in agreeing to and executing a sale of goods or services

price taker

a buyer or seller who cannot affect the market price

quantity demanded

the amount of a particular good that buyers will purchase at a given price during a specified period

law of demand

a fundamental characteristic of demand which states that, all else equal, quantity demanded rises as price falls

demand schedule

a table that shows the quantities of a particular good or service that consumers will purchase (demand) at various prices

demand curve

a graph that shows the quantities of a particular good or service that consumers will demand at various prices

substitutes

goods that serve a similar enough purpose that a consumer might purchase one in place of the other

complements

goods that are consumed together, so that purchasing one will make consumers more likely to purchase the other

normal goods

goods for which demand increases as income increases

inferior goods

goods for which demand decreases as income increases

quantity supplied

the amount of a particular good or service that producers will offer for sale at a given price during a specified period

law of supply

a fundamental characteristic of supply which states that, all else equal, quantity supplied rises as price rises

supply schedule

a table that shows the quantities of a particular good or service that producers will supply at various prices

supply curve

a graph that shows the quantities of a particular good or service that producers will supply at various prices

equilibrium

the situation in a market when the quantity supplied equals the quantity demanded; graphically, this convergence happens where the demand curve intersects the supply curve

equilibrium price

the price at which the quantity supplied equals the quantity demanded

equilibrium quantity

the quantity that is supplied and demanded at the equilibrium price

surplus (excess supply)

a situation in which the quantity of a good that is supplied is higher than the quantity demanded

shortage (excess demand)

a situation in which the quantity of a good that is demanded is higher than the quantity supplied

mid-point method

method that measures percentage change in demand (or supply) relative to a point midway between two points on a curve; used to estimate elasticity

perfectly elastic demand

demand for which the demand curve is horizontal, in a way such that demand could be any quantity at the given price, but drops to zero if the price increases

perfectly inelastic demand

demand for which the demand curve is vertical, in a way such that the quantity demanded is always the same no matter what the price

elastic

demand that has an absolute value of elasticity greater than 1

inelastic

demand that has an absolute value of elasticity less than 1

unit-elastic

demand that has an absolute value of elasticity exactly equal to 1

total revenue

the amount that a firm receives from the sale of goods and services, calculated as the quantity sold multiplied by the price paid for each unit

price elasticity of supply

the size of the change in the quantity supplied of a good or service when its price changes

cross-price elasticity of demand

a measure of how the quantity demanded of one good changes when the price of a different good changes

income elasticity of demand

a measure of how much the quantity demanded changes in response to a change in consumers' incomes

elasticity

a measure of how much consumers and producers will respond to a change in market conditions

price elasticity of demand

the size of the change in the quantity demanded of a good or services when its price changes

willingness to pay (reservation price)

the maximum price that a buyer would be willing to pay for a good or service

willingness to sell

the minimum price that a seller is willing to accept in exchange for a good or service

surplus

a way of measuring who benefits from transactions and by how much

consumer surplus

the net benefit that a consumer receives from purchasing a good or service, measured by the difference between willingness to pay and the actual price

producer surplus

the net benefit that a producer receives from the sale of a good or service, measured by the difference between the producer's willingness to sell and the actual price

total surplus

a measure of the combined benefits that everyone receives from participating in an exchange of goods and services

zero-sum game

a situation in which whenever one person gains, another loses an equal amount. such that the net value of any transaction is zero

efficient market

an arrangement such that no exchange can make anyone better off without someone becoming worse off

deadweight loss

a loss of total surplus that occurs because the quantity of a good that is bought and sold is below the market equilibrium quantity

market failures

situations in which the assumption of efficient, competitive markets fails to hold

price control

a regulation that sets a maximum or minimum legal price for a particular good

price ceiling

a maximum legal price at which a good can be sold

price floor

a minimum legal price at which a good can be sold

tax incidence

the relative tax burden borne by buyers and sellers

subsidy

a requirement that the government pay an extra amount to producers or consumers of a good

tax wedge

the difference between the price paid by buyers and the price received by sellers in the presence of a tax

Economic welfare

is the branch of economics that studies how the allocation of resources affects economic well-being

Consumer Surplus

Difference between a persons' willingness to pay for a good and price paid to get it above Price Equilibrium

Producer Surplus

Under Price equilibrium

Minimum price a seller will accept to sell a good or service

The difference between the price seller receives and the producers willingness to sell

Total Surplus

Sum of consumer and producer surplus, also called social welfare. Market considered efficient when an allocation of resources maximizes this

Total Surplus Equation

CS + PS (area of two smaller triangles or one large one) = (1/2)(baseheight) Or = (price high-price low)quantity*(1/2)

Efficiency

Size of Pie

Equity

refers to the fairness of the distribution of benefits within society, who eats pie, how many pieces

Deadweight loss

the decrease in economic activity due to market distortions.

Reasons for DWL

Price Ceilings, Price Floors, Taxes

Equation for DWL

= TS old - TS new

Tax and Inefficiency

Area of Square: (S Paid Price - S Received Price)*(quantity)

Elasticity Impact

The more relatively elastic demand is, greater the DWL and lower the TR (tax revenue)

Perfectly inelastic demand

consumers pay 100%

Externalities

costs or benefits of a market activity that affect a 3rd party

Internal Costs

the costs of a market activity paid by an individual participant

External Costs

costs of a market activity paid by people who are not participants

Social Costs

internal costs + external costs

Negative Externalities

occur when 3rd party is adversely affected by a market, pollution, construction noise, cig smoke

Goods and services that cause neg. ext. tend to be overproduced because producer doesn't pay full price

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Corrections for Negative Externalities

Internalize: When a firm takes into account the external costs (or benefits) to society that occur as a result of its actions, taxes, fines, regulations

Negative Externalities on the graph

S internal moves left to S social, from current quantity to the efficient quantity

Positive Externalities

occur when 3rd party is positively affected by a market, vaccines, condoms, Christmas lights

Goods and services that create positive externalities tend to be under supplied because the producers do not reap the full benefit of their production

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Corrections for Positive Externalities

• More difficult to fix than neg. ext.

• Market is producing too little of a good, we need incentives to produce more

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• Gov. subsidies to make good more affordable, but it is sometimes already free

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