Econ 1020 Final Exam Study Guide

Scarcity

-a situation in which unlimited wants but we have limited resources to fulfill those wants

Scarce Resources

-thing that people want but the quantity demanded exceeds supply

Scarcity

-a situation in which unlimited wants but we have limited resources to fulfill those wants

Scarce Resources

-thing that people want but the quantity demanded exceeds supply

Tradeoffs

-giving up one thing to get something else

Opportunity Costs

-the value of the next-best alternative to a choice

Opportunity Cost Equation

-Opportunity cost of Good X = (Change in Good Y Production / Change in Good X Production)

Buyers Problem

-marginal benefit decreases as quantity increases

-when we look to maximize marginal benefit between products, we want the marginal benefit to be equal

Economics

-a social science focused on the choices made by individuals, institutions, and society under the conditions of scarcity

Microeconomics

-choices that individuals are businesses make

Macroeconomics

-the study of the economy as a whole (nationally or globally)

Three Principles of Economics

-Optimization

-Equilibrium

-Empiricism

Economic Agent

-an individual or group that makes economic choices

Optimization

-trying to choose the best feasible option given the available information

-Economists assume people always try to select the best available option given the information that is available to them

Trade-off

-an alternative that we sacrifice to make a decision

Positive Statements

-claims that attempt to describe the world as it is

-can be verified or tested

Normative Statements

-claims that attempt to prescribe how the world should be

-are opinions

Normative Statement Key Words

-should

-ought

-good idea

Market

-a group of economic agents trading a good or service

Market Price

-the price when all sellers and buyers face the same price

Perfectly Competitive Market

1.) many buyers and sellers

2.) all firms selling identical products

3.) no barriers to new firms entering the market

4.) Equal access to information

Price-Taker

-when a buyer or seller accepts the market price

-buyers are price takers

Free Rider Problem

-for a group, the problem of people not joining because they can benefit from the group's activities without joining.

Tragedy Of The Commons

-situation in which people acting individually and in their own interest use up commonly available but limited resources, creating disaster for the entire community

Correlation

-a mutual relationship or connection between two or more things

Causation

-a cause and effect relationship in which one variable controls the changes in another variable

-x causes y

Slope

-change in y over change in x

What happens to marginal cost when the marginal product of labor is increasing?

-marginal cost of output is decreasing

What happens to marginal cost when the marginal product of labor is decreasing?

-marginal cost of output is increasing

Marginal Cost Graph Trends

-intially falls and then rises

-forms a u-shape

Demand

-consumer willingness and ability to buy products

Demand Curve

-shows the relationship between price and quantity demanded

-is inversely related

-as quantity increases price increases

Price Changes On A Demand Curve

-Increases in the price of either good cause the demand curve to pivot inwards

-decreases in the price of either good causes the demand curve to pivot outwards

Law of Demand

-quantity demanded by consumers rises as price increases

Aggregate Demand

-the amount of goods and services in the population that will be purchased at all possible price levels

Aggregation

-the process of adding up individual behaviors in the economy

Shifters of Demand

1. Tastes and Preferences

2. Number of Consumers

3. Price of Related Goods

4. Income

5. Future Expectations

Supply Curve

-plots quantity supplied against price level

-is upward sloping

-directly related

Shifters of Supply

1. A change in resource price

2. A change in technology

3. Changes in nature and politics

4. Changes in taxes

Law of Supply

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

Aggregate Supply Curve

-a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level

Consumer Surplus

-the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Price Impacts on Consumer Surplus

-when price increases, consumer surplus decreases

-when price decreases, consumer surplus increases

How to calculate consumer surplus

-the area below the demand curve and above market price

-0.5bh

Budget Constraint Graph

-amount of good a that can be purchased compared to amount of good b that can be purchased

-is downward sloping

Competitive Equilibrium

-the cross point of the supply and demand curve

Competitive Equilibrium Price

-price level when demand and supply are equal to one another

Competitive Equilibrium Qauntity

-quantity when demand and supply are equal to one another

Income Changes

-if you have more income you can purchase more goods

-if you have less income you can purchase less goods

Bang For Your Buck

-maximizing marginal benefit with the lowest opportunity cost

Percent Change Equation

-change in x over change in y

-new value - original value/original value

Elasticity

-a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

Unit Elastic Demand

-when goods have a price elasticity of demand equal to one

Elastic Demand

-when goods have an elasticity greater than one

Inelastic Demand

-when goods have an elasticity less than one

Perfectly Elastic Demand

-when goods are highly responsive to price change

Perfectly Inelastic Demand

-when the quantity of goods is unaffected by price

Perfectly Elastic Demand Curve

-horizontal line

Perfectly Inelastic Demand Curve

-vertical line

Elasticity Formula

(Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P2+P1)/2]

Elastic Parts of the Demand Curve

-the upper part of the demand curve is elastic

Inelastic Parts of the Demand Curve

-the lower part of the demand curve is inelastic

Price Elasticity of Demand

-how does quantity respond to a change in price

Price Elasticity of Demand Equation

% change in quantity demanded / % change in price

Determinants of Price Elasticity of Demand

-closeness of substitutes

-budget share spent on the good

-available time to adjust

Closeness of Substitutes (Determinants of Price Elasticity of Demand)

-as the number of available substitutes increases the price elasticity of demand increases

Budget Share Spent On The Good (Determinants of Price Elasticity of Demand)

-as you spend more of your budget on a good, the price elasticity of demand increases

Available Time to Adjust (Determinants of Price Elasticity of Demand)

-people are more responsive to price changes in the long run than in the short run

Cross-Price Elasticity of Demand

-measures the percent change in quantity demanded of a good due to the percentage change in another good's price

Cross-Price Elasticity of Demand Equation

% change in Qd for good 1 / % change in price of good 2

Complement Good

-when demand for good x increases, the demand for good y increases

-has a positive cross-price elasticity of demand

Substitute Good

-when the demand for good x increases, the demand for good y decreases

-has a negative cross-price elasticity of demand

Income Elasticity of Demand

-measures the percentage change in quantity demanded due to a percent change in income

Income Elasticity of Demand Equation

% change in quantity demanded / % change in income

Normal Goods

-when income rises, consumers buy more of a good

-have a positive income price elasticity of demand

Inferior Goods

-a good is inferior if the quantity demanded decreases when income rises

-has a negative income price elasticity of demand

Luxury Goods

-very elastic price

-demand increases as income rises

Capital

-any goods including machines and buildings that are used in production

Technology

-something that helps ups produce goods better, faster, or cheaper

Firm

-a businesses that sells goods or services

Short Run

-a period of time were only some of the firms inputs can be changed

Long Run

-a period of time where a firm can change any input

Fixed Factors of Production

-an input that cannot be changed in the short run

Variable Factor of Production

-an input that can be changed in the short run

Law of Diminishing Returns

-successive increases of inputs eventually lead to less marginal output

Accounting Profit

-total revenue - explicit costs

Economic Profit

-total revenue - explicit costs - implicit costs

Sunk Costs

-a cost that has already been incurred and can not be recovered

Marginal Product

-change in output/change in labor

Marginal Cost

-change in total cost/change in quantity

Average Total Cost

-total cost/quantity

Average Variable Cost

-total variable cost/quantity

Average Fixed Cost

-total fixed cost/quantity

Average Revune

-total revenue/quantity

Total Cost

-TVC+TFC

Profit Equations

-MC(Q) - TFC - AVC(Q)

Price

-marginal revenue under perfect conditions

When does optimization occur?

-when marginal revenue is equal to marginal cost

Firm Supply Curve

-represented by the segment of the firm's marginal cost curve that lies above the average variable cost curve or shutdown level of output

When does a firm shutdown?

-when market price is less than AVC

When does a firm leave the market

-when the market price is between the AVC and ATC curves

When does a firm breakeven?

-when the market price is equal to the ATC curve