Economics Exam 1

Firm (Company or Business)

A firm is an organization that produces goods and services

Entrepreneur

An entrepreneur is someone who operates a business, they decide what goods and services get produced and how to produce them

Innovation

A practical application of an invention

Goods

The process a firm uses to create good + services

Services

Activities performed for others

Revenue

Total amount received for selling a good or service

Profit

The difference between a firms revenue and its costs

Household

Suppliers of the factors of production (labor) and they demand goods and services

Factors of Production

Firms use factors of production to produce goods or services. Most important: labor and capital

Capital

In economics, capital refers to physical capital. Manufactured goods that are used to produce other goods and services. The total amount of physical capital available is called capital stock

Human Capital

The accumulated training, education, and skills workers possess

Scarcity

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

Marginal Analysis

Involves comparing marginal benefits and marginal costs

Productive Efficiency

Occurs when a good or service is protected at the lowest possible price

Allocative Efficiency

A state of the economy in which production reflects consumer preferences

Centrally Planned Economy

Is an economy in which the gov. decides how economic resources will be allocated

Market Economy

Is an economy in which decisions of households and firms interacting determine the allocation of resources

Productive Possibilities Frontier

PPF is a curve showing the maximum alternative combinations of 2 products that may be produced with available resources and technology

Opportunity Cost

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

Circular Flow Diagram

Entrepeneurship

Is someone who operates a business, bring together the factors of production in order to produce goods and services customers want

Private Property Rights

The rights individuals or firms have the exclusive use of their property including the right to buy and sell it

Change in Quantity Demanded vs Change in Demand

A change in demand represents a shift to new demand curve.
While a change in quantity demanded is a movement along the existing curve.

Change in Quantity Supply vs Change in Demand

A change in supply represents a shift to a new supply curve
While a change in supply demanded is a movement along the existing curve.

Influences on demand (Non-price)

1. Increase in an input price

2. Negative technological change

3. Increase in the price of a substitute in production

4. Decrease in the number of firms in the market

Influences on Supply (Non-price)

1. Decrease in an input price

2. Positive technological change

3. Decrease in the price of a substitute in production

4. Increase in the number of firms in the market

Price Elasticity of Demand

The elasticity of demand is the responsiveness of the quantity demanded to change in price

Elastic Demand

Occurs when the % change in quantity demanded is greater than the % change in price, so that the price elasticity is >1 in absolute value

• Decrease in price by 10%—increase in quantity demanded by 20%

Inelastic Demand

Occurs when the % change in quantity demanded is less than % change in price, so that the price elasticity is <1 in absolute value

• Decrease in price by 10%—increase in quantity demanded by 5%

Unit Elastic Demand

Occurs when the % change in quantity demanded is = % ∆ price, so that the price is =1 in absolute value

• Decrease price by 10%—increase in quantity demanded by 10%

Midpoint Formula

Determinants of E_d

1. The availability of close substitutes — the more substitutes available — the more elastic demand

2. Passage of time — the longer the time period — the more elastic the demand

3. Whether the product is a necessity or luxury, the demand for luxury good is more elastic

4. The definition of a market, the more narrowly we define the market, the more elastic the demand

5. The share of the product. The larger the share the purchase of the product. The larger the share of a good in a consumers budget the more elastic the demand

E_d and total revenue (TR)

1. Changes in price (P) and quantity demanded (Q) results in changes in total revenue (TR) received by term

   1. TR = P*Q

   2. Changes in TR are related Ed

   3. If demand is elastic, changes in price (increase or decrease) will result in changes in total revenue (TR) in the opposite direction

   4. If demand is inelastic, changes in price (increase or decrease) will result in changes in the total revenue (TR) in the same direction

   5. When demand is unit-elastic, changes in price (increase or decrease) will result in change in total revenue (TR)— same

Cross Price Elasticity of Demand

The % change in quantity demanded of one good divided by the % change in the price of the other good

1. For 2 substitutes, the CPE > 0 (positive)

2. For 2 compliments, the CPE < 0 (negative)

3. For 2 unrelated goods, the CPE = 0 (no relationship)

Income Elasticity of Demand

The % change in quantity demanded divided by the % change of income

1. For normal goods, IE > 0

   1. For necessities, 0<IE<1

   2. For luxury goods, IE > 1

2. For inferior goods, IE < 0

Price Elasticity of Supply

ES=% ∆ quantities/% ∆ price

1. Because of the law of supply, this elasticity will normally have a positive value

2. The longer the time period, firms have to respond to a price change, the greater the ES

3. The value of this depends on how quickly firms can change the quantity supplied when the price changes