Econ Exam 1

Opportunity cost

The value of what you give up for something else

Incentives

An opportunity to make yourself better off, something that induces a person to act.

The three principles of econ

1. The true cost of something is what you give up for it.

2. People act in their own self-interest.

3. People act a little bit at a time.

Marginal

The next unit of something.

Marginal benefit

The additional benefit associated with one more unit of something.

Decreasing marginal benefit

The negative relationship between quantity and marginal benefit.

Increasing marginal cost

The positive relationship between quantity and marginal cost.

Capital

Tools, infrastructure, and knowledge used to produce goods and services.

Relative scarcity

The comparison of one good to another.

Allocation

The process of assigning a good or service to one use instead of another.

Comparative advantage

The ability to produce a good at a lower opportunity cost than another producer.

Absolute advantage

The ability to produce goods or services more efficiently using fewer resources or at a lower cost than another producer.

Market

A place or mechanism by which buyers and sellers interact to trade goods and services.

Demand

The relationship between the price of a good and the quantity of that good consumers will purchase.

Law of demand

As the price of a good rises, the quantity demanded will fall all else held constant.

Income effect

The effect that a change in purchasing power has on demand for a good.

Substitution effect

The effect that occurs when people switch between similar products based on a relative price change.

A change in price causes a change in

Quantity demanded

A change in a non-price determinant of demand causes

a change of demand.

Determinants of demand

1. Normal goods/inferior goods

2. Changing taste or preferences

3. Number of buyers

4. Expectations

5. Substitutes

6. Compliments

Normal goods (demand)

A good that you want to consume more of as income rises.

Inferior goods

A good that you want to consume less of as income rises.

Changing taste or preferences

Pop culture trends leads to changing demand.

Number of buyers

More buyers leads to more demand.

Expectations

Changing expectations about the future affect the present.

Substitutes

Changes to substitute goods affect a good

Compliments

Changes to a complementary good affect a good.

Law of supply

As the price of a good rises, the quantity supplied will rise, all else held constant.

Determinants of Supply

1. Resource cost

2. Technology

3. Price expectations

4. Number of sellers

5. Taxes and subsidies

Technology

reducing costs and increase efficiency (shift right)

Number of sellers

A new supplier can increase market supply.

Taxes

Aren’t directly paid by the buyer, the supplier pays it.

Subsidies

Lower the cost of a good by paying a firm to produce a good.

Equilibrium

A situation where nobody has an incentive to do something different.

Surplus

A market condition in which the quantity supplied exceeds the quantity demanded.

Shortage

A market condition in which the quantity demanded exceeds the quantity supplied.

Price ceiling

A maximum legal price at which a good can be sold.

Binding price ceiling

Below the market and thus affects prices.

Non-binding price ceiling

Above the market price and has no effect.

Price floor

The minimum legal price at which a good can be sold.