EC201 Midterm 1 Review (Basically Definitions)

Opportunity Cost

The value of the next best option not taken

Incentive

Something that induces a person to act

Marginal

The next unit of something

Principle of rational decision making - Opportunity Cost

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

Principle of rational decision making - Incentives

People act in their own self interests

Principle of rational decision making - Maginal decision making

People act a little bit at a time

Comparative advantage

The ability to prodcues a good at a lower opportunity cost than naother producer

Absolute adavantage

The abbility to produces goods or services more efficiently, using fewer resources or at lower costs than competitors.

Law of Demand

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

Law of supply

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

Determianants of demand - Normal vs inferior good.

Normal Goods - A good that you want to comsume more of as income riess, and less of as income falls (Income rises: Demand shift right. Income falls: Demand shifts left.)

Inferior Good - A good you want less of as income rises and more of as income falls (Income rises: demands shifts left, income falls: Demands shfts right)

Determianants of demand - Expectations

If you expect something is going to be less in the future you will consume less off it now, making the demand shift to the right

Determianants of demand - Substitutes (Using Lyft and Uber as example)

If the price of Uber rises, the demand for Lyft increases.

If the prince of good A increases, the Demand of Good B will increase.

Determianants of demand - Compliments

If the price of good B increases, the demand for good A decreases.

Determinants of Supply - Technology

New technology can reduce the costs and increase efficency

• Shifts supply to the right

• Willing to supply more at any given price.

Determinants of Supply - Price Expectations

If the price of something will fall in the future you will increase the supply now so you can sell before the price falls.

Determinants of Supply - Taxes

Added taxed can cause decrease the amount supplied because seller must pay a free for every unit produced or sold.

• Supply decreases

• Curve shifts left

• At any given price, supply decreases

Determinants of Supply - Subsidies

The goverment coves a propertaion of the production costs, lower out of pocket pay

• Supply increases

• Curve shifts to the right

• At any given price, supply will increase.

Equilibrium

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

Surplus

A market condtions in which the quantity supplied exceeds the quanity demanded

Shortage

A market condtions in which the quantity demanded exceeds the quanity supplied

Binding Price Ceiling

Price Ceiling is less than the equilibrium

• Decrease In Quanitity supplied.

Price Floors

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

• Binding Price Floor Is Above the equilibrium price

• Non-binding is Below the equilibrum price