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Scarcity & Choice

1

PPC (Production Possibilities Curve)

a model that illustrates scarcity & tradeoffs

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Scarcity

When someone or something faces a constraint

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3

Every choice has a cost =

opportunity cost

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opportunity cost

What you have to give up to buy/obtain the other thing you want.

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Curved PPC means

A curved PPC implies that the opportunity cost of the good on the horizontal axis is rising as more is produced

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Productive efficiency means

producing to the maximum efficiency then when you want to produce more you will have to produce less of your other good

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Recession

Unemployment above normal & economy not producing at its full potential

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Comparative Advantage =

Low Opportunity Cost

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Scarcity

High demand for a low availability good

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Demand =

Consumers (buying side)

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Is the demand curve slope positive or negative?

Negative

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Supply =

Producers (selling side)

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Is the demand curve slope positive or negative?

Positive

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What happens below P1? (demand & supply)

Excess Demand (Shortage)

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What happens above P1? (demand & supply)

Excess Supply (Surplus)

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Ceteris Paribus

Everything equal but the price

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Decrease costs of production, the supply curve shifts?

Shifts to the right

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Innovation improvement, the supply curve shifts?

Shifts to the right

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Increase in the number of producers, the supply curve shifts?

Shifts to the right

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Increased cost of production, the supply curve shifts?

Shifts to the left

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21

Natural disasters, the supply curve shifts?

Shifts to the left

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Decrease in the number of producers, the supply curve shifts?

Shifts to the left

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23

A tax, the supply curve shifts?

Shifts to the left

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Change in taste, the demand curve shifts?

Shifts to the right

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Increase in income, the demand curve shifts?

Shifts to the right

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Increase in market population, the demand curve shifts?

Shifts to the right

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Increase in price of a substitute good, the demand curve shifts?

Shifts to the right

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Decrease in price of complementary, the demand curve shifts?

Shifts to the right

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Change in taste, the demand curve shifts?

Shifts to the left

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Decrease in income, the demand curve shifts?

Shifts to the left

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Decrease in market population, the demand curve shifts?

Shifts to the left

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Decrease in price of substitute good, the demand curve shifts?

Shifts to the left

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Increase in price of complementary good, the demand curve shifts?

Shifts to the left

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34

Price Ceiling

Sets the maximum amount a seller can charge for a good or service (normally a govn’t) eg: gas, medicine, and food

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Price Floor

lowest legal price that can be paid in a market (min price)

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Economic Surplus = the respective gains that a consumer or producer gets within an economic activity

Consumer Surplus + Producer Surplus = Total economic surplus

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Marginal Benefit

max amount a consumer is willing to pay for an additional good or service

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Marginal Cost

the change in total production cost that comes from making or producing one more unit.

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Allocative Efficiency

ensures that resources are used so that their marginal benefit to society is equal to their marginal cost.

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Consumer Surplus: Free Market (Q1) & Price Ceiling (Q2)

Free Market (Q1) : a+b

Price Ceiling (Q2) : a+c

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Producer Surplus: Free Market (Q1) & Price Ceiling (Q2)

Free Market (Q1) : c+d+e

Price Ceiling (Q2) : e

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Total Surplus: Free Market (Q1) & Price Ceiling (Q2)

Free Market (Q1) : a+b+d+c+e

Price Ceiling (Q2) : a+c+e

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Deadweight Loss: Free Market (Q1) & Price Ceiling (Q2)

Free Market (Q1) :

Price Ceiling (Q2) : b+d

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What is the equation for elasticity? (Demand & Supply)

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Elasticity? Inelasticity? Perfectly Elasticity? Perfectly Inelasticity? (Demand & Supply)

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When demand is inelastic?

When there is no close substitute good & consumers need this good.

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When supply is inelastic?

When there is a resource constraint (short-run)

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When demand is elastic?

When there is a close substitute or when consumers do not need this good

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When supply is elastic?

When there are no hard resource constraint (long-run)

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Total Expenditure means

what consumers spend on a product at a given price.

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What is the total expenditure equation?

Price * Quantity = Total Expenditure

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Inelastic or elastic if the total expenditure rises when the supply curve shifts back?

Inelastic

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Inelastic or elastic if the total expenditure falls when the supply curve shifts back?

Elastic

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What happens to the supply curve when tax is raised higher?

the supply curve shifts up/left

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Which one is inelastic and elastic?

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Do inelastic factors bear or avoid the tax?

bear

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Do elastic factors bear or avoid the tax?

avoid

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58

A household budget constraint equation:

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Budget Constraint equation for two goods:

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Total Utility

The total happiness one gets from consuming a given amount of a good

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Marginal Utility

addition satisfaction a consumer gets from having one more unit of a good or service.

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Diminishing Marginal Ulility

The marginal utility of a good or service declines as more of it is consumed by an individual.

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What is the equation for the total utility?

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What is the equation for the marginal utility?

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Draw the graphs of total and marginal utility

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Utility Maximization Condition with just two goods =

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Substitution Effect

A decrease in sales for a product bc consumers switch to cheaper alternatives when its price rises.

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Income Effect

A decrease in sales when a good’s price rises. If price increases, I won’=Utilitarian

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69

Libertarian

A kind of politics that says the government should have less control over people's lives. I

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70

Utilitarian

For example, if you are choosing ice cream for yourself, the utilitarian view is that you should choose the flavor that will give you the most pleasure

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How to find the total revenue (equation)?

Quantity sold * Price

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72

Equation for average total cost:

Total cost/Quantity

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73

How to find the total cost?

Opportunity cost of all inputs

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74

What is the equation for Economic Profit?

Total Revenue - Total Cost = Profit

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75

Draw a regular demand market then draw a individual firm demand market

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76

Fixed Cost means

costs that are based on time rather than the quantity produced or sold by your business. ex. rent or bills

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Variable Cost means

costs that change as the volume changes. ex. delivery cots, or credit card fees.

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Total cost means

The sum of fixed and variable costs

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Marginal Cost

The change in total costs from producing one more unit.

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80

Draw a line on how a marginal cost looks like on a graph?

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81

In a perfect competitive firm, Price =

marginal cost/marginal renvenue

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82

Draw a regular supply market then draw a individual firm supply market

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83

The horizontal sum of individual firms’ supply curves =

Market supply curve

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84

The Industry Supply Curve =

Industry Marginal Cost Curve

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97

Monopoly

when there is only one supplier for a good with no close substitutes → they can set the price and normally yield the largest possible profit. but the demand can fall because of this price point. ex. mircosoft and windows

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Natural Monopoly

Only one most effective firm whose supply meets the demand efficiently in the entire market. able to produce at ar (Watch ACDC econ)

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Monopoly equation

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