Econ 101 Exam 1 Dudley University of Michigan

Model

simplified representation of a real-life situtaion

"other things equal" assumption

in a model all relevant factors except for what we are studying remain unchanged

Production Possibility Frontier

simple representation, illustrating trade off of an economy that only produces 2 good

A point inside the PPF is...

feasible but not efficient

a point on the PPF is...

feasible and efficient

a point outside the PPF is...

not feasible

What does economic growth do to the PPF?

shifts the PFF outward

What does economic growth come from?

new technology, new resources, better allocation of resources

Comparative advantage

when you have lower opportunity costs of producing something (the basis for mutual gain)

Absolute advantage

when you can produce something better than other people can

Positive economics

describes the way the economy actually works (factual statements)

Normative economics

prescriptions about the way the economy should work

Explicit cost

costs that involve the actual outlay of money

implicit cost

costs that do not involve outlay of money (missing out on an alternative)

Accounting profit equation

revenue -- explicit cost and depreciation

economic profit equation

revenue -- opportunity cost of resources
opportunity cost=explicit cost+implicit cost

Capital

total value of assets owned by firm or individual

Implicit cost of capital

opportunity cost of the use of ones own capital aka the income earned if the capital had been employed in the next best alternative use

Marginal cost

the additional cost incurred by producing one more unit

Marginal benefit

the additional benefit derived from undertaking one more unit of an activity

optimal quantity

level that generates the maximum possible total net gain

sunk cost

cost we have paid for and will not get back, something we should not take into account when thinking about the next option

rational

a decision that chooses the best available option, that leads to the outcome he/she most prefers

Rational reasons to prefer lower economic payoff

concern about fairness, bounded rationality, risk aversion

Irrational reasons people choose less preferred outcome

misperceived opportunity cost, overconfidence, unrealistic expectations about future behavior, counting dollars unequally, loss aversion, status quo bias

Law of demand

price up, quantity demanded down

demand

whole curve

quantity demanded

actual amount consumers want to buy at a specific price (point on curve)

Causes of Demand curve shifts

changes in price of related goods, change in taste/preference, change in income, change in expectation, change in number of consumers

change in number of consumers

demand curve shift

change in expectation

demand curve shift

change in income

demand curve shift

change in price of related good

demand curve shift

change in taste/preferences

demand curve shift

substitute good

fall in price of one makes consumers more wiling to buy the other

complement good

fall in price of one makes consumers less willing to buy the other

normal good

a rise in income increase the demand for a good

inferior good

a rise in income decreases the demand for a good

causes of supply curve shift

change in input prices, change in price of production related goods/services, change in technology, change in expectation, change in number of producers

change in number of producers

supply curve shift

change in input prices

supply curve shift

change in price of production related goods/services

supply curve shift

change in technology

supply curve shift

change in expectation

supply curve shift

demand increase, supply increases

Price ?
Quantity up

demand increases, supply decreases

Price up
Quantity ?

demand decreases, supply increase

Price down
Quantity ?

demand decreases, supply decrease

Price ?
Quantity down

Willingness to pay

the maximum price at which someone is willing to buy a good

individual consumer surplus

net gain an individual buy gets from the purchase of a good

individual producer surplus

net gain a seller receives from selling a good

total surplus equation

consumer surplus + producer surplus