ECON*1050 Exam

scarcity

scarcity

our inability to satisfy our wants

incentive

a reward that encourages an action or a penalty that discourages one

economics

the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influences and reconcile those choices

microeconomics

the study of the choices that individuals and businesses make, the way these choices interact in markets, and the influence of governments

macroeconomics

the study of the performance of the national economy and the global economy

factors of production

the resources used to produce goods and services (labour, land, capital, entrepreneurship)

four issues in todays world

globalization; information-age monopolies; climate change; economic instability

globalization

the expansion of international trade, borrowing and lending and investment; is in the self interest of those consumers who buy low cost goods and services produced in other countries

six key ideas that define the economic way of thinking

a choice is a tradeoff; people make rational choices by comparing benefits and costs; benefits is what you gain from something; cost is what you must give up to get something; most choices are "how much" choices made at the margin; choices respond to incentives

production possibilites frontier

the boundary between those combinations of goods and services that can be produced and those that cannot; to illustrate the PPF, we look at a model economy in which the quantities produced of only two goods change, while the quantities produced of all other goods and services remain the same

production efficiency

if we produce goods and services at the lowest possible cost; this outcome occurs at all points on the PPF, at points inside the PPF, production is efficient because we are giving up more than necessary of one good to produce a given quantity of the other good

opportunity cost

the highest valued alternative forgone; the PPF makes this idea precise and enables us to calculate opportunity cost

allocative efficiency

when goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit

marginal cost

the opportunity cost of producing one more unit of it

marginal benefit

the benefit recieved from consuming one more unit of the good; the benefit is subjective-it depends on peoples preferences

marginal benefit curve

a curve that shows the relationship between the marginal benefit from a good and the quantity consumes of that good; note that the marginal benefit curve is unrelated to the PPF and cannot be derived from it

economic growth

the expansion of production possibilites; increases our standard of living, but it doesnt overcome scarcity and avoid opportunity cost

technological change

the development of new goods and of better ways of producing goods and services

capital accumulation

the growth of capital resources, including human capital

comparative advantage

if a person can perform the activity at a lower opportunity cost than anyone else

absolute advantage

a person who is more productive than others

firm

an economic unit that hires factors of production and organizes them to produce and sell goods and services

market

any arrangement that enables buyers and sellers to get information and to do business with each other

property rights

the social arrangements that govern the ownership, use , and disposal of anything that people value; real property includes lands and buildings and durable goods such as plants and equipment; financial property includes stocks and bonds and money in the bank; intellectual property is the intangible product of creative effort

money

any commodity or token that is generally acceptable as a means of payment; the invention of money makes trading in markets much more efficient

competitive market

a market that has many buyers and many sellers, so no single buyer or seller can influence the price

relative price

the ratio of one price to another; a relative price is the opportunity cost; to calculate the relative price, we divide the money price of a good by the money price of a basket of all goods

quantity demanded

the amount that consumers plan to buy during a given time period at a particular price; the quantity demanded is not necessarily the same as the quantity actually bought

law of demand

other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the greater is the quantity demanded

substitution effect

when the price of a good rises, other things remaining the same; its opportunity cost rises. as the opportunity cost rises, the incentive to economize on its use and switch to a substitute becomes stronger

income effect

when a price rises, other things remaining the same, the price rises relative to income. Normally, the good whose price has increased will be one of the goods people buy less of

demand

refers to the entire relationship between the price of a good and the quantity demanded of that good; the term quantity demanded refers to a point on a demand cure- the quantity demanded at a particular price

demand curve

shows the relationship between the quantity demanded of a good and its price when all other influences on a consumer's planned purchased remain the same

change in demand

when any factor that influences buying plans changes, other than the price of the good; when demand increases, the demand curve shifts rightward and the quantity demanded at each price is greater

substitute

a good can be used in place of another good

compliment

a good that is used in conjunction with another good

normal good

is one for which demand increases as income increases

inferior good

is one for which demand decreases as income increases

quantity supplied

the amount that producers plan to sell during a given time period at a particular price; the quantity supplied is measured as an amount per unit of time

law of supply

other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied

supply

refers to the entire relationship between the price of a good and the quantity supplied of it

supply curve

shows the relationship between the quantity supplied of a good and its price when all other influences on producer's planned sales remain the same; the supply curve is a graph of a supply schedule

change in supply

when any factor that influences selling plans other than the price of the good changes

six main factors bring changes in supply

the prices of factors of production; the prices of related goods produced; expected future prices; the number of suppliers; technology; the state of nature

change in the quantity supplied

a point on the supply curve shows the quantity supplied at a given price. a movement along the supplied curve

equilibrium price

the price at which the quantity demanded equals the quantity supplied

equilibrium quantity

the quantity bought and sold at the equilibrium price; a market moves toward its equilibrium because price regulates buying and selling plans, price adjusts when plans dont match

price of elasticity of demand

a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same; we calculate the price of elasticity of demand and by using the formula

price of elasticity of demand = % change in quantity demanded/ % change in price

perfectly inelastic demand

if the quantity demanded remains constant when the price changes, then the price elasticity of demand is zero

unit elastic demand

if the percentage change in the quantity demanded equals the percentage change in the price, then the price elasticity equals 1

inelastic demand

the price elasticity of demand is between zero and 1

perfectly elastic demand

if the quantity demanded changes by an infinitely large percentage in response to a tiny price change, then the price elasticity of demand is infinity

elastic demand

the percentage change in the quantity demanded exceeds the percentage change in price; the price elasticity of demand is greater than 1

total revenue

equals the price of the good multiplied by the quantity sold

rules of total revenue

if demand is elastic, a 1% price cut increases the quantity sold by more than one % and total revenue increases

if demand is inelastic, a 1% price cut increases the quantity sold by less than 1% and total revenue decreases

if demand is unit elastic, a 1% price cut increases the quantity sold by 1% and total revenue does not change

total revenue test

a method of estimating the price elasticity of demand by observing the change in the price, when all other influences on the quantity sold remain the same

total revenue test rules

if a price cute increases total revenue, demand is elastic

if a price cut decreases total revenue, demand is inelastic

if a price cut leaves total revenue unchanged, demand is unit elastic

income elasticity of demand

a measure of the responsiveness of the demand for a good or service to a change in income, other things remaining the same; it tells us by how much a demand curve shifts at a given price

cross elasticity of demand

a measure of the responsiveness of the demand for a good to change in the price of a substitute or complement, other things remaining the same

elasticity of supply

measures the responsiveness of the quantity supplied to a charge in the price of a good when all other influences on selling plans remain the same

momentary supply

when the price of a good changes, the immediate response of the quantity supplied is determined by the momentary supply of that good

short-run supply

the response of the quantity supplied to a price change when only some of the possible adjustments to production can be made is determined by short-run supply

long-run supply

the response of the quantity supplied to a price change after all the technologically possible ways of adjusting supply have been explored is determiend by long-run supply

command system

allocates resources by the order (command) of someone in authority

market demand

the market demand curve is the horizontal sum of the individual demand curves and is formed by adding the quantities demanded by all the individuals at each price

consumer surplus

the excess of the benefit received from a good over the amount paid for it

market supply

the market supply curve is the horizontal sum of the individual supply curves and is formed by adding the quantities supplied by all the other producers at each price

producer surplus

the excess of the amount recieved from the sale of a good or service over the cost of producing it; we calculate producer surplus as the price recieved minus the marginal cost (or minimum supply price), summed over the quantity sold

total surplus

the sum of consumer surplus and producer surplus

market failure

when a market is inefficient; either too little (underproduction) or too much (overproduction) of an item is produced

deadweight loss

the decrease in total surplus that results from an inefficient level of production

transaction cost

the costs of the services that enable a market to bring buyers and sellers together

utilitarianism

a principle that states that we should strive to acheive the greatest happiness for the greatest number; argued that income must be transferred form the rich to the poor up to the point of complete equality

big tradeoff

the costs of making income transfers; a trade off between efficiency and fairness

symmetry principle

the requirement that people in similar situations be treated similarly

Robert Nozick and fairness

the state must enforce laws that establish and protect private property

private property may be transferred from one person to another only by voluntary exchange

price ceiling/price cap

a government regulation that makes it illegal to charge a price higher than a specified level; the effects of a price ceiling on a market depend on whether it is imposed at a level that is above or below the equilibrium price

rent ceiling

when a price ceiling is applied to a housing market; a rent ceiling set below the equilibrium rent creates housing shortage, increased search activity, and a black market

search activity

the time spent looking for someone with whom to do business with; we spend some time in search activity almost every time we make a purchase

black market

an illegal market in which the equilibrium price exceeds the price ceiling; occur in rent-controlled housing and many other markets

lottery

allocates housing to those who are lucky

first-come first served

allocates housing to those who have the greatest foresight and get on the list first

discrimination

allocates scarce housing based on the views and self-interest of the owner

price floor

a government regulation that makes it illegal to charge a price lower than specified level; the effects of a price floor on a market depend on whether the floor is imposed at a level is above or below the equilibrium price

minimum wage

when a price floor is applied to a labor market; a minimum wage imposed at a level that is above the equilibrium wage creates unemployment

tax incidence

the division of the burden of a tax between buyers and sellers; if the price paid rises by the amount of the tax, the burden is on the buyers; if the price paid rises by a lesser amount, it falls partly on buyers and partly on sellers; if the price doesnt change, the tax falls on the sellers

benefits principle

the proposition that people should pay taxes equal to the benefits they recieve from the services provided by the government

ability to pay principle

the proposition that people should pay taxes according to how easily they can bear the burden of the tax; a rich can bear the burden more, so this reinforces the benefits principle to justify high rates of income tax on high incomes

production quota

an upper limit to the quantity of a good that may be produced in a specified period

subsidy

a payment made by the government to a producer

imports

the goods and services we buy from other countries

exports

the goods and services we sell to people in other countries

national comparative advantage

a situation in which a nation can perform an activity or produce a good or service at a lower opportunity cost than any other nation