Econ 1 Ch 1-3 Exam

Market demand curve

-A graph plotting the total quantity of an item demanded by the entire market, at each price. -Market demand is the sum of the quantity demanded by each person. -At each specific price, the total quantity of gas demanded is simply the sum of the quantity that each potential consumer will demand at that price. -Step one: Survey your customers, asking each person the quantity they will buy at each price. -Step two: For each price, add up the total quantity demanded by your customers. -Step three: Scale up the quantities demanded by the survey respondents so that they represent the whole market. -Step four: Plot the total quantity demanded by the market at each price, yielding the market demand curve. -Market demand curves obey the law of demand: The total quantity demanded is higher when the price is lower. -Movement along the demand curve: A price change causes movement from one point on a fixed demand curve to another point on the same curve. -Change in quantity demanded: The change in quantity associated with movement along a fixed demand curve -Shift in the demand curve: A movement of the demand curve itself. Because your demand curve is also your marginal benefit curve, any factor that changes your marginal benefits will shift your demand curve. -Rightward shift: increase in demand bc at each and every price, the quantity demanded is higher. -Leftward shift: Decrease in demand bc the quantity demanded is lower at each and every price. -6 factors shifting demand curve (other than price): income, preferences, prices of related goods, expectations, congestion and network effects, the type and number of buyers (1-5 shift individual demand and hence market demand. 6 only shifts market demand).

Sunken Costs

-A cost that has been incurred and cannot be reversed. -A sunk cost exists whatever choice you make, and hence it is not an opportunity cost. Good decisions ignore sunk costs -Good decision makers ignore sunk costs.

Inferior good

-A good for which higher income causes a decrease in demand. -Ex. Top ramen

Normal good

-A good for which higher income causes an increase in demand -Ex. steak

Individual supply curve

-A graph plotting the quantity of an item that a business plans to sell at each price. -Note that the curve is upward-sloping, meaning that the higher the prices, the higher the quantity supplied -Holding other things constant -Your supply curve is also your marginal cost curve. -Supply curves are upward-sloping because of rising marginal costs due to: 1. diminishing marginal product. 2. rising input costs.

MCOI

Marginal -Address "marginal" questions, instead of "how many" questions Cost-benefit -Assess the marginal costs and benefits Opportunity cost -Which costs? The opportunity costs Interdependence -Take account of broader effects of your decision

Individual demand curve

-A graph, plotting the quantity of an item that someone plans to buy, at each price. -Your individual demand curve is a graph summarizing your buying plans, and how they vary with the price. -Price always goes on the vertical axis, and the quantity demanded goes on the horizontal axis. -"Holding other things constant": A commonly used qualifier noting your conclusions may change if some factor that you haven't analyzed changes -Downward-sloping demand means that as the price gets lower, the quantity demanded gets larger. (When gas costs less, people buy more of it) -Law of demand -It's simply a graph that describes the quantity you will demand at each price. -Your demand curve is also your marginal benefit curve -Your demand curve reveals your marginal benefits. -Diminishing marginal benefit explains why your demand curve is downward-sloping.

Substitutes-in-production

-Alternative uses of your resources. Your supply of a good will decrease if the price of a substitute-in-production rises. -When the price increase of one good (like diesel) decreases your supply of another (like gasoline), -Which are alternative uses of resources you use for production, like producing diesel instead of gasoline.

Rational rule for buyers

-Buy more of an item if the marginal benefit of one more is greater than (or equal to) the price. -Follow rule to maximize economic surplus -you should keep buying until: price=marginal benefit

Marginal principle

-Decisions about quantities are best made incrementally. You should break "how many" questions into a series of smaller, or marginal decisions, weighing marginal benefits and marginal costs. -The marginal principle suggests that you evaluate whether the extra benefit from hiring one more worker exceeds the extra cost of that extra worker. -the extra benefit you get from one more worker the marginal benefit -The extra cost of that worker is called the marginal cost. -Marginal benefit must exceed marginal cost! -Always use this principle when answering "how many" questions.

Diminishing marginal benefit

-Each additional item yields a smaller marginal benefit than the previous item. -Downward sloping demand curve

Complements-in-production

-Goods that are made together. Your supply of a good will increase if the price of a complement-in-production rises. -Usually produced together. -Products you might produce together

Complementary goods

-Goods that go together. Your demand for a good will decrease if the price of a complementary good rises. -Products you might consume together

Substitute goods

-Goods that replace each other. Your demand for a good will increase if the price of a substitute good rises -Goods you might consume as a substitute for each other, like buying a pizza instead of a hot dog

Movements along the demand curve

-If individual demand curves don't shift following a price change, then neither will the market demand curve. The logic is simply this: A demand curve is a plan for how to respond to different prices, and if buyers' plans haven't shifted, then the market demand curve hasn't shifted.

Rational rule

-If something is worth doing, keep doing it until your marginal benefits equal your marginal costs.

perfect competition

-Markets in which 1) all firms in an industry sell an identical good; and 2) there are many buyers and sellers, each of whom is small relative to the size of the market. -Best strategy is to charge a price that is pretty much identical to whatever your competitors are charging

Why productivity growth matters Hal Varian video

-Productivity growth measures the increased production of output over time and it's what we leave to the future. Higher standard of living Higher consumption Higher production

Rational rule for sellers

-Sell one more item if the price is greater than (or equal to) the marginal cost.

Production possibility frontier

-Shows the different sets of output that are attainable with your scarce resources. -Moving along your production possibility frontier reveals your opportunity costs. -Productivity gains shift your production possibility frontier outward.

Price-takers

-Someone who decides to charge the prevailing price and whose actions do not affect the prevailing price. -They take the market price as given and just follow along.

Marginal product

-The increase in output that arises from an additional unit of an input, like labor.

Diminishing marginal product

-The marginal product of an input declines as you use more of that input.

Opportunity cost principle

-The opportunity cost of something is the next best alternative you have to give up. -The principle forces you to focus on the real trade-offs you face, and in doing so you will make better decisions. -The opportunity cost principle highlights the problem of scarcity. -Scarcity: Resources are limited. -If you want to make sure that you are evaluating your opportunity cost correctly, you should ask yourself just two questions: What happens if you pursue your choice? What happens under your next best alternative? -Some out-of-pockets costs are opportunity costs -Opportunity costs need not involve out-of-pocket financial costs. -Not all out-of-pocket costs are real opportunity costs. -Some nonfinancial costs are not opportunity costs.

Law of demand

-The tendency for quantity demanded to be higher when the price is lower.

Law of supply

-The tendency for the quantity supplied to be higher when the price is higher. -This law means that supply curves are upward-sloping, because higher prices are associated with larger quantities.

Fixed costs

-Those costs that don't vary when you change the quantity of output you produce.

Variable costs

-Those costs—like labor and raw materials—that vary with the quantity of output you produce. -As you calculate your marginal cost, make sure that it reflects only the variable costs that you'll incur from producing extra gas, and that you're excluding all fixed costs.

Market supply curve

-We build market supply curves by adding up the individual supply curves of all potential suppliers. -Market supply is the sum of the quantity supplied by each seller. -In virtually every market the higher the price, the greater the quantity supplied. That is, the market supply curve obeys the law of supply. -A price change causes movement from one point on a fixed supply curve to another point on the same curve yielding a change in the quantity supplied (The change in quantity associated with movement along a fixed supply curve) -When the supply curve moves, we refer to t as a shift in the supply curve. -A rightward shift is an increase in supply because at each and every price, the quantity supplied is higher -A leftward shift is a decrease in supply because the quantity supplied is lower at each and every price -Any increase in marginal costs leads to a decrease in supply (shifting the curve to the left), while a decrease in marginal costs leads to an increase in supply (shifting the curve to the right

Congestion effect

-When a good becomes less valuable because other people use it. If more people buy such a product, your demand for it will decrease.

Network effect

-When a good becomes more useful because other people use it. If more people buy such a good, your demand for it will also increase. -Ex. Valentine's day converse

Interdependence principle

-Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors changes, your best choice might change. -4 types of interdependencies: 1. Dependencies between each of your individual choices 2. Dependencies between people or businesses in the same market 3. Dependencies between markets 4. Dependencies through time

Cost-benefit principle

-costs and benefits are the incentives that shape decisions. This principle suggests that before you make any decision, you should: -Evaluate the full set of costs and benefits associated with that choice. -Pursue that choice, only if the benefits are at least as large as the costs. -Convert costs and benefits into dollars by evaluating your willingness to pay. -The difference between the benefits you enjoy and the costs you incur is called your economic surplus, and it is a measure of how much your decision has improved your well-being.

someone else's shoes technique

By mentally "trading places" with someone so that you understand their objectives and constraints, you can forecast the decisions they will make.

The paradox of value video

Diamonds vs water -Paradox of value: Defining value isn't as easy as it seems. -Exchange value: What you can obtain from them at a later time. -What matters more is their use-value. -Use value: How helpful they are in your current situation. -Also have to consider the opportunity cost -Utility: How well something satisfies a person's wants or needs. -Marginal utility: When choosing between diamonds and water, you compare utility obtained from every additional bottle of water to every additional diamond. -The more of it you acquire, the less useful/enjoyable it becomes. (Law of diminishing marginal utility)