ECON 111 Test 1 (for real)

Sunk Costs

A cost that has been incurred and cannot be reversed. Exist in whatever choice you make, so it's not an opportunity cost. Good decisions ignore these costs.

Ridesourcing

A for-profit activity in which drivers offer rides to destinations that are not the driver's final destination.

Price Ceiling

A government mandated maximum price imposed on transactions in a market.

Price Floor

A government mandated minimum price imposed on transactions in a market.

Fixed Price

A government mandated price imposed on transactions in a market.

Supply Curve

A graphical representation of the quantity of a product or service that producers will sell at each price.

Demand Curve

A graphical representation of the quantity of a product or service that purchasers will buy at each price.

Subscription Pricing

A pricing model that allows customers to subscribe to services or purchase products for a specific amount of time on a recurring basis at a set price point - often in monthly or annual intervals.

Economic Efficiency

An outcome is more economically efficient if it yields more economic surplus.

Market Equilibrium

An equilibrium exists when there is no tendency for the price and/or quantity transacted to change.

Normative Analysis

Arguing for what should happen. Concerned with value statements and opinions.

Rational Rule for Buyers

Buy more of an item if the marginal benefit or one more is greater than (or equal to) the price. Keep buying until price = marginal benefit

Complements

Goods that go together. Demand for a good will decrease if the price of a complementary good rises, and will increase if the price of a complementary good falls.

Marginal Analysis

Comparing the benefits and costs of adding one more unit of a good or service to your consumption.

Rational Rule for Sellers

Continue making and selling your product until marginal cost = marginal benefit.

Cost-Benefit Principle

Costs and benefits are the incentives that shape decisions. Before you make a decision you should: -Evaluate the full set of costs and benefits associated with that choice -Pursue that choice only if the benefits are larger than the costs

Complements (income)

Goods that people buy less of when their income increases. Income rises, demand falls.

Normal Goods

Goods that people buy more of when their income increases. Income increases, demand falls.

Marginal Principle

Decisions about quantities are best made incrementally. Break down "how many" questions into a series of smaller decisions, weighing marginal benefits and marginal costs.

Positive Analysis

Describing or explaining what is happening, or predicting what will happen. Concerned with objective statements.

Diminishing marginal utility/Law of diminishing marginal returns

Each additional item yields less added utility than the previous one. EX: If you're dying of thirst you would pay anything for the first glass of water, but less for the second.

Complements in production

Goods that are made together. Supply of a good will increase if the price of a complement in production rises. EX: Beef and leather both come from the same cow.

Deadweight Loss

Lost surplus when a market produces an inefficient quantity/we cannot get to an equilibrium.

Substitutes in production

Goods that rely on the same inputs and technology. Supply of a good will decrease if the price of a substitute in production rises. EX: Corn can be used to make whiskey, or sold directly.

Substitutes

Goods that replace each other. Demand for a good will increase if the price of a substitute good rises, and will fall if the price of a substitute good falls.

Law of Demand

Holding all else equal, the quantity demanded for a good falls if the price for that good rises, and the quantity demanded rises if the price falls (if the price charged for a good or service rises, consumers buy less).

Law of Supply

Holding all else equal, the quantity of a good supplied by sellers rises if the price for that good rises, and the quantity supplies falls if the price falls (when the prices go up, more and more businesses will find it worthwhile to sell).

Income Effect

If the price of a good that you have been buying falls, then your purchasing power has risen - you can buy more of all goods and services. If the price rises, then your purchasing power has fallen and you need to buy fewer of all goods and services.

"Holding all else equal"

Implies that everything else in the market is frozen when we are seeing the effect of one single change.

Demand Shifters

Number of buyers Preferences Expectations Network effects Price of other things (substitutes and complements) Income (normal goods and complements)

Supply Shifters

Number of sellers Input prices Productivity and technology Expectations Prices of other things (substitutes in production and complements in production)

Symptoms of market disequilibrium

Persistent shortages or surpluses Queuing Secondary Markets Forced bundling of extras Freely giving away extras

Budget Set

The combinations of goods and services that an individual can afford given a fixed budget.

Scarcity

The condition in which the desire/demand for something is greater than the supply of that thing.

Inconvenience Cost

The cost in utility associated with consuming a good. Lowering this cost will raise the willingness to pay.

Consumer Surplus

The excess benefit consumers receive from a good, above and beyond what they pay. Measured by the difference between what consumers would have been willing to pay and what they actually paid.

Producer Surplus

The excess benefit producers receive from selling a good or service, above and beyond the costs they pay. Measured by the difference between what the producers actually received and what they would have been willing to accept.

Utility

The level of satisfaction that an individual receives from their choices. Observe willingness to pay to learn more about this.

Marginal utility per dollar

The marginal utility associated with each purchase, divided by the price of the purchase.

Equilibrium

The point at which there is no tendency for buyers or sellers to change what they are doing in a market (where supply and demand meet).

Total (or Social) surplus

The sum of consumer surplus and producer surplus.

Opportunity Cost Principle

The true cost of something is the next best alternative you have to give up to get it. Focuses on the trade offs you face. EX: pursuing one venture means not pursuing others.

Willingness to pay

What an individual will give up in order to obtain one more unit of a commodity or service.

Substitution Effect

When a good or service becomes more expensive, people seek out substitutes. They buy more of other goods and less of the more expensive goods. When a good or service becomes cheaper, people want to buy more of that good and less of substitute goods.

Disequilibrium

When the buyer or seller (or both) is unhappy.

Market Failure

When the forces of supply and demand lead to an inefficiency.

Shortage

When the quantity demanded exceeds the quantity supplied at a given price.

Surplus

When the quantity supplied exceeds the quantity demanded at a given price.

Interdependence Principle

Your best choice depends on your other choices, the choices others make, developments in the other markets, and expectations about the future. When any of these factors changes, your best choice might change.