econ 202 exam 1 review

voluntary exchange

gains from trade, when marginal benefit is greater than marginal cost, there are buyers who are willing to pay more than sellers are willing to accept, left of the equilibrium both parties willingly participate

tradeoff

giving up something in order to get something else

utility

measure of satisfaction and wellbeing (guiding principle)

taste-based discrimination

motivated by bigotry and hatred and a direct dislike for a particular group Employers, Customers, Workers

equilibrium

quantity supplied = quantity demanded, no push for change in the system

law of supply

When prices go up, businesses are willing to sell more, holding all else equal, they can cover their increasing marginal costs

sunk costs

a cost that has already been paid, that you cannot get back should be ignored when making a decision

the income effect

purchasing power goes up, so you buy more of it

income elasticity of demand

% change in quantity / % change in income Positive: the more of the good you consume, >0, normal good >1, luxury good <0, inferior good

cross-price elasticity

% change in quantity for one good, x, / % change in price for a different good, y Positive: the two goods are substitutes Negative: the goods are compliments Zero: the goods are unrelated

price elasticity of supply

% change in quantity supplied / % change in price Measures how responsive sellers are to price changes The larger the number, the more responsive it is to a change in price, the more elastic it is Positive number

margin

An additional unit. Comparing the benefit of the next unit to the cost of the next unit.

what determines how elastic a demand curve is

Availability of substitutes Definition of the market (market for pizza at one restaurant, or pizza overall) Need Share of the budget (the demand for a good is generally more elastic the larger the share of the consumer's budget it takes up) Adjustment time (in general the larger the time horizon the more elastic it is)

factors that cause a change in demand

Changes in income Changes in preferences Changes in related goods Changes in the size of the market Changes in expectations about the future

factors that shift the labor supply curve

Changes in population Changes in non-wage benefits and taxes or subsidies Changing alternatives

factors that play a role in the gender wage gap

Compensating differentials Difference in experience Preferences

factors that shift the labor demand curve

Demand for the output good Price of capital Productivity Non-wage benefits and taxes or subsidies

marginal benefit

Extra benefit you get. ex. Eating a cookie... it's delicious

interdependence principle

How we understand how different decisions depend on each other. They're all connected. your best choice depends on: your other choices, choices made by others in the same market, the relationship between different markets, choices over time

labor complementary

If the scale effect dominates, then the capital and labor are complements, more skilled work

labor saving technology

If the substitution effect dominates, the capital and labor are substitutes, easier work

factors that cause the supply curve to shift

Input prices Productivity Related goods Size of the market Expectations about the future

factors that change elasticity of supply

Inventories and storability Available inputs and capacity constraints Easy entry and exit Time

diminishing marginal product

Marginal costs go up as you produce more, increasing marginal costs

law of demand

Quantity is low when the price is high, and quantity is high when price is low

price takers

Sellers have no control over market prices and just have to accept it, they charge what everyone else charges for the same product

anecdotal evidence

Small samples, not looking at all of the data and using one rare point to support your claim

four lessons about opportunity cost

Some out of pocket 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 Ask or what... "should i get my mba OR continue working"

marginal cost

The extra cost of one additional item, ex. the price of that cookie

change in quantity

a movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price, other factors causes the curve to shift

spurious correlation

a relationship between two variables that is actually caused by a third factor

change in demand

a shift of the demand curve, which changes the quantity demanded at any given price, other factors affect the quantity

money

a unit of measurement

omitted or confounding variables

a variable that could affect both of the variables, not included in the model or could lead to misinterpretation of results

market supply curve

a willingness to sell curve, under the assumption of price takers, it is also a marginal cost curve At each quantity, it tells us the least producers are willing to accept for their good At a price, it tells us the most quantity producers are willing to make

unit elastic

absolute value of e sub p = 1

inelastic

absolute value of e sub p is less than one Quantity changes a little for a big change in price

marginal revenue product of labor

aka the value marginal product of labor, the number of the product that each worker can make times the price the firm can sell it for, how much revenue each worker can produce

ceteris paribus

all else equal Holding everything constant, everything other than what we are interested in remains the same

substitutes in production

alternative uses of your resources If the substitute in production rises, the supply of this good will fall If the substitute in production falls, the supply of this good will rise

income effect

an increase in wages makes us richer, purchasing power has gone up, the higher our wages, the more leisure we will buy, negative relationship

diminishing marginal benefit

as he gets more, the willingness to pay per item decreases, the marginal benefit of each additional unit is smaller than the marginal benefit of the previous until

opportunity-cost principles

before making a choice, we consider the alternatives, considers both financial and non financial aspects The opportunity cost of something is the next best alternative you have to give up. Leads us to focus on the true trade offs you face. Highlights the problem of sacristy.

scale effect

cheaper capital means the business can produce more output, the business will use more labor alongside that capital

4 core principles of economics

cost-benefit principle, opportunity-cost principle, marginal principle, interdependence principle

marginal principle

decisions about quantities are best made incrementally. we think at the margin, always asking whether a bit more or a bit less of something would be an improvement. How many?

derived demand

derived from the demand for products that use labor in the production process

compensating wage differentials

differences in wages that offset differences in working conditions, risky and unpleasant jobs have to pay more to attract workers

causal

does one variable cause the other to change, does more education cause more income

rational behavior

doing the best you can with the information you have

law of diminishing returns

each additional worker will produce a bit less eventually

"ban the box" policies

employers are legally forbidden to ask about criminal history until later in the hiring process

supply curve

has nothing to do with a buyer's willingness to pay, it gives the relationship between the price and quantity supplied just for the seller, aka the Marginal cost curve, it is the least you'll accept, the lowest price for which you are willing to sell

marginal product of labor

how much does each additional worker produce

purchasing power

how much you can buy with a given amount of money

price elasticity of demand

how responsive the quantity demanded is to a change in price (written e sub p) % change in quantity/ % change in price

rational rule

if something is worth doing, keep doing it until your marginal benefits equal your marginal costs. Leads to good decisions You will maximize your economic surplus

self-interest

keeps the consumer fed and happy... people are motivated by utility

competitive market

lots of competition so no one can set their price above what others are charging

change in quantity demanded

movement along the demand curve showing that a different quantity is purchased in response to a change in price, when the price affects the quantity demanded

rational

people are systematically doing the best they can to achieve their objectives given their opportunities, use available information to achieve their goals

market demand curve

plots the total quantity of goods demanded by market, at each price

profit

revenue - cost

demand curve

shows willingness to pay and is a marginal benefit curve

compliments in production

something that uses the same resources as your good If a complement in production increases in price, the supply of this good will shift to the right If the complement in production decreases in price, the supply of this good will shift to the left

perfectly inelastic demand

the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero when the demand curve is vertical

perfectly elastic demand

the case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity when the demand curve is horizontal

change in quantity supplied

the change in amount offered for sale in response to a change in price, moving up and down the price curve holding all else equal

substitution effect (labor demand)

the company substitutes away from workers and towards capital because it is now cheaper

producer surplus

the difference between the least a producer is willing to accept for a particular quantity and the market price, the area above the supply curve and below the price

consumer surplus

the difference between the maximum price a consumer is willing to pay and the market price, area under the demand curve and above the price

incentives

the forces that shape our decisions. Rewards and Punishments that form our behavior. Help us predict human behavior.

willingness to pay

the maximum amount a buyer is willing to pay

reverse causality

the second thing actually causes the first occurs when we mix up the direction of cause and effect

surplus

the sellers are supplying more than consumers are willing to buy Above the equilibrium, there is a push downwards, below the equilibrium, there is a pressure upwards

human capital

the stock of skills that each person has that helps determine their productivity

economics

the study of people "in the ordinary business of life"

revenue

the total amount of funds a seller recieved from selling its goods or services Price per good x number of units sold

economic surplus

the total benefits minus the total cost flowing from a decision. It measures how much a decision has improved your well-being

correlation

the two variables are related, they tend to move together, people with more education earn more income

market supply curve for labor

upward sloping even if some individuals curves are backward bending, because as the wage rises, there are always people who will enter the labor market for those high wages so more labor will be supplied

statistical discrimination

using information about a group to draw conclusions about an individual, stereotyping, short cuts to decide if someone will be a valuable employee More information can often help this

scarcity

we are limited in what we can purchase, how much time we have, etc.

cost-benefit principle

we consider the costs and benefits of making a choice... pros and cons. If the marginal benefit is greater than the marginal cost then you should do it.

revealed preference

what does your actual behavior show you care about?

stated preference

what people say they want

counterfactual

what would have happened in some other scenario, compared to what Much of modern economics is about finding ways to estimate the counterfactual

elastic

when the percent change in quantity is greater than the percent change in price, when the absolute value of e sub p is greater than 1 Quantity changes a lot for a small change in price Write in absolute values

shortage

when the price is below equilibrium, sellers will not supply as much as consumers are demanding

substitution effect (labor supply)

when wages go up, leisure becomes more expensive, opportunity cost goes up, positive relationship

substitution effect

you substitute some of your purchases towards pizza when its price goes down When an item gets cheaper, your purchasing power increases