ECON 2106 Midterm

the marginal principle

Decisions about quantity are best made incrementally

diminishing marginal benefits

Each additional item yields a smaller marginal benefit than the previous item

rational rule

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

network effect

The effect that occurs when a good becomes more useful because other people use it

opportunity cost

The true cost of something is the next best alternative you must give up to get it

the 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.

inferior good

a good for which higher income causes a decrease in demand

normal good

a good for which higher income causes an increase in demand

individual supply curve

a graph plotting the quantity of an item that a business plans to sell at each price

if demand is elastic

a higher price yields less revenue

if demand is inelastic

a higher price yields more revenue

price elasticity of demand

a measure of how responsive buyers are to price changes percent change in quantity demanded / percent change in price

cross-price elasticity of demand

a measure of how responsive the demand of one good is to price changes of another positive for substitutes negative for complement % change in quantity demanded/ % change in price of another good

income elasticity of demand

a measure of responsive the demand for a good is to changes in income positive for normal goods negative for inferior goods % change in quantity demanded/ % change in income

demand is inelastic when

absolute value of the price elasticity is less than 1

perfectly competitive market

all firms in the industry sell an identical good there are many buyers and many sellers

substitutes in production

alternative uses pf your production capacity

price-taker

an actor who charges the market price action do not affect the market price

at equilibrium, neither suppliers nor demanders have

an incentive to change

market

any setting that brings together potential demanders and suppliers

Economics is NOT

business administration/ finance or public administrations

import

buy goods or services from foreign seller

movement along the demand curve

caused by a change in price

change in quantity supplied

change in quantity associated with movement along a fixed supply curve

fixed costs

costs that do not vary with the quantity of output produced (sunk costs in the short term) property tax, insurance, machinery

variable cost

costs that vary with the quantity of output produced

underproduction creates

deadweight loss

If prices and quantities move in the same direction

demand curve shifted

decrease in demand

demand curve shifts left

increase in demand

demand curve shifts right

policy question

do the gains outweigh the costs? - import gains (more consumer surplus) are greater than import costs (loss of producer surplus) - import gains are diffuse across 100M consumers but import costs are concentrated amongst a few large firms

who support international trade

exporters and import-dependent businesses

trade costs

extra costs from buying or selling internationally rather than domestically trade costs are in opportunity costs - shipping and taxes

complements in production

goods that are produced together (by-products)

complementary goods

goods that go together

substitute goods

goods that replace each other

productivity growth

growth that occurs when businesses figure out how to produce more output with fewer inputs

the cure for high price is high price

high price cause consumer to consumer, less demanded, drop price

perfectly elastic

horizontal demand curve

price elasticity of supply depends on

how flexible your business can be

willingness to pay

how much a buyer values a good

Economics is

how we analyze choices and make decisions and the role of incentives

production possibilities frontier

illustrates the trade-offs you experience when deciding how to allocate scarce resources

who opposes international trade

import-competing businesses

technological change

invention of new machinery or new techniques

marginal vs cost-benefit

marginal: how many cost-benefit: either/pr apply marginal then cost-benefit

price elasticity of supply

measures how responsive sellers are to price changes (positive) % change in quantity supplied / % change in price

the midpoint formula

measures the percent change between any two points relative to the point midway between those two points

shift in demand curve

movement of the curve itself

the price elasticity is

negative price and quantity changes always move in opposite direction absolute value focuses on the magnitude of the price elasticity of demand

movement along supply curve

price change causes movement on the curve

perfectly competitive firms are

price takers

change in price vs factor

price: movement along demand curve factor: shift in demand curve

Why do we trade?

produce good or service for which you have comparative advantage and trade for everything else increases opportunities for everyone

economic surplus due to export

producer surplus rise and consumer surplus declines sellers magnify their gains by selling more while buyers mitigate their losses by buying less therefore economic surplus rises

When price is below equilibrium price

quantity demanded exceeds the quantity supplied, and a shortage results

equilibrium

quantity supplied = quantity demanded

when price is above equilibrium price

quantity supplied exceeds the quantity demanded, and a surplus results

export

sell good or services to foreign buyers

the rational rule for sellers in competitive markets

sell one more item if the price is greater than or equal to the marginal cost to maximize profit, sellers should continue to produce until price = marginal cost

decrease in supply

shift the supply curve to the left

increase in supply

shift the supply curve to the right

market demand

sum up individual quantities demanded at each price

if prices and quantities move in opposite directions

supply curve shifted

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

demand is elastic when

the absolute value of the price elasticity is greater than 1

the price elasticity of demand reflects

the availability of substitutes

congestion effect

the effect that occurs when a good becomes less valuable because other use it

marginal benefit

the extra benefit from one more unit

marginal cost

the extra cost from one extra unit

Economic surplus is maximized when

the marginal benefit of consumption is equal to the marginal costs of production

diminishing marginal product

the marginal product of an input declines as you use more of that input (too many cooks in the kitchen)

equilibrium price

the price at which the market is in equilibrium

world price

the price where a good or service is bought by the world market

equilibrium quantity

the quantity demanded and supplied at equilibrium

Law of Demand

the quantity demanded is higher when the price is lower (holding other things constant)

scarcity

the resources we use to produce goods and services are limited

law of supply

the tendency for the quantity supplied to be higher when the price is higher

total revenue

the total amount you receive from buyers price * quantity

economic surplus

the total benefits minus total costs flowing from a decision

world demand

total quantity demanded by all buyers around the world

world supply

total quantity supplied by all sellers around the world

in short run, a money-losing firm will continue to produce as long as it covers its

variable cost

markets determine

what gets produced how much gets produced who produces it who receives it at what price

consequences of imports

- price declines to the world price - the lower price reduces the quantity supplied by domestic sellers and increases the quantity demanded by domestic buyers - fill gap between supply and demand

impact of an increase in demand

1. # of consumers 2. consumer income 3. price of substitute 4. price of complement 5. future expectations 6. demographic changes 7. preference

four 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

three factors that shape comparative advantage

1. abundant inputs 2. specialized skills 3. mass production

price elasticity of supply increases

1. for firms that store inventories 2. when inputs are easily available 3. for firms with extra capacity 4. when firms can easily enter and exit the market 5. when there's more time to adjust

factors that shift supply curve

1. input price 2. productivity and technology 3. prices of related outputs 4. expectations 5. type and number of sellers (market supply curve only)

5 arguments for limiting trade

1. national security requires that we produce strategically import goods ourselves 2. protection can help infant industries develop 3. anti-dumping law prevent unfair competition 4. trade should not be a way to skirt regulations 5. foreign competition may lead to job losses

Four steps to estimate market demand

1. survey 2. add up total quantity demanded by customer for each price 3. scale up the quantities demanded by survey respondents to represent whole market 4. plot demand curve

5 tools of international trade policy

1. tariffs 2. red tape 3. import quotas 4. exchange rate manipulation 5. free trade

price elasticity increase when

1. there are more competing products 2. for specific brands rather than broad categories 3. for things that aren't necessities 4. when consumers search more 5. when there's more time to adjust (time increase availability) 6. price relative to budget

sunk cost

A cost that has already been incurred and that cannot be reversed (exist whether you make choice or not)

market supply curve

A graph plotting the total quantity of an item supplied by the entire market, at each price.

individual demand curve

A graph, plotting the quantity of an item that someone plans to buy, at each price.

percent change in price (midpoint)

(P2-P1)/(P1+P1/2)*100

percent change in quantity (midpoint)

(Q2-Q1)/(Q1+Q1/2)*100

Cost-Benefit Principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.