Econ Exam 1

The U.S. manufacturer of the EpiPen raised its price by nearly 25% per year for nearly a decade. For each 25% increase in the price, quantity demanded would _____ by _______ 25%

decrease; less than

congestion effect

-When a good becomes LESS VALUABLE because other people use it -If more people buy it, the demand for it will decrease

network effect

-When a good becomes MORE USEFUL because other people use it. -If more people buy it, the demand for it will increase

price taker

-a buyer or seller who is unable to affect the market price -someone who decides to change the prevailing price and whose actions do not affect the prevailing price

"holding other things constant"

A commonly used qualifier noting your conclusions may change if some factor that you haven't analyzed changes.

Someone else's shoes technique

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

If an item has a negative income elasticity, it is...

an inferior good

Rising marginal costs imply

an upward sloping supply curve

Elasticity of Demand Formula

change in quantity demanded/change in price

diminishing marginal product

the marginal product of an input declines as you use more of that input

Substitute goods: You would expect the value of the cross-price elasticity to be large because....

the opportunity cost of getting information on price is low.

equilibrium price

the price at which the market is in equilibrium

Inferior good

A good for which higher income causes a decrease in demand

Individual supply curve

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

market supply curve

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

If demand is elastic, a higher price yields...

less revenue

An increase in supply leads to a

lower price and larger quantity

A decrease in demand leads to a

lower price and smaller quantity

If demand is inelastic, a higher price yields...

more revenue

Higher prices lead to _____ total revenue if demand is inelastic, and lead to _____ total revenue if demand is elastic

more, less

The price elasticity of supply....

Explains how the suppliers of goods and services react to changes in price

Law of supply

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

Cost-Benefit Principle

an individual should undertake an activity if and only if the additional benefit of doing so is greater than or equal to the additional cost of doing so.

When the price elasticity of supply is a positive number, changes in price lead to:

changes in quantity supplied stay in the direction

Inelastic

Describes demand that is not very sensitive to a change in price

A bakery hires a baker who can make 15 cakes per day. The bakery then decides to hire a second baker who will use the kitchen at the same time as the first baker. The bakery finds that the second baker can produce only an additional nine cakes per day. What concept does this scenario illustrate?

Diminishing marginal product

diminishing marginal benefit

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

The four principles

Marginal (one more) Cost-benefit (benefit beat cost) Opportunity Cost (or what) Interdependence (what else)

perfect competition

Markets where: 1.) all firms in an industry sell an identical good 2.) there are many buyers and sellers, each of whom is small relative to the size of the market

If an item is a necessity rather than a luxury, its demand curve will be:

Relatively steep

Production possibility frontier

Shows the different sets of output that are attainable with your scarce resources.

The marginal principle

Suggests that you evaluate whether the extra benefit from one extra unit exceeds the extra cost of that unit.

individual demand curve

Summarizes your buying plans and how they vary with the price

marginal cost

The additional cost from one extra unit

Paper producers can manufacture both printing and drawing paper. What effect would rising prices for printing paper have on the market for drawing paper?

The supply of drawing paper will decrease.

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 change, your best choice might change.

The price elasticity of _____ measures how responsive buyers are to _____.

demand; price changes

substitutes tend to...

fall or rise in price together

Jonathan Mendez is deciding whether to study for his economics exam at a café or go to a concert with friends tonight. The cost of dinner at the fancy restaurant on the way to the concert is ____ in the calculation of his opportunity cost and represents a _____ cost.

included; financial

When the percent change in price is _____ than the percent change in quantity demanded, demand is _____.

larger; inelastic

Europe has eight different companies selling devices similar to the EpiPen. If these devices were available for use in the U.S. market, you would expect price elasticity of demand to become________. This would also lead Mylan to charge a_________ price.

less inelastic; lower

marginal benefit

the extra benefit from one extra unit (of goods purchased, hours studied, etc)

marginal product

the increase in output that arises from an additional unit of input (like labor)

Ceteris Paribus

a Latin phrase that means "all other things held constant"

inelastic supply

a change in price has relatively little effect on quantity supplied; the percentage change in quantity supplied is less than the percentage change in price; the price elasticity of supply has a value less than 1.0

a movement up and to the left on a price and quantity graph represents...

a decrease in quantity demanded

Normal good

a good for which higher income causes an increase in demand

An Inferior Good

a good whose demand decreases when consumer income rises (or demand increases when consumer income decreases)

Substitutes examples:

-shoes and sandals -beef and chicken

Compliments examples

-wine and cheese -tables and chairs -shampoo and conditioner

5 factors that shift the market supply curve

1. input prices 2. productivity and technology 3. prices of related outcomes 4. expectations 5. the type and number of sellers

Increase in demand (regarding the curve)

A shift of the demand curve to the right

opportunity cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

Variable costs

Costs (like labor and raw materials) that change with the quantity of output you produce

Rational rule

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

Shifts vs movement along supply curve

If the only thing changing is the price, then you're thinking about a movement along the supply curve. But when other market conditions change, you need to think about shifts in the supply curve

willingness to pay

In order to convert nonfinancial costs or benefits into their monetary equivalent, as yourself "What is the most I am willing to pay to get this benefit"

The "or what" trick

In order to make a decision, you have to ask yourself this, comparing your choice to its next best alternative

Diamond-Water Paradox

The observation that things with the greatest value in use sometimes have little value in exchange and things with little value in use sometimes have the greatest value in exchange.

Fixed costs

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

framing effect

When a decision is affected by how a choice is described (or framed). You should avoid framing effects altering your own decision.

cross price elasticity

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

shift in the supply curve

a movement of the supply curve itself

If an item has a small income elasticity , it is...

a necesity

Rational Rule for Buyers

buy more of an item if its marginal benefit is greater than (or equal to) the price

Planned economy

centralized decisions are made about what is produced, how, by whom, and who gets what.

The sign of income elasticity tells you....

if the good is normal or inferior

The sign of cross elasticity tell you...

if the goods are compliments or substitutes

surpluses lead to....

prices falling

shortages lead to...

prices rising

equilibrium

the point at which there is no tendency for change. A market is in equilibrium when the quantity supplied equals the quantity demanded.

Scarcity

the problem that resources are limited

inelastic demand

the quantity purchased is not very responsive to price.

equilibrium quantity

the quantity supplied and demanded in equilibrium

Law of Demand

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

economic surplus

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

market demand curve

the total quantity of an item demanded by the entire market, at each price.

shortage

when the quantity demanded exceeds the quantity supplied

surplus

when the quantity demanded is less than the quantity supplied

Price Elasticity of supply formula

% change in quantity supplied / % change in price

Percent change in quantity equation

(Q2−Q1) / [(Q2+Q1)/2] × 100

complementary goods

- goods that GO TOGETHER. - demand for a good will decrease if the price of the other rises

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.

Market economy

Each individual makes their own production and consumption decisions, buying and selling in markets.

Suppose supply shifts out and demand shifts back. What happens to the equilibrium price and quantity?

Price falls. The effect on quantity is uncertain.

Rational Rule for sellers in competitive markets

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

If an item has a large income elasticity, it is....

a normal good

movement along the supply curve

a price change causes movement from one point on a fixed supply curve to another point on the same curve

Market

a setting bringing together potential buyers and sellers

Decrease in demand (regarding the curve)

a shift of the demand curve to the left

decrease in supply (regarding the curve)

a shift of the supply curve to the left

increase in supply (regarding the curve)

a shift of the supply curve to the right

substitutes-in-production

alternative uses of your resources, your supply of a good will decrease if the price of a _______ rises

elastic

describes demand that is very sensitive to a change in price

A Normal Good

goods for which the demand rises as consumer income rises.

compliments-in-production

goods that are made together, your supply of a good will increase if the price of a ______ rises

An increase in demand leads to a...

higher price and larger quantity

A decrease in supply leads to a

higher price and smaller quantity

The price elasticity of demand for a good with a vertical demand curve is:

perfectly inelastic.

Supply shifts lead to

price and quantity moving in opposite directions

Demand shifts lead to

price and quantity moving in the same direction

Diminishing marginal product leads to...

rising marginal costs for a seller.

The supply curve is upward-sloping because

sellers can make more profit per unit if the market prices rise.

Supply is inelastic whenever the percent change in quantity supplied is:

smaller than the percent change in price.

You know that the price elasticity of demand for your leading generic drug is 1.5 and you sell it for three times what it costs. As the pricing manager, you should....

suggest decreasing the price on the leading generic drug to increase revenue.

change in quantity demanded (regarding the curve)

the change in quantity associated with movement along a fixed demand curve

substitute goods

- goods that REPLACE each other - demand for a good will increase if the price of the other rises

Six factors shifting demand

-Income -preferences -prices of related goods -expectations -congestion and network effects -the type and number of buyers

sunk cost

A cost that has already been incurred that cannot be changed by any decision made now or in the future. Good decisions ignore this.

change in the quantity supplied

the change in quantity associated with movement along a fixed supply curve