ECoN Final Exam PRAY FOR ME
"Willingness to pay" is the same as ""
"total benefit"
Suppose I am willing to pay $2.50 for 3 bites of ice cream and $2.75 for 4 bites of ice cream. So, the fourth bite of ice cream has a marginal benefit of __
$0.25
TOP HAT: Which of the following is a possible "price" for a cookie that would be acceptable to both Ariel and Bella:
(2.5 hamburgers) Without trade: It costs Bella 3 hamburgers to make a cookie Ariel makes 1 hamburger if she gives up 1 cookie With this price: It costs Bella 2.5 hamburgers to get a cookie Ariel gets 2.5 hamburgers if she gives up 1 cookie
Marginal cost ex
(change in total cost) / (quantity)
opportunity cost formula
(give up/gain)
Alex opportunity cost of one orange is
(give up/gain) You give up 1 apple to get 3 oranges Opportunity cost of 1 orange is of an apple
Alex opportunity cost of one apple is
(give up/gain) You give up 3 oranges to get 1 apple Opportunity cost of 1 apple is 3 oranges
how giving you money to charity may somehow fall under the rhelum of acting in your own self interest
-Enjoy talking to your friends about how generous you are -Feel good about yourself when you give -Believe your gift will make a difference for a cause you care about
Specialization
-if Alex doesn't produce apples and specializes in oranges, she can make 300 oranges. -If Clara only produces apples she can produce 200 apples -if neither specialize, together 150 apples and 250 oranges are produced. 200 app > 150 app 300 oran > 250 oran
Claras production schedule apples v oranges: What is Clara's opportunity cost of producing an orange?
1 apple
Determinants of Demand
1) Normal and Inferior goods 2) Tastes and Preferences 3) Number of buyers 4) Expectations 5) Substitutes 6) Compliments
3 reasons the demand curve slopes down
1)Diminishing Marginal Benefit 2)income Effect 3)Substitution Effect
Alex has to give up 3 oranges to make 1 apple Clara has to give up 1 apple to make 1 orange - How many oranges per apple should the trade price be
2 oranges per apple. Any price between 1 and 3 oranges-per-apple makes both people better off
TOP HAT: LEBRON CUPCAKE _ Summary: 20 tablespoons of cocoa powder 1 tablespoon per chocolate cupcake 2 tablespoons per double-chocolate cupcakes If LeBron only makes chocolate cupcakes, how many cupcakes can he make?
20
TOP HAT: What is the opportunity cost of 8 small jets for Boeing? (Hint: use points A and B to answer the question)
6 Dreamliners
Efficient:
A attainable set of goods where, when produced, there is no way to produce more of one good without producing less of another good
Normal Good:
A good for which there is a direct (positive) relationship between the demand for the good and income.
Inferior Good:
A good for which there is an inverse (negative) relationship between the demand for the good and income.
Model
A model is a way of simplifying something complicated We lose some of the details, but keep the parts we need
Law of Demand:
A principle which states that as the price of a good rises, the quantity demanded will decrease, all else held constant.
Attainable:
A set of goods that could be produced
Production Possibilities Schedule (PPS) definition
A table that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology (can illustrate trade-offs)
for each additional square foot when building a house, what are the benefits and costs? How much sq feet will u build
After 2,000 square feet, the marginal benefit ($100) is less than the marginal cost ($125), so I do not want to add those square feet. I will choose to build a 2,000 square-foot house
An "incentive" is:
An opportunity to make yourself better off Something that induces a person to act
Summary: 20 tablespoons of cocoa powder 1 tablespoon per chocolate cupcake 2 tablespoons per double-chocolate cupcakes If LeBron only makes double-chocolate cupcakes, how many cupcakes can he make?
Answer: 10
If LeBron makes 8 chocolate cupcakes, how many double-chocolate cupcakes can he make? 20 tablespoons of cocoa powder 1 tablespoon per chocolate cupcake tablespoons of cocoa powder left 2 tablespoons per double-chocolate cupcake
Answer: 6 double-chocolate cupcakes
Market
Any place where, or mechanism by which, buyers and sellers interact to trade goods and services (eBay, car dealership etc)
Ariel Give up 10 cookies, get 10 hamburgers Give up 1 cookie, get 1 hamburger O.C. of 1 cookie is 1 hamburger Bella Give up 2 cookies, get 6 hamburgers Give up 1 cookie, get 3 hamburgers O.C. of 1 cookie is 3 hamburgers
Ariel has the lower O.C. for a cookie Ariel has the comparative advantage at cookies This means Bella has the comparative advantage at hamburgers
TOP HAT: To make a cookie, Ariel has an opportunity cost of 1 hamburger and Bella has an opportunity cost of 3 hamburgers. _______ will make hamburgers and _____ will eat hamburgers
Ariel; Ariel and Bella
1)Diminishing Marginal Benefit
As people consume more of a good during a fixed time period, the satisfaction received from each additional unit falls. Reduced satisfaction means a reduced willingness to pay If you want to sell me more pizza, you need to lower the price
TOP HAT: Ariel can produce 10 hamburgers and no cookies or 10 cookies and no hamburgers Bella can produce 6 hamburgers and no cookies or 2 cookies and no hamburgers. _______ has a comparative advantage at producing hamburgers and _______ has a comparative advantage at producing cookies
Bella; Ariel
Opportunity Cost of an Orange: Clara: Alex:
Clara: 1 apple Alex: 1/3 apple
Opportunity Cost of an Apple Clara: Alex:
Clara: 1 orange Alex: 3 oranges
Alex's opportunity costs
Constant Opportunity Costs 1->2 or 2->3: Give up 150 to gain 50 Give up 3 to gain 1 Opportunity cost of an apple is always 3 oranges
Which of the 3 reasons for demand to slope down is the following example: the price of airplane tickets goes up. I decide to fly home for Christmas but not for Thanksgiving, because I like to get presents but my grandma's cooking is just okay.
Diminishing Marginal Benefit
Demand curves are Downward sloping
Downward sloping means: When P increases, Q decreases When P decreases, Q increase
Expectations (factors of)
Future income Future availability Future prices
Substitutes:
Goods that are viewed as replacements for one another. coke vs pepsi
what is true about adding square feet to a house in regards to money and marginal benefit
I kept making my house bigger as long as marginal benefit was greater than marginal cost
2nd house example, now how many feet will you chose to build
I will choose to build a 1,500 square-foot house
Substitution Effect example
If the price of pizza goes up, I may choose to have a slice of pizza and a bagel instead of two slices of pizza
Which of the 3 reasons for demand to slope down is the following example: I cannot afford to fly home as frequently
Income effect
TOP HAT: In the example at right, the opportunity cost of producing small jets _________ as the number of small jets produced increases
Increases
do something less if
Increasing marginal costs
Decrease in Demand due to change in non-price determinants
Inward shift of the Demand Curve
optimal point on a graph is where...
Marginal Benefit(MB) = Marginal Cost(MC)
diminishing marginal benefits
Most activities have decreasing marginal benefits
Increase in Quantity Demanded due to lower price
Movement to down and to the right on the demand curve
Decrease in Quantity Demanded due to higher price
Movement up and to the left on the Demand Curve
Suppose you are watching the nightly news and you hear a reporter say this: "In the wake of Hurricane Dorian, gas prices increased by almost 50 cents per gallon, and consumers have responded by significantly decreasing their demand for gas." Is the news reporter using the word "demand" the same way an economist would?
No - demand did not decrease. There was movement along the demand curve. At a given price, people are still willing to purchase the same quantity of gasoline.
Economic Scientific Method
Observe something Try to explain it Test (if possible) ex(Professional football players hire movers)
optimization
Optimization means finding the point where MB = MC This is where you are best off Combines two of our principles: Self interest Marginal decision making
Increase in Demand due to non-price determinant
Outward shift of the Demand Curve
Principles of rational decision making
Principle 1: The true cost of something is what you give up for it Principle 2: People act in their own self interest Principle 3: People think and act "a little bit at a time"
Which of the 3 reasons for demand to slope down is the following example: I get a ride home from a friend for my mom's birthday instead of flying home
Substitution effect
income Effect example
Suppose you have $20 to spend on gasoline each week. If the price of gasoline is $2 per gallon, you buy 10 gallons If the price goes up to $5 per gallon, you buy 4 gallons When price increased by $3, your consumption went down 6 gallons
Comparative Advantage:
The ability to produce a good at a lower opportunity cost than another producer.
Marginal Benefit
The additional benefit associated with one more unit of an activity.. how much you like each bite of icecream
Marginal Cost
The additional cost associated with one more unit of an activity
Substitutes - Example (Coke v Pepsi) suppose the price for Pepsi increases The demand curve for Pepsi____ The demand curve for Coke____
The demand curve for Pepsi____ (shifts up bc price increase, and curve shifts in bc substitutes) The demand curve for Coke____ Shifts out)
Substitutes: what happens to the demand for object #2 if the price of object #1 increases
The demand for object #2 increases
2)income Effect
The effect that a change in the price of a good has on the purchasing power of income.
3)Substitution Effect
The effect that a change in the price of one good has on the demand for another good.
Decreasing Marginal Benefit
The negative relationship between quantity consumed and marginal benefit
Increasing Marginal Cost
The positive relationship between quantity produced and marginal cost Most activities have increasing marginal costs (you ate and then went running The first 100 yards was not nearly as unpleasant as the last 100 yards.)
How Prices are Determined (Jefs car example) no one will buy if he sells for $80,000 and he wont sell for $800
The price of my car is the "sweet spot" where I am willing to sell it and someone is willing to buy it.
marginal decision making
The process of making choices in increments by evaluating the additional, or marginal, benefit against the additional, or marginal, cost of an action. -The benefit of studying for one more hour (or even one more minute) The benefit of an extra cubic foot of cargo space in my vehicle
Economics
The study of how individuals and societies allocate scare resources among many competing uses
Opportunity Cost
The value of the best option not chosen The value of the opportunity that you gave up when you chose one opportunity instead of another
Top hat study ex: Suppose that, for studying economics, you have decreasing marginal benefits (in terms of your grade) and increasing marginal costs (in terms of how much you dislike studying). When you go to bed the night before your midterm, you note that, for the last hour you spent studying, the marginal benefit of studying was less than the marginal cost. Which of the following is true)
You should have studied more
A Production Possibilities Frontier is a graphical representation of
a Production Possibilities Schedule
Scarcity
a condition that results from the inability of limited resources to satisfy unlimited wants.
Movement vs Shift: If consumers' willingness to pay at every possible price changes, that is
a shift in demand.
A resource is
anything used to satisfy someone's wants Land Labor Stuff
unattainable
area of production possibilities curve above the demand curve
possible and inefficient
area of production possibilities curve below the demand curve
possible and efficient
basically the demand curve
Whenever there are two individuals and two goods, unless they have exactly the same production schedules, each person will have a ________
comparative advantage in one good.
Usually, marginal benefits gradually__ and marginal costs slowly __
decrease increase
Normal Good: as income decreases, demand____
decrease (ability to buy a new phone)
Inferior Good: as income increases, demand____
decreases (amount of romen noodles bought)
Purchasing Power is
how much power your money has to purchase goods
The demand curve shows
how quantity purchased changes when price changes, all else equal
Normal Good: as income increases, demand____
increases (ability to buy a new phone)
Inferior Good: as income decreases, demand____
increases (amount of romen noodles bought)
Number of Buyers increase in the number of buyers
increases quantity demanded (shifts to the right)
Tastes and Preferences increased preference for the good or service
increases quantity demanded (shifts to the right)
Change in price:
movement along the curve. Change in something else: movement of the curve (shifts up of down)
Movement vs Shift: If a storm destroys the lettuce crop, leading to a price increase, that will be
movement along the demand curve No change in how much people like lettuce
Even though Clara is better at producing everything than Alex Alex has to give up only 1/3 of an apple to get an orange Alex has a comparative advantage in producing
oranges
Opportunity costs exist because of
scarcity
Movement vs Shift: If more people decide to become vegetarians, there will be a
shift in demand for lettuce
Self interest does not imply that people always act selfishly Self interest does not imply that people never make mistakes
smoking.. illegal drugs
If quantity purchased changes due to anything other than a price change
the demand curve itself moves (shifts right of left)
Micro economics
the study of how households and firms make decisions and how they interact in markets -Our desires are unlimited -Resources are scarce How we use scarce resources is what economics is all about
The model is not designed to show every detail of running a farm The model is designed to show there are ___ in production.
trade-offs
The true cost of something is
what you give up
TOP HAT: What is the opportunity cost of 1 small jet for Boeing?
¾ Dreamliner
