Econ202 Ch. 1-5
income elasticity
% change in quantity demanded / % change in income; normal > 0; luxury > 1; inferior < 0; how responsive your demand for a good is to changes in income.
elasticity of supply
%change in quantity supplied/%change in price; 1) inventory/stability 2) available inputs 3) easy entry/exit 4) time
equilibrium
A state of balance; set demand = supply market changes : higher demand = higher price & higher quantity higher supply = lower price & higher quantity (vice versa)
spurious correlation
a relationship between two variables that is actually caused by a third factor
marginal
additional; the change that results from an additional unit
trade-offs
alternative choices
cost-benefit principle
an action should be taken if the marginal benefit is greater than the marginal cost.
elasticity of demand
availability of substitutes determines price
economic surplus
benefits outweigh the costs following a decision
changes in labor supply
better managers = higher productivity, higher marginal price per labor, higher marginal revenue product benefits, subsides, taxes, at every level of employment companies pay less in wages.
rational rule for buyer
buy more if MB of 1 more is >= (greater than or equal to) the price; keep buying until MB = price; same principle for sellers!
movement on demand curve
change in price
not discrimination
compensating differentials, differences in experience, difference in preference.
sunk costs
costs that are made in the past and cannot be recovered
increasing marginal cost
each additional unit costs more to produce than the previous one; extra money from producing extra.
elasticity
elasticity price = % change in quantity/ % change in price: %change in price = %change in quantity/price elasticity
unit elastic
elasticity price = 1
inelastic
elasticity price is greater then 0 but less then 1; rarely substitutable
elastic
elasticity price is greater then 1; easily substitutable
money
financial/non-financial aspects of decisions
inferior goods
goods that consumers demand less of when their incomes rise
inelastic demand
higher price = more total revenue ---> raise prices
elastic demand
higher prices = less total revenue
perfectly elastic
horizontal line; quantity changes & price doesn't change
price elasticity of demand
how responsive buyers are to change in quantity demanded
price elasticity of supply
how responsive buyers are to price changes
cross-price
how responsive the quantity demanded a good is to the price change of another
market demand
if given quantity at a price for multiple people; add quantity at each price for market demand.
marginal revenue product
new revenue amount - old amount and divided by amount added
revenue
price times quantity
network effect
product becomes useful as more people use it.
congestion
products value decreases as more people use them
individual demand curve
quantity demanded at each given price
marginal product
raise in product from labor ---> diminishing marginal product = increases marginal cost
counterfactual
relating to or expressing what has not happened or is not the case
production possibilities frontier (PPF)
set of outputs that are attainable with scare resources. If one increase then another decreases.
labor supply decrease
shift to the left
labor demand decrease
shifts to the left
labor demand increase
shifts to the right
labor supply increase
shifts to the right
shifts in labor supply
1) population 2) non-wage benefits 3) changing alternatives
supply shifters
1) input 2) productivity 3) related goods 4) size of market 5) expectations
causation
A cause and effect relationship in which one variable controls the changes in another variable; correlation does not imply causation; not directly related
rational rule
If something is worth doing, keep doing it until your marginal benefits equal your marginal costs; until economic surplus is maximized.
diminishing MB
MB of additional units is lower than previous MB items
anecdotal evidence
Personal stories about specific incidents and experiences.
productivity
The value of a particular product compared to the amount of labor needed to make it; higher education increases productivity.
substitution goods
Two goods that can provide essentially the same utility to the consumer; if the price increases the demand decreases and the other good demand will increase; opposite outcome. POSITIVE CROSS PRICE ELASTICITY.
ceteris paribus
a Latin phrase that means "all other things equal"
demand curve
a graph of the relationship between the price of a good and the quantity demanded; price raises quantity falls; price decreases and quantity increases
labor supply
deals with opportunity cost
marginal principle
decisions about quantities should be made in sections.
derived demand
demand for something which is a consequence of demand of something else.
interdependence
depends on other choices; choices made by others in the same market; relationships between market
consumer surplus
difference between max price a consumer is willing to pay & market price.
marginal benefit curve
downward sloping; demand curve
demand line
downward sloping; demand curve= MB curve; depends on marginal benefit.
scale effect
increase in capital & labor = complements
rational
individuals always make decisions that provide them with the highest amount of personal utility
scarcity
limited resources
cross-price elasticity
measures how sensitive the demand of a product is over a shift of a corresponding product price; substitutes positive; complements are negative; unrelated = 0
shortage
not enough supplied & too much demanded (price increases) lower prices = shortage
change in quantity demanded
only changes price; movements
change in demand
other things than price changes; 1) income 2) preferences 3) related goods 4) size of market 5) expectations 6) # of buyers
rational behavior
people do the best they can, based on their values and information, under current and anticipated future circumstances
taste-based discrimination
people's preferences cause them to discriminate against a certain group; hatred
opportunity cost
the alternative to the next best thing
marginal revenue product labor
the change in a firm's revenue as a result of hiring one more worker; set by market; $ of final good
income effect
the change in consumption resulting from a change in income; more purchasing power = more buying; more leisure less working
marginal cost
the cost of producing one more unit of a good; MB>MC= do it; include variable costs, not foxed costs
willingness to pay (WTP)
the maximum amount that a buyer will pay for a good
diminishing marginal product
the property whereby the marginal product of an input declines as the quantity of the input increases
reverse causality
the situation in which the apparent "cause" is actually the "effect"
human capital
the skills and knowledge gained by a worker through education and experience
surplus
too much supplied ¬ enough demanded (price decreases) higher prices = surplus
complement goods
two goods that are bought and used together; increase price for one causes decrease demand for other; same outcome. CROSS PRICE ELASTICITY IS NEGATIVE
correlation
two variables that go together; education & income (human cap.) causal: cause/effect omitted/cofounding variables: not included or misinterpretation
discrimination
unjustifiable negative behavior toward a group and its members
statistical discrimination
using information about group averages to make conclusions about individuals; stereotyping
perfectly inelastic
vertical; no matter the price it is demanded; quantity doesn't change & price changes
compensating wage differentials
wage premiums paid to attract workers to undesirable occupations.
substation effect
wages go up, leisure becomes expensive; opportunity cost, increase in capital & labor
stated preference
what people say they want
revealed preference
what you choose reveals your preference; leads to willingness to pay
marginal benefit
what you gain by adding one more unit
individual supply
willingness to sell/accept slops upward higher price = higher quantity lower price = lower quantity supply curve = marginal cost; the least you'll accept
