Microeconomics Test 1 (Chapters 1-3)
Capital Investment
Spending on infrastructure, production facilities, that will increase future production possibilities
Economics
Study how people allocate their limited resources to satisfy their unlimited desires
Models for a single variable
1. Bar Graph 2. Pie Chart 3. Time-Series graph
Determinants of Cross Price Elasticity
1. Compliments E<0 2. Substitutes E>0 3. Unrelated goods E=0
Mistakes made in graphing
1. Confusing Causation 2. Extrapolation- using your estimates from 1 graph and applying them to a different sample
What makes a Supply curve shift right
1. Cost of input decreases 2. Taxes decrease or subsidies increase 3. The number of sellers increase 4. The price of product is expected to fall in future 5. Technological expansion/more efficient
What makes a supply curve shift left
1. Cost of input increases 2. Business taxes increase or subsidies decrease 3. The number of sellers decrease 4. Belief that the price of a product will rise in future
Reasons why Demand Curve shifts right
1. Demand for normal good rises and inferior goods decreases (income rises) 2. the price of a substitute good rises 3. the price of a complimentary good falls 4. The good is in style 5. Belief price will rise in future 6. The number of buyers rises
Points on a graph
1. Efficient 2. Inefficient 3. Unattainable
Different types of Variables
1. Exogenous variables- out of our control 2. Endogenous Variables- The variables we choose and are interested in testing
How do Economists test hypothesis
1. Experiment 2. Historical Data 3. Wait
Determinants of Price Elasticity in Supply
1. Flexibility of Producers 2. Ability to relocate 3. Time
Scientific Method
1. Form hypothesis 2. Build a model for our hypothesis 3. Design a way to test our hypothesis 4. Evaluate your hypothesis
Examples of opportunity cost
1. Going to class makes you give up studying 2. Going to college instead of getting a job
What is the Big 5 of Economics?
1. Incentives 2. Trade-Offs 3. Oppurtunity Costs 4. Marginal Thinking 5. Gains from Trade
Measures of Magnitude of Elasticity
1. Inelastic 0>E>-1 2. Elastic E<-1 3. Perfectly Inelastic E=0 4. Perfectly Elastic E=0 5. Unitary: E=-1
What were the key factors that made the Wright brother's wind tunnel a useful tool for wing design?
1. It was able to model real world flight conditions 2. Allowed measurement of wing performance 3. Enabled independent control of each key variable
Types of Goods
1. Normal 2. Inferior 3. Luxury 4. Substitutes 5. Compliment
Reasons why Demand Curve shifts to left
1. Normal goods fall and inferior goods rises (income less) 2. Price of substitute good falls 3. Price of complimentary good rises 4. Good falls out of style 5. Belief that price will decline in the future 6. The number of buyers decreases
Types of Analysis
1. Normative (Facts) 2. Positive (opinions)
What kinds of Incentives
1. Positive: reward -Ex-Allowance 2. Negative: Punishment -Ex: detention 3. Direct: Obvious outcomes -Ex: paying more for winning a game encourages better performance 4. Indirect: hidden unintended consequences -Ex: Paying for winning a game, leads to people cheating
Determinants of Price Elasticity of Demand
1. Substitutes- when many substitutes, price is elastic 2.Share of Budget 3. Necessity vs Luxury good 4. Time
Firm Goals
1. When demand is elastic, firms decrease price to increase total revenue 2. When demand is inelastic, firms increase price to increase total revenue 3. The firm's goal is to operate where E=unitary
Determinants of Income Elasticity
1.Inferior goods E<0 2. Normal goods 0<E<1 3. Luxury Goods E>1
Types of Elasticities
1.Price Elasticity of Demand 2. Price Elasticity of Supply 3. Income Elasticity of Demand 4. Cross Price Elasticity of Demand
Compliments
2 goods that are used together -Example: hamburger and fries or Peanut butter and Jelly
Demand Curve
A graph of the relationship between the prices and the quantity demanded at those prices
Supply Curve
A graph that shows the relationship between the price and quantity supplied
Competitive Market
A market with similar goods with many buyers and sellers such that each has only a small impact on market price and output; -no individual makes a difference
Supply Schedule
A table that shows the relationship between price and quantity supplied
Demand Schedule
A table that shows the relationship between the prices and the quantity demanded at those prices
Law of Demand
All other things are equal; as the prices increase, the quantity demanded decreases. The demand curve should always slope downward.
Quantity Demanded
Amount of a good or service buyers are willing to purchase at a certain price - These are points on the demand Curve
Normal Goods
As income increases, the consumers buy more normal goods - Example: Nikes
Inferior Goods
As income rises, consumers buy less inferior goods -Example: Can of soup
Luxury Goods
As income rises, consumers not only buy more luxury goods, but they also increase their purchases by a higher percentage than the increase of income
Law of Supply
As the price of a good increases, the quantity supplied increases -Example: drug war
Time adjustment Period
As time progresses, demand becomes more elastic
Movement along curve
Because Price changed
Market
Bring Buyers and sellers together to exchange goods and services
Monopoly
Extreme example of an imperfect market- when there is only one company that supplies the entire market
Marginal thinking
For each unit of a good you're going to buy, you must evaluate the cost and benefit of the additional purchase
Trade Off
Forgone alternatives in any decision
Substitute Goods
Goods that are used in place of each other -Example: meat or chicken; Nike or adidas
Centeris Paribus
Latin for one or the other; Only changing 1 thing that we can study (isolating a variable)
Scarcity
Limited Nature of resources
Price Elasticity of Demand
Measure of the responsiveness of quantity demanded to a change in price -% change in Quantiy demanded/ % change in price *Answer should always be negative
Income Elasticity Of Demand
Measures how a change in income affects spending - % change in quantity demanded/% change in income
Elasticity
Measures the responsiveness of buyers and sellers to changes in price or income
Price Elasticity of Supply
Measures the responsiveness of quantity supplied to price change - % change in quantitied supplied/ % change in price *answer should always be positive
Cross- Price Elasticity of Demand
Measures the responsiveness of the quantity demanded of 1 good to a change in the price of another good -% change in quantity demanded for good A/ % change in price of good B
Production Possibilities Frontier
Model that illustrates the combination of outputs a society can produce if it uses all its resources - represents trade offs that society faces in production
What is another word for incentives?
Motivation
TINSTAFFL
No such thing as a free lunch (Trade Off)
Immediate run (Time)
No time to adjust behavior
Long Run (Time)
Period of time when consumers can fully adjust to market conditions
Short run (Time)
Period of time when consumers can partially adjust behavior
Inefficient points
Points inside the graph because the did not meet the expectations
Efficient Points
Points on the graph because we utilize all our resources
Unattainable
Points outside graph because they impossible
Equilibrium Price
Price at which quantity supplied equals quantity demanded
Equilibrium Quantity
Quantity at which quantity demand equals quantity supplied
Quantity Supplied
The amount of good or service producers are willing and able to sell at a certain price
Imperfect Market
The buyer or seller can influence market -Example: Musicians and Iphones
Equilibrium
The point at which the demand and supply curve interact -quantity supplied=quantity demanded
Market Demand
The sum of all individual quantities demanded by each buyer in the market at each price
Market Supply
The sum of quantities supplied by each seller at each price
Variable
The thing we're interested in plotting
Trade
The voluntary exchange of goods and services between 2 or more parties
Why do people respond to incentives?
Theory of Rational self: Individuals always try to better themselves
Oppurtunity cost
Whatever you give up to do what your doing
Comparitive Advantage
When someone can produce at a lower opportunity cost than a competitor
Absolute Advantage
When someone can produce more of a good than another country with the same resources
The effects of Elasticity of supply and demand
When the demand or supply becomes more elastic, the price changes become smaller while quantity changes became larger
Surplus
When the quantity supplied is greater than the quantity demanded - Inventory Depletion *Price must decrease to bring market into equilibrium
Shortage
When the quantity supplied is less than the quantity demanded. - Inventory Buildup * Price must increase to bring market to equilibrium
Market Economy
Where resources are allocated among household and firms with no government interference
What are incentives?
Why do we do the things we do
Total Revenue
amount that consumers pay seller
Law and Supply and Demand
market price of any good will adjust to bring the quantity supplied to equal quality demanded
Adam Smith's invisible hand
markets respond to supply and demand
Model for 2 variables
scatterplot
Example of Trade off
what could you have done instead of coming to class? -sleep -eat-study