ECON 1010 EXAM 1
factors that shift supply curves (5)
1) input prices 2) productivity and technology 3) other opportunities and the prices of related outputs 4) expectations 5) the type and # of sellers ... but not a change in price
when the price is below the equilibrium price: what happens w/ surplus and price?
a shortage leads to markups which push the price up
money is what
a tool for measuring value. not the most important thing in econ
start with a ___ to then form an individual demand curve
demand curve
demand curve
plan for how to respond to different prices and if buyers' plans haven't shifted, then market demand curve hasn't shifted lower price --> rise in quantity demanded
every choice you make affects...
resources available for every other decision (limited time, income, attention, etc)
increase in demand shifts demand curve...
right
demand shifts lead price and quantity to move in different/same direction?
same
opportunity costs reflect what?
scarcity - when you choose to do X, you implicitly decide not to do Y
rational rule for sellers in competitive markets
sell one more item if the price is greater than (or equal to) the marginal cost
what is a market
setting bringing together potential buyers and sellers
when the price is above the equilibrium price: what happens w/ surplus and price?
surplus leads to discounts which pushes the price down
law of demand
tendency for quantity demanded to be higher when the price is lower
law of supply is what
tendency for quantity supplied to be higher when the price is higher. means that the supply curves are upward sloping bc the higher the price, the higher the quantity supplsied
the opportunity cost principle says what?
the true cost of something is the next best alternative you must give up to get it. decisions should respect opportunity cost rather than out of pocket financial costs
equilibrium occurs where?
where supply curve cuts the demand curve
the effect of two shifts can depend on what?
which curve shifts the most
cost benefit principle says what?
evaluate full set of costs & benefits associated w/ the choice. pursue that choice only if benefits are @ least as large as the costs
how to quantify costs/benefits?
evaluate w/ "willingness to pay"
an increase in demand leads to a _____ price and a _____ quantity
higher, larger
a decrease in supply leads to a ___ price and ___ quantity (equilibrium)
higher, smaller
market demand curve shows what
how market price shapes the total quantity demanded across all buyers
how type & # of buyers shift demand curve
if # of buyers rises, there are more individual demand curves to add up when calculating market demand which will shift market demand curve to the right
what shifts supply curves?
increase in supply: shift of supply curve to the right decrease in supply: shift o fsupply curve to left
decisions about quantities are best made how?
incrementally
how much a firm should supply is based on what?
individual supply schedules
interdependencies over time
investment choices you'll want to make depend on your expectations of the future
what is a variable cost
like labor and materials, vary w/ quantity of output you produce
an increase in supply leads to ___ price and ___ quantity (equilibrium)
lower, larger
a decrease in demand leads to a _____ input price and a _____ quantity
lower, smaller
prices are determined at the __?
margin
supply curve reveals what type of cost?
marginal
demand curve =
marginal benefit
demand curve reveals what
marginal benefits
individual demand reflects
marginal benefits
supply curve is also the ...
marginal cost curve
supply shifts lead price and quantity to move in the same/opposite directions?
opposite
market supply curve is upward sloping because... (2)
1) a higher price leads individual businesses to supply a larger quantity 2) higher price means more businesses are supplying their goods and services: a lowe rprice means fewer businesses are doing so
as you increase quantity produced, marginal cost of producing an extra unit rises bc of the following
1) diminishing marginal product: marginal product of an input declines as you use more of that input - rising input costs --> rising marginal costs
how to choose the best quantity to buy
1) focus on marginal benefits 2) apply core principles to make good decisions
leftward shift of demand curve is what?
decrease in demand
if marg ben < marg cost, what happens to economic surplus?
decreases
when is the price stable & the market is in equilibrium?
supply equals demand
always ask about your willingness to pay after/before/when you look @ the price?
before
opportunity principle
before making a choice, asking alternatives --> "or what"
following cost benefit principle increases what?
economic surplus
why is marginal cost (supply curve) upward sloping?
1) higher prices can lead to higher profits, so businesses want to supply more 2) increasing marginal costs
marginal principle for what type of question?
"how many"
marginal principle is more helpful for what type of decision?
"how many" not "either/or"
interdependencies btwn people & businesses
- competing for society's scarce resources, competing for buyers or sellers
how income shifts demand curve
- if income were to fall --> decrease in demand NORMAL GOOD: good for which higher income causes an increase in demand INFERIOR GOOD: good for which higher income causes a decrease in demand
symptoms of disequilibrium
1) queuing - the extra time you spend in the queue raises the effective price you're paying bc it'll cost both time and money to get a spot. 2) building of extras - when you bought dinner just so you could get the valet to park your car, you were buying extras (that dinner) so you could get the spot, raising the price you're paying to park 3) a secondary market - when you parked in someone else's driveway, you've found a way around the "official" market for parking spots
production possibility frontier
1) shows different sets of output that are attainable w/ your scarce resources 2) reveals opportunity cost 3) productivity gains shift production possibility frontier forward
how do you find out market demand curves?
1) survey customers, asking each person the quantity they will buy @ each price 2) for each price, add up total quantity demanded by customers 3) scale up quantities demanded by survey respondents so they represent whole market 4) plot total quantity demanded by the market @ each price, yielding market demand curve
calculate opportunity cost by asking (2)?
1) what happens if you pursue your choice 2) what happens under your next best alternative?
economic surplus is maximized when marg cost ? marg ben?
=
how expectations shift demand curve
EX: if you think a high gas price is temporary, you might put off filling up your tank (decreasing today's demand for gas)
are sales relevant w/ cost-benefit principle?
NO. ignore sales & avoid comparing prices to evaluate your own willingness to pay
change in demand ≠ change in ...
QUANTITY demanded
what is economic surplus
a measure of total benefits - total costs of a decision that measures how much a decision has improved your wellbeing
what is the "perfectly competitive markets" assumption?
all firms in industry sell an identical good. there are many buyers & sellers, each of whom is small relative to size of market
substitutes-in-production
alternative uses of your resources. your supply of a good will decrease if price of a substitute-in-production rises
rightward shift of demand curve is what?
an increase in demand bc @ each and every price, quantity demanded is higher
marginal principle
asks whether a bit more or a bit less of something would be an improvement
rational rule for buyers
buy more of an item if the marginal benefit of one more is greater than (or equal to) the price
what is a planned economy
centralized decisions are made about what is produced, how, by whom, and who gets what
changed in quantity supplied...
change in quantity associated w/ mvmt along a fixed supply curve
interdependencies btwn markets
changes in prices and opportunities in one market affect choices you might make in other markets
how prices of related goods shift demand curve
choices are interdependent across different goods COMPLEMENTARY GOODS: goods that go together. your demand for a good will decrease if the price of a complementary good rises SUBSTITUTE GOODS: good that replace each other. your demand for a good will increase if the price of a substitute good arises
cost benefit principle
considering costs & benefits of a choice
what 2 principles to use w/ "either-or" questions?
cost benefit & opportunity cost
both buyer and seller must follow ___ each to both benefit from the voluntary exchange?
cost benefit principle
the 4 core principles of econ
cost benefit, opportunity cost, marginal principle, interdependence
opportunity cost =
dif btwn consequences of making that choice and consequences of next best alternative
change in price does/doesn't shift demand
doesn't
what is a fixed cost
doesn't vary when you change quantity of output you produce
diminishing marginal benefit
each additional item yields a smaller marginal benefit than the previous item. explains why your individual demand curve is downward sloping
market economy
each individual makes their own production and consumption decisions, buying and selling in markets
complements-in-production
goods that are made together. your supply of a good will increase if the price of a complement-in-production rises
what is an individual demand curve?
graph plotting the quantity of an item that someone plans to buy @ each price. holds all other factors constant. downward sloping
market demand curve
graph plotting the total quantity of an item demanded by the entire market @ each price
market supply curve
graph plotting the total quantity of an item supplied by the entire market @ each place
what is the rational rule?
if something is worth doing, keep doing it until your marginal benefits = marginal costs. following this leads to good decisions
when is it a movement along the demand curve instead of a shift?
if the only thing changing is price. when other market conditions change, think about shifts in the demand curve
what to do w/ sunk costs?
ignore them. a cost that has incurred and cannot be reversed. exists w/ whatever choice you make. not an opportunity cost. good choices ignore sunk costs
costs & benefits are what?
incentives that shape decisions
6 factors that shift demand curve
income, preferences, prices of related goods, expectations, congestion & network effects, type and # of buyers 1-5 shift individual demand and hence market demand #6 only shifts market demand
don't confuse shifts in demand curve w/ what?
movement along the demand curve due to a change in price which leads to a change in quantity demanded
shift in demand curve is what?
movement of the demand curve itself
when price changes...
mvmt along the market demand curve & changes in total quantity demanded
shift in supply curve means what?
mvmt of supply curve itself
are all markets perfectly competitive?
no
if individual demand curves don't shift following a price change, will the market demand curve?
no
opportunity cost is the road...
not taken
mvmt along supply curve...
price change causes mvmt from one point on a fixed supply curve to another point on the same curve
how are axes labeled on individual demand curve?
price on Y, quantity on X
how do shortages affect price?
price rises
perfectly competitive firms are what following what?
price takers, market price
use rational rule to get to what?
profit maximization point
what is market demand
purchasing decisions of all buyers taken as a whole
equilibrium quantity
quantity demanded and supplied in equilibrium
"demand" is what?
quantity demanded by each individual @ each price (not price @ each quantity)
demand curve is downward sloping, so a lower price will ___ the quantity demanded. higher price will ___ total quantity demanded
raise, reduce
change in demand does what to curve?
shifts it. any change that's not price
how preferences shift demand curve
social pressure
what is a price taker
someone who decides to charge the prevailing price and whose actions do not affect the prevailing price (ex: when u buy gas u just take the price)
macroeconomics is what?
study of choices across the whole economy
microeconomics is what?
study of individual choices and implications for specific markets
market supply is what
sum of quantity supplied by each individual seller
prices are determined by what two things?
supply & demand: water is plentiful and costs little to produce so it's less expensive although perhaps less 'special' than diamonds
what is equilibrium
the point @ which there is no tendency for change. a market is in equilibrium when the quantity supplied equals the quantity demanded
equilibrium price
the price @ which the market is in equilibrium
what is scarcity
the problem that resources are limited
economics is what?
the study of people in the ordinary business of life, a toolkit
what is your best bet as a seller in a perfectly competitive market?
to charge almost exactly what your competitors are charging
what is marginal principle used to do?
to evaluate whether the extra benefit from hiring one more worker exceeds the cost of that extra worker
interdependence principle
understanding how different choices depend on each other
continue buying one more of something until when?
until price (marginal cost) = marginal benefit
how congestion & network effects shift demand curve
usefulness for some products is shaped by choices that others make NETWORK EFFECT: when a good becomes more useful bc other people use it. if ore people buy such a good, your demand for it will increase CONGESTION EFFECT: when a good becomes less valuable bc other people use it. if more people buy such a product, your demand for it will increase
what is individual demand?
what you want @ each price
what is the framing effect?
when a decision is affected by how a choice is described or framed. avoid these altering your decisions
what is a shortage
when the quantity demanded exceeds the quantity supplied
surplus
when the quantity demanded is less than the quantity supplied
interdependence principle says that...
you don't make choices in isolation. depends on: 1) one's other choices 2) choices made by others in the (same) market 3) developments in other markets (markets) 4) expectations about the future (through time)
demand curve illustrates the price @ which...
you're willing to buy a quantity
your demand curve is also what?
your marginal benefit curve