Econ 202 Exam One

choices are the...

foundation of economic forces

marginal revenue product of labor

marginal product of labor, multiplied by the price you can sell that output for

prejudice (taste-based)

motivated by bigotry, hatred for a specific group, no reason just based on people's preferences about groups of ppl

what shifts labor supply curve?

1. changes in population - more people willing to supply work at each wage - supply curve shifts right. less people - shifts left 2. changes in non wage benefits and taxes or subsides. at every wage more people are willing to work when there are better benefits - shift right 3. changing alternatives - opportunities elsewhere

why does the supply curve slope upward?

1. diminishing marginal product 2. rising input costs

taste-based discrimination can be done by...

1. employers - racist, sexist boss - firms can't be both profit maximizing and do taste-based discrimination - pay fee cuz it's cheaper to not be discriminatory 2. customers 3. workers

Why are people paid differently?

1. human capital - stock of skills, education, training, experiences - all boosts human capital, making you more productive, higher marginal revenue product of labor, higher wages 2. compensating wage differentials - gross or dangerous work has to compensate with money or people will do a different job 3. discrimination

five factors shifting the demand curve plus the factor shifting the market demand curve

1. income 2. preferences 3. prices of related goods 4. expectations 5. congestion and network effects 6. type and number of buyers (only shifts market demand)

factors that shift supply curves

1. input prices 2. productivity and technology 3. other opportunities and the prices of related outputs 4. expectations 5. the type and number of sellers not change in price

What determines price elasticity of supply?

1. inventories and storability (ex. frozen turkeys vs. fresh flowers) 2. available inputs and capacity constraints (ex. pizza place can more easily get pizza supplies than a hospital can get things like mri machines) 3. easy entry/exit (ex. much easier to open a pizza shop than a new hospital) 4. time (ex. price elasticity of supply is higher over a time span)

Steps to predict market outcomes

1. is supply or demand curve shifting 2. is that shift an increase, shifting curve right? or is it a decrease, shifting left? 3. how will prices and quantities change in the new equilibrium?

how do you forecast changing labor market conditions?

1. is the labor supply or demand curve shifting? (or both?) 2. is that shift an increase or a decrease? 3. how will wages and number of jobs change in the new equilibrium?

5 determinants of price elasticity

1. more competing products mean greater elasticity - the more competing products, the more likely you are to find a close substitute 2. specific brands tend to have more elastic demand than categories of goods 3. necessities have less elastic demand 4. consumers search makes demand more elastic - those who are willing to search for a better price will be more responsive to price changes 5. demand gets more elastic over time - more subs become available and you can adjust to prices over time

why the labor supply curve is upward sloping

1. new people may be induced to enter the workforce (higher wages convince more people to work) 2. existing workers may put in more hrs 3. some ppl may switch occupations

How to find market demand?

1. survey customers, asking each person the quantity they will buy at each price 2. for each price, add up total quantity demanded by customers 3. Scale up the quantities demanded by the survey respondents so that they represent the whole market 4. plot the total quantity demanded by the market at each price, yielding the market demand curve

Interdependence, choices depend on...

1. your other choices 2. choices made by others in the same market 3. relationships between different markets 4. choices over time

causation

A causes B

bi-directional causation

A causes B and B causes A

What does the market demand curve tell us at each quantity and each price?

at each price it tells us the most that consumers are willing to buy, and at each quantity it tells us the most consumers are willing to pay

diminishing marginal product of labor

at some point additional workers won't benefit

Opportunity cost principle

before making a choice, we consider the alternatives, asking "or what?"

cross price elasticity of demand

measures how responsive the quantity demanded of one good is to price changes of another

Income elasticity of demand

measures how responsive your demand for a good is to changes in your income

money is the...

measuring stick

as wages rise...

more ppl will want to work for longer hrs

income effect

purchasing power goes up, so you buy more

horizontal axis

quantity

opportunity cost of something is...

the next best alternative you have to give up

With a demand shift, price and quantity will move in...

the same direction

perfect competition

the special case in which, 1. all firms in the market are selling an identical good, and 2. there are many sellers and many buyers, each of whom is small relative to the size of the market. Ex. gas

Economics

the study of people in the ordinary business of life

If the elasticity of supply is 0...

the supply curve is perfectly inelastic, no matter what the price is the quantity supplied is the same

revenue

total amount of funds that seller receives (price per good times quantity)

Market Supply

total quantity of an item supplied across all firms in the market

correlation

two variables are related, they move together

If price elasticity of demand is one it is called

unit elastic

The market supply curve has a what slope?

upward sloping

When you have to decide how many of something you should?

use marginal principle to break decisions into a series of smaller decisions

statistical discrimination

using info about a group to draw a conclusion about an individual; stereotyping. without much info employers rely on stereotypes to hire people

Scarcity

we are limited on what we can purchase, there is not an unlimited amount of everything in this world

Interdependence Principle

we are particularly attuned to understanding how different decisions depend on each other

Cost-benefit principle

we consider the costs and benefits of a choice

Because of scarcity..

we have to accept tradeoffs

Marginal principle

we think at the margin, always asking whether a bit more or less of something would be an improvement

revealed preference

what does actual behavior show what you care about

counterfactual

what would have happened in another senario

true cost of something is not the money but,

what you give up to get it

complementary goods

when a higher price of one good decreases your demand for another good (hot dog buns and weiners)

substitution effect for labor

when wages go up, leisure becomes more expensive. the opportunity cost goes up, more expensive to buy leisure purchase less of it - substitute away from leisure, towards other things - working

Where does the equilibrium point occur?

where the quantity supplied equals the quantity demanded where willingness to pay equals the willingness to except marginal benefit equals marginal cost

If the elasticity of supply is between 0 and 1...

a big change in price has a small effect on quantity

A leftward shift in a demand curve means...

a decrease in demand, the quantity demanded is lower at each price

What does a leftward shift for market supply curve mean?

a decrease in supply, quantity supplied is lower at each and every price

compensating differentials

a difference in wages require to offset the undesirable aspects of the job

elastic demand curves have a what kind of slope?

a flatter slope

if demand is elastic what happens when price rises?

a higher price yields less revenue

reverse causality

B causes A

who are producers of labor?

the workers

thinking on the margin question

"should I eat ONE more cookie?, should I study for ONE more hour?"

If demand is inelastic what happens when price rises?

a higher price yields more revenue

cross price elasticity formula

% change in quantity of one good/% change in quantity of another good

income elasticity of demand formula

% change in quantity/% change in income

formula for price elasticity of demand

% change in quantity/% change in price

Why is the market supply curve upward sloping?

at higher prices, greater quantity is supplied

Individual supply curve

a graph of the quantity that a business plans to sell at each price; how much are they willing to sell, summarizes business's selling plans

What are the five factors shifting the supply curve?

1. Input prices 2. productivity and labor 3. prices of related outputs 4. expectations 5. the type and number of sellers IPOET

Changes that shift the whole demand curve

1. change in income 2. change in preferences 3. changes in related goods 4. changes in size of market 5. changes in expectations about the future

factors that shift labor demand curves

1. changes in demand for your product 2. changes in price of capital 3. better management and productivity gains 4. non wage benefits, subsidies, taxes

Factors that shift demand curve

1. income increases demand for normal goods and decreases demand for inferior goods 2. preferences including advertising and social pressure 3. prices of complements and substitutes 4. expectations 5. congestion and network effects 6. the type and number of buyers not change in price

Common causal variable

C causes A and B

Things that cause market supply curve to shift?

Input prices, productivity, related goods, size of the market, expectations about the future

calculating price elasticity of supply

Q2-Q1/(Q2+Q1)/2 times 100 P2-P1/(P2+P1)/2. times 100

Which way does the market supply curve shift when productivity rises?

RIGHT

Opportunity cost principle highlights the problem of...

Scarcity, a choice always has a cost, even if it's not an amount of money, there is always an opportunity cost

economic surplus

The difference between the benefits you enjoy and the costs you incur is the economic surplus. A measure of how much your decisions improved your well-being.

changes in price result in what?

a movement along the demand curve, yielding a change in quantity demanded

If the elasticity of supply is more than 1...

a small change in price, has a big change in quantity

inelastic demand curves have a what kind of slope?

a steeper slope

If the elasticity of supply is infinity...

a tiny change in price will change quantity supplied enormously, infinitely

omitted variables

a type of selection bias that occurs in regression analysis when we don't include the right controls (leave out important details)

ceteris paribus

all else equal (holding everything else constant)

What does knowing price elasticity of demand do?

allows you to forecast how price changes will affect your revenues and profits

marginal

an additional unit

A rightward shift in a demand curve means...

an increase in demand, at every price the quantity demanded is higher

What does a rightward shift for market supply curve mean?

an increase in supply, at each and every price, quantity supplied is higher

income effect for labor

an increase in wages makes us richer, purchasing power goes up bc paid more. buy more leisure as income goes up, higher the wages are the more leisure we buy and the less we work

inferior goods

as income goes up demand goes down, ppl want less bc they most likely switch to a higher quality product

voluntary exchange

both sides are better off, both participate because they want to

market demand

broad view, the purchasing decisions of all buyers taken as a whole

as wages fall...

businesses will hire more for longer hrs

How can you estimate market supply?

by surveying a sample of businesses, asking how much they will supply at any given price, have to ask everyone who is selling that certain thing and everyone that may start selling that thing

How do you quantify benefits?

by willingness to pay

confounding variables

can lead to misinterpretation

Change in prices cause what for the market supply curve?

causes movement along the supply curve which yields a change in quantity supplied

spurious correlation

coincidental relation between A and B

who are the consumers of labor?

companies and businesses

Four core principles of Economics

cost benefit principle, opportunity cost principle, marginal principle, interdependence principle

fixed costs

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

variable costs

costs that vary with quantity of output you produce

What does a shift that decreases quantity suppliers plan to sell at each price do?

decrease in supply, shift left

where does the demand for labor come from?

demand for labor is derived from demand for the final goods produced by the firm

normal goods

demand for them increases when income rises, when ppl have more money they demand more at every price, willingness to pay goes up so ppl are willing to pay more at every quantity

producer surplus

difference between the least a producer is willing to accept for quantity and market price

If marginal benefit is greater than marginal cost then...

do what you were considering

if the benefits are greater than the cost then...

do whatever you're considering

If the cost is greater than the benefits then...

don't do whatever you're considering

If price elasticity of demand is more than one then it is

elastic, quantity changes by a big % for a certain change in price, stretches a lot for certain amount of force

ban the box

employers are legally not allowed to ask about criminal records until later in the process

marginal product of labor

extra output you produce from hiring an extra worker

marginal benefit of another worker

extra revenue you'll earn

Cost benefit considers both...

financial and non financial aspects

increase in demand leads to...

higher price, larger quantity

decrease in supply leads to...

higher price, smaller quantity

Rational rule for employers

hire additional workers as long as their marginal revenue product is greater than or equal to the wage

what is the price in labor markets?

hourly wage vertical axis

what is the quantity in labor markets?

hours of work horizontal axis

marginal product of labor

how much does each additional worker produce

movements along the labor demand curve show

how quantity demanded of employment changes with wage rate

price elasticity of demand

how responsive is the quantity demanded to a change in price - (ep)

Foundation of economics is...

human decisions

rational rule

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

correlation does not..

imply causation

what does a shift that increases quantity suppliers plan to sell at each price do?

increase in supply, shift right

If price elasticity of demand is less than one then it is

inelastic, quantity changes a little % for a certain change in price, takes a lot of force for it to stretch a little

The slope of a demand curve

is negative, quantity is low when price is high, quantity is high when price is low

What does a positive and more than one income elasticity of demand mean?

it is a luxury good

What does a positive income elasticity of demand mean?

it is a normal good

What does a negative income elasticity of demand mean?

it is an inferior good

What does it mean if the demand curve is vertical?

it means that the price elasticity of demand is 0, no matter what the change in price is, the total quantity demanded is unchanged, perfectly inelastic demand

What does it mean if the demand curve is horizontal?

it means the price elasticity of demand is infinite, any change in price leads to an infinite change in quantity, perfectly elastic demand

Which way does the market supply curve shift when companies exit

left

Which way does the market supply curve shift when input prices rise

left

Which way does the market supply curve shift when productivity falls?

left

Which way does the market supply curve shift when substitute in production rises?

left

Which way does the market supply curve shift when there are higher future prices expected?

left

perfectly competitive labor market

lots of businesses looking to hire from a pool of workers with similar skills, employers pay the market wage

increase in supply leads to...

lower price, larger quantity

decrease in demand leads to...

lower price, smaller quantity

quantity demanded is more when price is ________ and is less when price is ________

lower, more

production possibility frontier

maps out the different sets of output that are attainable with scarce resources, illustrates opportunity costs

demand curve is the same as..

marginal benefit curve.

diminishing marginal product

occurs when the marginal product of an input declines as you use more of it

decisions are made...

on the margin

sunk costs

one that has already been paid, can't get it back

causal

one variable CAUSES the other variable

With a supply shift, price and quantity will move in...

opposite directions

Price and demand always move in what?

opposite directions, when price goes up, demand goes down and vice versa

stated preference

people say they want lots of stuff especially if they think it's what they're supposed to say

why does the market demand curve shift?

people's buy plans shift any change that leads you to buy more at each price - increase in demand - shift right any change that leads you to buy less at each price - decrease in demand - shift left

Price elasticity of supply

percent change in quantity supplied/percent change in price

Law of Demand

pervasive pattern that economists call the tendency for the quantity demanded to be higher when the price is lower

market demand curve

plots total quantity of a good demanded by the market (across all potential buyers) at each price

elasticity of supply is always a...

positive number, unlike elasticity of demand

Individual supply curve has a _____ slope?

positive, higher prices you want to supply a larger quantity

types of discrimination

prejudice (taste-based), implicit bias, statistical discrimination

vertical axis

price

For market supply curve the entire curve shifts when things other than...

price changes

Which way does the market supply curve shift when companies enter?

right

Which way does the market supply curve shift when input prices fall?

right

Which way does the market supply curve shift when substitute in production falls

right

Which way does the market supply curve shift when there are lower future prices expected?

right

Why does the supply curve shift?

selling plans change - market supply curve shifts

how to find equilibrium wages in labor market

set demand for labor equal to supply of labor

any factor that changes marginal costs will also...

shift the supply curve

It's not should I buy all the tacos or none of the tacos, it's about...

should I buy the next taco?

demand curve

shows willingness to pay

framing effect

small differences in how alternatives are described, or framed, can lead ppl to make diff choices. Ex. one really expensive item on a menu

efficiency wages

sometimes ppl are paid more to make them more productive - provides incentive to keep working hard

economy

sum of billions of people making decisions, considering trade offs, driven by self interest, and responding to incentives

market demand curve for labor

sum of quantity of labor demanded for all firms at each wage rate holding all else equal

ignore...

sunk costs

The workers are on the ______ side, while businesses are on the _______ side.

supply; demand

marginal benefit curve

tells us how much willing to pay for any amount

What does negative cross price mean?

the 2 goods are complements (pizza,soda)

What does positive cross price mean?

the 2 goods are substitutes (pizza,tacos)

What does the cross price of 0 mean?

the 2 goods are unrelated (pizza,hats)

purchasing power

the cheaper the item is, the more you can buy with the same amount of money, purchasing power goes up

The affect on price and quantity depends on what?

the degree of which supply and demand curves both shift

consumer surplus

the difference between maximum price consumer is willing to pay for quantity and market price

What explains why demand curve is downward sloping?

the fact that marginal benefit decreases as the quantity increases

marginal cost of another worker

the increase in your business's costs due to hiring one more worker - weekly wage

The larger the price elasticity of supply is means...

the more responsive the quantity supplied is to change in price - more elastic it is

Price elasticity is larger when...

there are more competing products, for specific brands rather than broad categories, for things that aren't necessities, when consumers search more, and when there's more time to adjust

What happens when demand curve and supply curve meet?

there is an equilibrium - a point where there is no push for change in the system

if everyone involved in a transaction following the cost benefit principle

they are only participating if their benefits outweigh the costs, then everyone is better off

substitute goods

they can replace each other (walking, cycling, ride share, the bus - substitutes for driving)

shortage

too much demand not enough supply; price rises

surplus

too much supply not enough demand; prices fall

implicit bias

without being aware your snap judgement may reflect implicit or unconscious associations

rational rule for workers

work one more hour as long as the wage is at least as large as the marginal benefit of another hour of leisure

supply curve is also...

your marginal costs curve