ECON

decrease in demand

a leftward shift of the demand curve

normal goods income elasticity

positive

substitutes (cross price elasticity)

positive elasticity

% change in quantity demand / % change in price

price elasticity of demand

Law of Supply

producers offer more of a good as its price increases and less as its price falls

framing

refers to how decision issues are posed or how choices are structured make decisions on underlying costs and benefits NOT on how decisions are framed o described

Necessities Income Elasticity

tend to have a small income elasticity

midpoint formula (absolute value of price elasticity of demand)

(Q2-Q1)/((Q2+Q1)/2) x100 / (P2-P1)/((P2-P1)/2) x100

economics is the study of people...

"in the ordinary business of life."

to apply the opportunity cost principle correctly ask...

"or what?"

price elasticity of demand

% change in quantity demand / % change in price

income elasticity of demand formula

% change in quantity demanded / % change in income

Percentage Change in Price (midpoint)

(new-old)/average x100

Percentage change in Quantity (midpoint)

(new-old)/average x100

The price of product A is cut by 30%. As a result, the quantity demanded of product B rises by 40%. The cross-price elasticity of demand between product A and product B is _____, and they are _____.

-1.33, complements

The price of milk at the local grocery store rises by 25%, and the quantity of milk demanded falls by 10%. The absolute value of the price elasticity of demand for milk is _____, and demand is _____.

.4 inelastic

our types of interdependencies

1. dependencies between each of your individual choices 2. dependencies between people or businesses in the same market 3. dependencies between markets 4. dependencies through time

Estimating Market Demand

1. survey asking what quantity they will buy t each price 2. add up the quantity demanded by each of your surveyed customers for each price 3.scale up the quantities demanded by the survey responders so that they represent the whole market 4. plot the total quantity demanded by the market at each price, yielding the demand curve

The price of product C rises by 10%. As a result, the quantity demanded of product D rises by 20%. The cross-price elasticity of demand between product C and product D is _____, and they are _____.

2 substitutes

The price of a dozen eggs falls from $3 to $2.70. In response to this price change, the quantity supplied of eggs falls from 100,000 dozen eggs to 75,000 dozen eggs. What is the price elasticity of supply for eggs?

2.7

Change in Demand vs. Change in Quantity Demanded

A change in demand is when the whole curve shifts and a change in quantity demanded is movement along the demand curve due to a change in price. Price Doesn't shift the curve.

change in quantity demanded

A change in the quantity demanded along a fixed demand curve (or within a fixed demand schedule) as a result of a change in the price of the product.

individual supply curve

A graph plotting the quantity of an item that a business plans to sell at each price. summarizes a business selling plans her things held constant

individual demand curve

A graph, plotting the quantity of an item that someone plans to buy, at each price. reflects the question that you face as a buyer every day: at this price, what quantity should I buy? it reveals an individual's willingness to pay for each quantity an individual demand curve holds other things constant

the total amount you receive form buyers =Price x Quantity if change is greater: positive if change is less: negative

Change in total revenue

what shifts demand curves? factors

Factors that shift both individual and marketdemand curves include the following :1. income. 2. preferences. 3. prices of related goods. 4. expectations. 5. congestion and network effects. Factors that shift only market demand curvesinclude the following: 6. the type and number of buyers.

substitute goods

Goods that replace each other. Your demand for a good will increase if the price of a substitute good rises. ex driving, walking, cycling, bus

Four Core Principles

Cost-Benefit, Opportunity Cost, Marginal, Interdependence

Cost-Benefit Principle

Costs and benefits are the incentives that shape decisions. You should evaluate the full set of costs and benefits of any choice and only pressure those shoes benefits are at least as large as their cost

Choosing the Best Quantity to Supply (Cost-Benefit Principle)

Decisions depend on the balance of marginalbenefits and marginal costs. What is the marginal benefit of producing one moreunit (what is the money that you will get for one moreunit)? What is the marginal cost of producing one more unit(what is the extra cost for producing one more unit)? Produce one more unit if the marginal benefitexceeds the marginal cost.

diminishing marginal benefit

Each additional item yields a smaller marginal benefit than the previous item ice cream example-- a you eat more ice cream, the marginal benefit of another scoop keeps getting lower

rational rule

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

demand shifter 6: type and number of buyers

If the composition of the market changes, market demand will also change. Market demand increases over time as the population grows.

Shift vs. movement along demand curve

Increase in demand: Demand curve shifts change in quantity of demand: Movement along demand curve price changes: movement

Mary loves avocados and must consume avocados every week, regardless of the price. Which of the following must be true?

Mary has an inelastic demand for avocados

opportunity cost example

Nerida has noticed that many of the executives sheadmires have advanced degrees. In the long run,she might be even more successful if she has anMBA. What happens if Nerida pursues an MBA (twoyears of school)? She pays $60,000 in tuition, pays for room andboard, spends time studying, and quits her currentjob (loses that income). What happens if Nerida pursues her next bestalternative (continuing to work at her current job)? She earns $70,000 per year, still has to pay for rentand meals, and spends her time working 60,000 (tuition) + 70,000 (in income) + zero OC for housing and food-has to pay either way) + zero OC for work-has to spend 10 hours either way)=$130,000 per year in total opportunity cost

choosing the best quantity to supply-interdependence

The best choice depends on your other choices,the choices others make, changes in other markets,and expectations about the future. For now, we are holding these factors constant.

movement along the demand curve

The movement from one point on a fixed demand curve to another point on the same curve that is caused by a price change.

Economics

The study of how people seek to satisfy their needs and wants by making choices It is a way of thinking, and the economic approach canalso help you understand politics, families, careers,and just about every aspect of your life

opportunity cost principle

The true cost of something is the next best alternative you must give up to get it. You reflect this opportunity cost, rather than just the out-of-pocket financial costs

market demand curve

a graph plotting the total quantity of an item demanded, by the entire market, at each each price the sum of the quantity demanded by each person in the market, at each price

choosing the best quantity to supply- opportunity cost

When determining the marginal cost, you should compare the cost of production to its next best option- not producing. Marginal cost does include variable costs ... Variable costs are those costs that vary with the quantity of output, such as labor and raw materials. ... but does not include fixed costs. Fixed costs don't vary when the quantity of output changes, they are incurred regardless of level of output.

Cost benefit example

You walk into a coffeeshop and decide whether to order coffee. The coffee costs $3. Costs are straight forward: $3. Benefits are more difficult to quantify...Do You Buy a $3 Coffee? you shucked buy the coffee if the benefit exceeds the cost (willingness to pay is at least $3)

Interdependence principle

Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors changes, your best choice might change.

Ceteris Paribus

a Latin phrase that means "all other things held constant" interdependence principle reminds us to forget these connections

inferior good

a good that consumers demand less of when their incomes increase

normal good

a good that consumers demand more of when their incomes increase

increase in demand

a rightward shift of the demand curve

price taker

actor who changes the market price

perfectly competitive market

all firms in the industry sell an identical good there are many buyers and sellers, each of whom is small relative to the size of the market

market

all potential buyers for one product

Almonds are a crop that grows on trees. Farmers do not need to replant trees every year to produce a crop of almonds. It takes at least five years after planting for trees to bear fruit. Several factors such as weather, disease, and long term projections about price impact the supply of almonds available. Barley is a grass that must be planted each year to produce a crop. The growing season is short, about three to four months. Several factors influence farmers' decisions to plant barley each year, including price, weather, and disease. Based on this information,

almonds have a more inelastic supply in the short run because little can be done to change production in the short run.

marginal principle asks

ask instead of "how many" ask "one more"

Rational Rule for Buyers

buy more of an item if its marginal benefit is greater than (or equal to) the price

rational rule for buyers:

buy more of an item if its marginal benefit is greater than (or equal to)the price keep buying until price=marginal benefit

demand shifter; preference

change in preferences social pressure shift your demand curve fashion trends

demand shifter: price of related goods

change in price for melted goods

the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B measure of how responsive the demand of one good is to price change of another related good % change QD/% change price of another product

cross-price elasticity

marginal benefit principle

decisions about quantities are best made incrementally. You should break "how many" decisions into a series of smaller or marginal decisions

The EpiPen is a lifesaving device used by individuals with severe allergies. The U.S. manufacturer of the EpiPen raised its price by nearly 25% per year for nearly a decade. For each 25% increase in the price, quantity demanded would ______ by _______ 25%.

decrease less than

network effect

describes how products in a network increase in value to users as the number of users increases ex popular social media platforms

law of demand curve

downward slope-quantity demanded is higher when the price is lower

When the absolute value of the price elasticity of demand is greater than 1, demand is:

elastic

Consumers now have easy access to internet shopping because of smartphones. Technology has caused demand to become more ____ for goods you can purchase at stores like Barnes and Noble and Best Buy. This is because the cost of getting price information from other retailers is now _____. To stay competitive, Best Buy uses a strategy called _____ where they offer to sell items at competitor prices.

elastic, lower, price matching

elastic curves are

flatter, horizontal

Select each factor which helps determine the price elasticity of supply for a product.

flexibility of inputs or resources used to make a product the ability to store product ease of firms to enter or exit the market

complementary goods

goods that are consumer together demand for a good will decrease if the price of complementary goods rises example; hot dogs and buns

quantity demand is in the ____ axis

horizontal

Demand Shifter: congestion and network effects

how other people use goods affect demand curves

supply curve example

if gas costs $1 produce 10 mil gal cost $2, 15 mil $3, 20 mil $4, 25 mil $5, 30 mil points on graph (10 mil gal, $1) (15 mil gal, $2)... at prices sell than $1 will sell zero gas

individual demand curve example

if gas price is $5 willing to buy 1 gal $4-2 gal $3-3 gal $2- 5 gal $1 - 7 gal grab curve with points: (1 gal, $5), (2 gal, $4) ....

Demand Shifter: Expectations

if you believe prices might rise, you will purchase today(shifting demand curve to right) if you believe prices will fall, you will delay your purchase, decreasing toys demand (shifting demand curve to the left)

Demand Shift: Income

increase in income, citrus paribus, causes an increase in demand for all normal goods

When the absolute value of the price elasticity of demand is less than 1, demand is:

inelastic

If demand is _____, a higher price yields _____ total revenue.

inelastic, higher

sunk cost

is a cost that has already been incurred and that cannot be reversed Ignore sunk costs

4. dependencies over time

is it better to act today or tomorrow? -buy a pair of jeans today, or wait until next week when they might be in sale (or sold out)?, invest in a new technology today, or wait until next year when a better product might be available decisions you make today shape future decisions

economic surplus

is the total benefits minusthe total costs flowing from a decision It is a measure of how much your decision has improved your well-being By maximizing your economic surplus, you can make good decisions.

following the rational rule

leads to good decisions, maximizes economic surplus when marginal benefit equals marginal cost, you will maximize economic surplus

kinds of limited resources (opportunity costs)

limited money limited time limited production capacity in your factory limited attention

your decision and your demand curve

marginal principle: the demand considers each additional gallon of gas separately cost-benefit principle: the demander compares the marginal cost to the marginal benefit for each gallon of gas opportunity cost principle: when this individual evaluates his marginal benefits, he compared then benefits to the next best alternative

(Q2-Q1)/((Q2+Q1)/2) x100 / (P2-P1)/((P2-P1)/2) x100

midpoint formula (absolute value of price elasticity of demand)

Suppose the price of gasoline rises. As time passes, people adjust to the higher price, and the demand for gasoline becomes:

more elastic

shift in the demand curve

movement of a demand curve right or left resulting from a change in one of the determinants of demand other than the price of the good

Inferior goods income elasticity

negative

complements (cross price elasticity)

negative elasticity

law of demand

negative relationship between price and quantity demanded increase in price causes reduction in quantity demanded

congestion effect

occurs when a good becomes less valuable because other people use it ex roads

principles in short (what to ask)

one more? how many?-marginal benefit beat cost?-cost-benefit or what?- opportunity cost principle what else?-interdependence

When the absolute value of the price elasticity of demand is infinite, demand is:

perfectly elastic

3. dependencies between market

rising interest rates in the credit market make it more expensive to get a mortgage, which might reduce your ability o buy a house- credit markets are connected to housing markets when housing is cheap, entrepreneurs become more likely to convert homes into childcare centers- the housing market is connected to the childcare market

opportunity cost arises because of...

scarcity(occurs because resources are limited)

Inelastic curves are

steeper, vertical

You may have observed that items such as different brands of aspirin, tomato sauce, or gasoline are typically priced the same as each other. This is particularly true when consumers can find these goods in close proximity to each other. For example, prices are often the same at gas stations that are on opposite sides of the street. Prices are also generally the same for products next to each other on the same grocery store shelf. The aforementioned examples are goods that are likely to be _______.You would expect the value of the cross-price elasticity to be _______, because the opportunity cost of getting information on price is low.

substitutes large

You are a pricing manager at a generic pharmaceutical distributor. The CEO of the company calls a meeting of all the managers and states that it is critical to increase revenue soon or you may have to start laying off employees. You know that the price elasticity of demand for your leading generic drug is 1.5 and you sell it for three times what it costs. As the pricing manager, you should

suggest decreasing the price on the leading generic drug to increase revenue.

marginal benefit

the extra benefit form one unit (of goods purchased, ours studied)

marginal cost

the extra cost from one extra unit

cross-price elasticity

the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B measure of how responsive the demand of one good is to price change of another related good % change QD/% change price of another product

Law of Demand

the quantity demanded is higher when the price is lower-- holding the ratings constant

Inputs

the resources—such as labor, money, materials, and energy—that are converted into outputs

Macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth The study of decision making acrossthe whole economy.

Microeconomics

the study of the economic behavior and decision making of small units, such as individuals, families, and businesses The study of individual decisionmaking and the implications for specific markets

opportunity cost

the true cost of something is the value to you of the next best alternative you must give up to get it opportunity cost is he road not taken

individual supply curve slopes

upward positive relationship between price and quantity

prices in the ____ axis

vertical

opportunity costs ask:

what havens if you pursue your choice what happens under your next best alternative

choosing the best quantity to supply- marginal principle

what is then marginal benefit of producing one more unit( what is the money that you will get for one more)? What is cost of producing one more unit? produce one more unit if the marginal benefit exceeds the marginal cost

Cost benefit principle applied to marginal decisions

yes, buy one more if the marginal benefit is at least as large as marginal cost

1. 1. dependencies between each of your individual choices

your choice are all interdependent because you have limited resources your decision about how much to spend on housing and how much to spend on food- income is a limited resource your decision about how much time to spend studying economics- time is a limited resource

2. dependencies between people or businesses in the same market

your vote in the election could offset my vote- we are competing sellers in the market for votes if you parents go to your brother's choir concert on Tuesday, they can't go to your sister's soccer game- your siblings are competing "buyers" market for parental attention