econ midterm

define income when relating to shifting demand curve

- a normal good is a good for which higher income causes an increase in demand - an inferior good is a good for which higher income causes a decrease in demand

how do you find who has the comparative advantage?

- determine how long each task takes each person (this measures the cost of producing each good in hours) -convert this into a measure of opportunity cost by calculating how much of the alternative good you could have produced in that time -whoever can produce each good at the lowest opp. cost has the CA

define expectations when relating to the shift of the demand curve

- expectations about the future - if you believe prices will rise, you buy the item today which increases todays demand

the opportunity cost principle

- price of next best alternative -cost of choice-cost of next best alternative= opportunity cost

define input prices when relating to the shift of the supply curve

- the price of stuff you use to produce something -if input price falls, there is an increase in supply because the inputs cost less so you can make more

rule of thumb for demand

- when price changes it's a movement - when anything else changes its a shift

interdependent principle

- your best choice depends on other choices you make, choices of others, and developments in markets

define preferences when relating to shifting the demand curve

-advertising/marketing -social pressures -trends

why is supply curve upward sloping?

-because of increasing marginal costs -as you increase the quantity you produce, the marginal cost of producing an extra unit rises

define prices of related goods relating to the shift of the demand curve

-changes in the price of related goos cause the graph to shift - complementary goods are goods that go together so if price pf buns increase, this will increase the demand for hot dogs - substitute goods are goods that can replace each other, if pepsi price increase, the demand for coke increases

define expectation when relating to the shift of the supply curve

-decisions are linked through time -if their is a higher price next year, you start production early to save money and sell it later

cost benefit principle

-evaluate full set of costs and benefits, make choice if the benefit is greater than the cost -incentive: reason to change behavior

if the market supply curve is upward sloping then...

-higher price leads businesses to supply a larger quantity -higher price means more businesses are supplying their goods/services -lower price means fewer businesses are supplying their goods/services

define productivity and tech when relating to the shift of the supply curve

-how good people use stuff -productivity growth: when businesses figure out how to produce more with fewer input, this cause a shift to the right because more efficient=more quantity

define congestion and network effects when relating to the shift of the demand curve

-how other people use goods can affect demand curves -network: effect that occurs when a good becomes more useful because other people use it -congestion: effect that occurs when a good becomes less valuable because other people use it

marginal principle

-if your marginal benefit is greater than or equal to the cost, then yes, buy one more - decisions made one by one

how to choose the best quantity to supply?

-produce one more unit if marginal benefit exceeds marginal cost -when determining marginal cost, compare cost of production to its next best alternative

what happen when international trade imports a good at a high price

-quantity demanded by buyers fall -quantity supplied by sellers rise -consumer surplus decrease and producer surplus increase -economic surplus increases

what happens when international trade imports a good at a low price

-quantity demanded by buyers increase -quantity supplied by sellers decreases -consumer surplus increase and producer surplus decreases -economic surplus increases

define prices of related outputs when relating to the shift of the supply curve

-substitutes in production: alternative uses of your production capacity -complements in production: goods that are made together An increase in the price of one complement good causes an increase in the supply of the other. A decrease in the price of one complement good causes a decrease in the supply of the other

what happens when buyers import goods

-the price declines to the world price -the lower price reduces the quantity supplied by domestic sellers and increase the imports to fill the gaps between supply and demand

import

-to buy goods/services from a foreign seller

What is market demand and the market demand curve

Market demand is what the market wants Market demand curve is the sum of quantity demanded by each person

define specialized skills relating to CA

a. develop a specialized skill b. unique skills, production methods play a source of CA

define abundant outputs relating to CA

a. take advantage of what you have to get what you want b. abundance can be due to climate, geography, natural resources, and strategic investment

define mass production relating to CA

a.production in large quantities result in a lower opportunity cost per unit b. lower opp. cost from mass production is a source of CA

what are the three sources that shape comparitive advantage

abundant inputs, specialized skills, and mass production

efficient allocation

allocating goods to create the largest economic surplus - requires that each good goes to the person who will receive the highest marginal benefit

changing supply vs quantity supplied

anytime you move along a supply curve that is a change in quantity supplied

why do american producer gain when they import a good

because they pay a lower price

what do economic surplus and deadweight loss have in common

both focus on marginal benefits and marginal cost

voluntary exchange

buyers and sellers exchange money for goods only if they both want to

what happens to the graph when there is a decrease in demand

causes graph to shift to the left leads to a new equilibrium and a decrease in price and quantity

what happens to the graph when there is an increase in demand?

causes graph to shift to the right this leads to a new equilibrium and an increase in price and quantity

what does economic surplus equal

consumer surplus and producer surplus

calculate deadweight loss

economic surplus at efficient quantity-actual economic surplus=

trade cost

extra costs added as a result of buying/selling something internationally rather than domestically -shipping/taxes

how has the power to limit market failure

government policies

deadweight loss def

how far economic surplus falls below the efficient outcome

define types and number of sellers when relating to the shift of the supply curve

if new businesses enter the market, supply increases

What shifts both an individual demand curve and the market demand curve

income, preferences, prices of related goods, expectations, and congestion and network effects

what causes the supply curve to shift?

input prices, productivity/technology, prices of related outputs, expectations, and the types and number of sellers

comparitive advantage is foundation of what

internation trade

what is a downward sloping demand curve?

it is the diminishing marginal benefit, each additional item yields a smaller marginal benefit than the previous item

perfectly competitive market

many buyers and many sellers each of whom is small relative to the size of the market

the demand curve is also the

marginal benefit curve - it illustrates the price at which you are willing to buy at each quantity

calculate economic surplus

marginal benefit-marginal cost

calculate consumer surplus

marginal benefit-price

the supply curve is also the _____ curve

marginal cost

predicition market

markets whos payoffs are linked to whether an uncertain event occurred

internal market

markets within a company to buy and sell scarce resources, help companies, non profits, and government agencies

efficent allocation __________ benefits

maximizes

efficient production has what effect on the cost

minimizes it

a decrease in supply on the supply curve causes the graph to move to

move to the left

an increase in supply on the supply curve cause the graph to

move to the right

information problems def

not enough info given out before selling

what does the individual supply curve plot

plots the quantity to sell at each price

how do markets organize and coordinate economic activites

price

what happen when you shift a demand curve?

price and quantity move in the same direction

equilibrium price

price at which market is in equilibrium

Movements of demand curve are caused by

price changes only

what is the individual demand curve plotting

price vs quantity (holds everything besides price constant)

calculate producer surplus

price-marginal cost

when maximizing profit (supply), you will continue selling until...

price=marginal cost

efficent production

producing a given quantity of output at the lowest possible cost -this requires allocating production so that each item is produced at the lowest marginal cost

what creates deadweight loss?

quantities not prices

what happens when price is below equilibrium

quantity demand exceeds quantity supplied and a shortage results

equilibrium quantity

quantity demanded and supplied at equilibrium

the rational rule for markets lead to efficient quantities, what is efficient quantity

quantity that produces the largest possible economic surplus

irrationality def

reasons why you're not following the rationale rule (for sellers in market)

diminishing marginal product leads to...

rising marginal cost - marginal product of an input declines as you use more of the output

what is the rational rule for sellers in competitive market

sell one more unit if the price is greater than or equal to the marginal cost

what is prices 3 roles and their meaning when relating to markets

signal: price is line of communication between buyers and sellers incentive: higher price is incentive for suppliers to produce more,, higher price is incentive for buyers to buy less information: process of buying and selling aggregates info

externalities def

something that occurs when you do something and if affects other people and you don't take into consideration of the effects

what is the law of supply

tendency for the quantity supplied to be higher when the price is higher

comparative advantage

the ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.

absolute advantage

the ability to produce a good using fewer inputs than another producer

marginal benefit

the additional benefit to a consumer from consuming one more unit of a good or service

gains from trade def

the benefits that come from relocating resources, goods and services to better uses

marginal cost

the cost of producing one more unit of a good

opportunity cost of doing a task

the output you could produce of an alternative task -calculate by: opportunity cost of task=hour the task takes divided by hours required to produce alternative output

world price

the price where a good/service is bought by the world market

what is the law of demand

the quantity demanded is higher when the pric eis lower

what happens when price is above equilibirum?

the quantity supplied exceeds quantity demanded and a surplus results

what happens (supply) when the price of something becomes higher in the market?

the seller has an incentive to make more

world supply

the total quantity by all sellers around the world -total quantity of the product supplied by all sellers around the world

export

to sell goods or services to a foreign buyer

world demand

total quantity demanded by all buyers around the world

what is the market supply curve plotting

total quantity of an item supplied by the entire market at each price

market power def.

when a market is not perfectly competitive

how does government failure occur

when government policies lead to worse outcomes

when does market failure occur

when the forces of supply and demand lead to an inefficient outcome -market power, externalities, info problems, irrationality and government reelations

equilibrium

where supply meets demand

do gains outweigh the cost

yes