econ

determinants of supply elasticity

flexibility of inputs mobility of inputs ability to produce substitute inputs time

microeconomic

focuses on individual decisions

cost benefit principle

an individual, firm, or society should take an action if and only if the extra benefits from taking the action are at least as great as the extra costs

efficient point

any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other

inefficient point

any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other

attainable point

any combination of goods that can be produced using currently available resources

barrier to entry

any factor that makes it difficult for a new firm to enter a market

example of inferior good

apartment in sketchy neighborhood-- having more money would make you buy less of it

income effect

change in quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power

substitution effect of a price change

change in quantity demanded of a good that results because buyers switch to or from substitutes when the price of a good changes

macroeconomics

focuses on overall national economic growth and factors that affect the overall economy such as the impact of changing interest rates on total spending in the economy

allocative function of price

directs resources away from overcrowded markets and toward markets that are undeserved

rationing function of price

distributes scarce goods to those consumers who value them most highly

what is required for the invisible hand to hold

free entry and exit

market equilibrium may not maximize total economic surplus because

goods entail costs and benefits that do not fall on buyers and sellers.

supply curve

graph or schedule showing the quantity of a good that sellers wish to sell at each price

production possibilities curve

graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good

goods with more substitutes have a ___ price elasticity of demand

greater

if marginal cost of producing an additional output is less than average cost, then average cost will ___ as output increases

fall

demand curve statement : all else constant, consumers will purchase more of a good as the price___

falls

price elasticity of supply

percentage change in quantity supplied that occurs in response to a 1 percent change in price will always be 1 in any point along a straight line curve that passes through the origin

price elasticity of demand

percentage change in the quantity demanded of a good or service that results from a 1 percent change in its price

efficiency conditions

perfectly competitive markets, no costs or benefits shifted

as price changes and demand stays the same, the demand is

perfectly inelastic

elasticity is 0

perfectly inelastic

short run

period of time sufficiently short that at least one factor of production is fixed

if the percentage change in price is negative(price falls), then the percentage change in quantity demanded is typically

positive

normal good has a ___ income elasticity

positive

positive/descriptive economic principle

predicts how people will behave

causes for shifts in demand

price of complementary goods price of substitute goods income preferences number of buyers in the market expectations about the future

when demand decreases, both the equilibrium ___ and ___ will fall

price, quantity

Assume that the production technology required to produce goods X and Y is very similar. If a firm that is producing good X notices that the market price of good Y is rising, it will

produce good Y

economics

study of how people make choices under conditions of scarcity and of the results of those choices for society

average total cost

sum of all payments made to a firms fixed and variable factors of production divided by total output

If the firms in a market have negative economic profits, then, in the long run, the market ______ curve will shift to the ______.

supply, left

if the firms in a market are earning an economic profit, then in the long run the market ___ curve will shift to the ____

supply, right

invisible hand

term economists use to describe the self-regulating nature of the marketplace

economic rent

that part of the payment for a factor of production that exceeds the owner's reservation price, the price below which the owner would not supply the factor

nominal price

the absolute price of a good in dollar terms

optimal combination

the affordable combination that yields the highest total utility

economic surplus

the benefit of taking an action minus its cost

substitution effect

the change in the quantity demanded of a good that results from buyers switching to or from substitutes when the price of a good changes

buyer's surplus

the difference between the buyer's reservation price and the price he or she actually pays

seller's surplus

the difference between the price received by the seller and his or her reservation price

real price

the dollar price of a good relative to the average dollar price of all other goods

profit motive

the force that encourages people and organizations to improve their material well-being

price elasticity of demand for a good tends to be lower if

the good has few close substitutes

marginal benefit

the increase in total benefit that results from carrying out one additional unit of an activity

marginal cost

the increase in total cost that results from carrying out one additional unit of an activity

market equilibrium occurs when

the quantity buyers demand at the market price is exactly the same as the quantity that sellers offer. T

inferior good

demands decreases when income increases

normal profit

difference between accounting profit and economic profit

total surplus

difference between buyer's and seller's reservation price

increase in price a firm receives for its output will lead form to

expand output

total revenue

explicit costs + accounting profit

price elasticity of demand at a given point

(P/Q) * (1 / slope)

price elasticity of demand when price vs quantity graph

(P/Q) x (1/slope)

markets work best when

-Buyer's marginal benefits = seller's marginal costs -Society's marginal benefits = society's marginal costs

opportunity cost for someone making a calculator if they make 100 calculators per hour and 10 computers per hour

.1 computers

factors that increase supply

1. A decrease in the cost of materials, labor, or other inputs used in the production of the good or service. 2. An improvement in technology that reduces the cost of producing the good or service. 3. An improvement in the weather (especially for agricultural products). 4. An increase in the number of suppliers. 5. An expectation of lower prices in the future.

factors that increase demand

1. A decrease in the price of complements to the good or service. 2. An increase in the price of substitutes for the good or service. 3. An increase in income (for a normal good). 4. An increased preference by demanders for the good or service. 5. An increase in the population of potential buyers. 6. An expectation of higher prices in the future

decision pitfalls

1. Measuring costs or benefits proportionally 2. ignoring implicit costs 3. failing to think at the margin

three ways to earn a big payoff

1. Work exceptionally hard 2. Have some unique skill or talent 3. Be lucky

characteristics of perfectly competitive market

1. all firms sell the same standardized product 2. the market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged 3. productive resources are mobile 4. buyers and sellers are well informed

decreasing productivity

1. start with resources with lowest opportunity cost, then move to next highest, and still higher.

slope of Tom is 1/2... coffee vs nuts. this means that the opportunity cost of an additional pound of nuts is ____

1/2 pound of coffee

Assume point A on a linear production possibilities curve represents the combination of 12 coffees and 3 cappuccinos, and point B represents 3 coffees and 6 cappuccinos. Suppose coffees are on the vertical axis and cappuccinos are on the horizontal axis. The opportunity cost of a cup of coffee is

1/3 of a cappuccino

diminishing marginal utility

Decreasing satisfaction or usefulness as additional units of a product are acquired

efficiency principle

Efficiency is an important social goal because when the economic pie grows larger, everyone can have a larger slice.

comparative advantage

One person has a comparatave advantage over another if his or her opportunity cost of performing a task is lower than the other person's opportunity cost

total expenditure = total revenue

The dollar amount consumers spend on a product is equal to the dollar amount sellers receive

unattainable point

a combination that cannot be produced using current resources

economic efficiency

a condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels

excess supply or surplus

amount by which quantity supplies exceeds quantity demanded when the price of a good exceeds equilibrium price

profit maximizing firm

a firm whose primary goal is to maximize the difference between its total revenues and total costs

unit elastic

a given change in price causes a proportional change in quantity demanded

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

equilibrium principle

a market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action

perfectly competitive market

a market in which no individual supplier has significant influence on the market price of the product

incentive principle

a person is more likely to take an action if its benefit rises, and less likely to take it if its cost rises

incentive principle is an example of ____

a positive economic principle.

a change in demand

a shift of the demand curve, which changes the quantity demanded at any given price

outsourcing

a term increasingly used to connote having services performed by low-wage workers overseas

specialization

an economic concept that refers to separating tasks in which people in a factory or company work at one kind of job and learn to do it well

normative economic principle

an economic principle that says how people should behave

consumer surplus is the area

above price and below the demand curve

normal profit + economic profit=

accounting profit

marginal utility

additional utility gained from consuming an additional unit of a good

efficient points lie

along the curve

producer surplus

area below price and above supply curve

consumer surplus on a graph

area of triangle below demand curve and above the price.

government says only sell 1$ companies dont sell too cheap, sellers are willing to pay more bc limited supply, buyers say okay

artificially increased demand and supply

points that lie beneath the production possibilities curve are ____ but ____

attainable, inefficient

markets maximize the difference between

benefits and cost

the market

buyers and sellers signal wants and cost

causes for shift in supply

change in price of input change in technology weather number of sellers in the market expectation of future price changes

is govmt decides to pay childcare, this would incraese ___ in the market for childcare

consumer surplus

subsidies cause ____ to grow, and ___ to shrink

consumer surplus, total economic surplus

if a person takes an action if and only if the extra benefits from taking that action are at least as great as the extra costs, then that person is following the___

cost benefit principle

sunk cost

cost that is beyond recovery at the moment a decision must be made

central planning

decisions made my individuals or small groups

if cross price elasticity between two goods is negative, then the two goods are complements. so, an increase in price of one, will leads to a ___ in demand for the other

decrease

two good are complements if an increase in the price of one good leads to a _____ in demand for the other

decrease

when supply decreases, there will be a

decrease in the quantity demanded

increase in wages paid to workers who make jeans will

decrease price of jeans

when income increases, demand for an inferior good___

decreases

normal good

demand increases as income increases

elastic

demand is elastic with respect to price if its price elasticity of demand is greater than 1

increase in the quantity demanded

downward movement along the demand curve as price falls.

fundamental property of the demand curve

downward sloping with respect to price

in the long run a perfectly competitive industry

economic profit and loss are driven to zero by entry and exit.

goal as an economic decision maker is to generate the largest possible_____

economic surplus

a cut in price will increase total spending on a good if demand is _____, but reduce it if demand is ______

elastic, inelastic

the price at which a good will sell

equilibrium price

quantity of a good that will be sold

equilibrium quantity

principle of comparative advantage

everyone does best when each person concentrates on the activities for which their opportunity cost is lowest

with trade, each persons consumption can be

greater than production

rational person

has well defined goals and tries to fulfill those goals as best as they can

If a linear, two-good production possibilities curve has a slope of −2, then

having an additional unit of the good measured on the vertical axis means giving up 1/2 unit of the good measured on the horizontal axis

market demand curve is obtained by

horizontal addition, add quantities of individual demand curves.

substitute goods

if increase in price of of one causes a rightward shift in the demand curve for the other.

inelastic

if its price elasticity is less than one

perfectly elastic

if price elasticity of demand is infinite, a horizontal line

how do i know if i should do something

if the marginal benefit is greater than the marginal cost.

Principle of Increasing Opportunity Cost

in expanding the production of any good, first employ those resources with lowest opportunity cost, and only afterward turn to resources with higher opportunity costs

a rightward shift in the entire demand curve represents an_____ in demand

increase

two goods are substitutes if an increase in the price of one good leads to an ____ in demand for the other

increase

Suppose farmers in a given market can either grow soybeans or corn on their land. In addition, suppose an increase in the demand for corn causes the price of corn to increase. In the long run, this increase in the demand for corn is likely to ______ the price of soybeans.

increase because supply would go down, leading to increase in price.

complementary goods are

increase in price of one causes a leftward shift in the demand curve for the other... ex: as tennis courts price of rental becomes less expensive, shift in demand curve for tennis balls will be rightward , more tennis balls demanded.

factors that shift the PPC curve/factors of economic growth

increase in the amount of productive resources available, population increase, improvements in knowledge about technology

if each firm earns a positive economic profit, what will happen to number of firms in the market

increase, because firms will enter the market

normal goods: increase in price leads to ____ in consumption, decrease in price leads to ___ in consumption

increase, decrease

increase in price of variable factor will ___ marginal cost, thereby ___ its supply

increase, reducing

a bow shaped PPC means that opportunity cost of producing something ____ as the economy produces more of them

increases

when income increases, demand for a normal good ___

increases

equilibrium leaves no opportunities for

individuals to gain

if it is possible to make a change that will help some people without harming others, then the situation is

inefficient

if percent change in quantity demand (numerator) is less than percent change in price(denom), tje price elasticity of demand would be less than one, so the demand is

inelastic.

if demand decreases as income increases, then the good is

inferior

Inferior good has a ____ income elasticity

negative

price elasticity of demand is ALWAYS____

negative, because price changes are always in opp direction from change in quantity demanded

buyer's reservation price

largest dollar amount the buyer would be willing to pay for a good

the buyer's reservation price is

largest price the buyer would be willing to pay for it

if economic profit is negative, what will you do in the long run

leave

supply decreases when sellers are willing to offer

less for sale at each possible price

average cost declines when marginal cost is ____ average cost

less than

cost benefit principle is a model... if costs increase, the action is ___ likely. If benefits increase, the action is ___ likely

less, more

principle of increasing opportunity cost is also called the

low hanging fruit principle

for inferior goods, an increase in income leads to a decrease in consumption... this implies that the income elasticity of demand is ___ for inferior goods

negative

seller's reservation price

lowest price a seller would go

you should perform an action if ____ exceeds its ____

marginal benefit, marginal cost

efficiency

marginal cost equals marginal benefit

price ceiling

maximum allowable price specified by law

price ceilings

maximum allowable price specified by law

unlike economic profit, economic rent

may not be driven to zero by competition

subsidies

meant to assist low income consumers, governmental funding of essential goods and service

the long run equilibrium price occurs at the

minimum of the ATC curve

marginal cost curve must intersect both average cost and average total cost at their respective

minimums

why is the slope of the production possibilities curve negative?

more of one good thing means less of another.

changes in choices occur due to

more resources, investment in capital, population growth, improvement in tech, more specialization

change in quantity supplies

movement along the supply curve

scarcity principle is also called the

no free lunch principle

if the demand for cucumbers and tomatoes both rise when income falls, we know they are ___ goods

normal

economic profit= accounting profit -

normal profit

cost benefit principle is an example of ___

normative economic principle

market equilibrium

occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price

absolute advantage

one person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person

a profit maximizing competitive firm must decide

only how much to produce, taking price as fixed.

if you have a comparative advantage in something, you should

only make those

firms that earn normal profit recover only their

opportunity cost

slope of PPC

opportunity cost

implicit cost of starting a business

opportunity cost of the time you spend working at the business

implicit costs

opportunity costs of the resources supplied by the firms owners

increase in demand

outward shift of demand curve

explicit costs are

payments firms make to purhcase- resources, land, labor

law of demand

people do less of what they want to do as the cost of doing it rises

formula for price elasticity of demand

percent change in quantity demanded/ percent change in unit price

income elasticity of demand

percentage by which a good's quantity demanded changes in response to a 1 percent change in income

cross price elasticity of demand

percentage by which the quantity demanded on the first good changes in response to a 1 percent change in the price of the second

a change in price leads to change in

quantity demanded

socially optimal quantity

quantity of a good that results in the maximum possible economic surplus from producing and consuming the good

if there is an excess supply, then

quantity supplied is greater than quantity demanded

rational spending rule

ratio of marginal utility to price should be equal for all goods

demand will be more elastic with respect to price for goods in which close substitutes are

readily available

a decrease in the price of a firm receives for its output will lead firm to

reduce output

environmental damage is a

relevant cost of production

buyers will purchase an item if its price is less than or equal to their _____

reservation price

equilibrium price and quantity are efficient if:

sellers pay all the costs of production buyers receive all the benefits of their purchase

change in supply

shift of entire supply curve

an increase in an economy's productive resources will lead the production possibilities curve to

shift outward

invisible hand theory

states that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources

if economic profit is positive, you should

stay

implicit costs are the opportunity costs of

the resources supplied by the owner of the firm

utility

the satisfaction people derive from consumption

principle of increasing opportunity cost tells us what about the slope?

the slope of the production possibilities curve becomes stepper as we move downward to the right.

law of diminishing marginal utility

the tendency for the additional utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point

average benefit

the total benefit of undertaking n units of an activity divided by n

average cost

the total cost of undertaking n units of an activity divided by n

economic surplus =

total benefits - total costs

average fixed cost

total fixed cost per unit of output

accounting profit + explicit costs =

total revenue

accounting profit =

total revenue - explicit costs

accounting profit is equal to

total revenue - explicit costs

economic profit

total revenue- explicit costs - implicit costs

measuring costs or benefits proprtionally

treating a change in cost or benefit as insignificant if it constitutes only a small proportion of the original amount.. absolute dollar amounts should be employed, not proportions

economic rent is earned by factors of production that are

unique

opportunity cost

value of what must be forgone to undertake an activity

scarcity principle

we have boundless needs and wants, but the resources available to us are limited. So having more of one good thing means having less of another

when would the demand curve be a stairstep shape

when a product can be sold only in whole number amounts.

the pitfall of failing to think at the margin

when deciding whether to perform an action, the only costs and benefits that are relevant are those that would result from taking the action. ignore sunk costs

economic efficiency relating to change

when no change could be made to benefit one party without harming the other

pitfall of ignoring implicit costs

when performing a cost benefit analysis of an action, it is important to account for all relevant costs, including the implicit value of alternatives that must be forgone in order to carry out the activity

substitution effect

when prices go up, substitutes become more attractive, causing consumers to abandon the good for its substitutes

no cash on the table

when surplus is maximized, no opportunity to gain from additional sales or purchases

demand has decreased if buyers are

willing to buy less at each price

supply increases when sellers are

willing to offer more for sale at each price