ECON101 Modules 1, 2, 3, 4, & 5

increase in demand

an increase in the quantity demanded of a good, service, or resource at every price; graphically represented by a rightward shift of the demand curve

increase in supply

an increase in the quantity of a good, service, or resource supplied at every price; graphically, an increase in supply is represented by a rightward shift of the supply curve

allocation

process of assigning a good, service, or resource to one use instead of another

how to find opportunity cost

United States can produce 40 million cars or 200 billion gallons of milk, Japan can produce 25 million cars or 20 billion gallons milk >equate car to milk production -> 40C = 200M; solve for C -> 1C =5M; thus the opportunity cost of 1 million cars is 5 billion gallons of milk in the United States; same for Japan -> 25C = 20M -> 1C = 0.8M; opportunity cost of 1 million cars is 0.8 billion gallons of milk >Japan has the lower opportunity cost of producing cars (0.8<5) , gives up 0.8 billion gallons of milk for 1 million cars while United States gives up 5 billion gallons >same to find opportunity cost of producing milk -> United States produce milk and Japan cars

resource

any item, whether a gift of nature, the result of production, or the result of human effort, that is used to produce goods and services, also known as factors of production (but not money); (land, labour, capital, entrepreneurial ability) >All else held constant, lower resource costs reduce overall costs of production and are likely to increase supply, shifting the supply curve to the right; higher resource costs increase overall costs of production and decrease supply, shifting the supply curve to the left.

constant opportunity costs

characteristic of production whereby the opportunity cost associated with increasing the production of one good or service, in terms of another, is constant at every level of production (results in a straight line PPF)

relative scarcity

comparison of the scarcity of one good, service, or resource to that of another (i.e. relative scarcity of drinking water compared to water in general)

scarcity

condition that results from the inability of limited resources to satisfy unlimited wants

macroeconomics

entire economy of a state, country, or world; large-scale issues of an economy (i.e. total output, average price levels o inflation, unemployment); whole economy can be affected by important national and global events (i.e. wars, natural disasters, technological innovation, government policy)

complements

goods, services, or resources that are used or consumed with one another >an increase in the price of a complement will cause a decrease in the demand for a good, shifting the demand curve to the left; a decrease in the price of a complement will cause an increase in the demand for a good, shifting the demand curve to the right

optimal level of output

level of output at which the marginal benefit of the last unit produced and consumed is equal to the marginal cost of that unity (MB = MC); use marginal analysis to determine the optimal level of an activity

price floor

a minimum legal price at which a good, service, or resource can be sold

binding price floor

a minimum legal price that is set above the existing equilibrium price. Since the market equilibrium price is lower than the price floor, the floor restricts trade and is said to be binding

nonbinding price floor

a minimum legal price that is set below the existing equilibrium price. Since the market equilibrium price is greater than the price floor, the floor has no effect on the market and is said to be nonbinding

service

an intangible product or action that consumers, firms, or governments wish to purchase

marginal benefit marginal cost

>additional benefit associated with one more unit of an activity >additional cost associated with one more unit of an activity (i.e. when supersizing a meal, determine whether the marginal benefit of more chips and soda is greater than the marginal cost of upgrading the purchase)

technology

The knowledge, inventions, and innovations that can potentially increase resource productivity. All else held constant, positive technological changes tend to improve productivity, increasing supply and shifting the supply curve to the right. The opposite is also true: Negative technological changes tend to diminish productivity, decreasing supply and shifting the supply curve to the left.

nonprice determinant (demand)

a characteristic of the demand for a good, service, or resource other than its own market price. A change in a nonprice determinant of demand changes the relationship between price and quantity demanded, either increasing or decreasing quantity demanded at every price. Sometimes referred to as non-own-price determinant

nonprice determinant (supply)

a characteristic of the supply of a good, service, or resource other than its own market price. A change in a nonprice determinant of supply changes the relationship between price and quantity supplied, either increasing or decreasing quantity supplied at every price. Sometimes referred to as non-own-price determinant

decrease in demand

a decrease in the quantity demanded of a good, service, or resource at every price; graphically represented by a leftward shift of the demand curve

decrease in supply

a decrease in the quantity of a good, service, or resource supplied at every price; graphically, a decrease in supply is represented by a leftward shift of the supply curve >a change in a nonprice determinant of supply shifts the supply curve. When the supply increases, the supply curve shifts to the right. When the supply decreases, the supply curve shifts to the left.

good

a tangible product that consumers, firms, or governments wish to purchase

normal good

a good for which there is a direct relationship between the demand for the good and income; for normal goods, an increase in income causes the demand curve to shift to the right while a decrease in income causes the demand curve to shift to the left >if income changes, consumers' willingness and ability to buy a good, service, or resource changes as well, resulting in a new demand relationship

inferior good

a good for which there is an inverse relationship between the demand for the good and income; for inferior goods, an increase in income decreases demand, and a decrease in income increases demand; for inferior goods, an increase in income reduces demand, shifting the demand curve to the left while a decrease in income increases demand, shifting the demand curve to the right

supply curve

a graphical representation of the relationship between the price of a good, service, or resource and the quantities producers are willing and able to supply

demand curve

a graphical representation of the relationship between the price of a good, service, or resource and the quantity that individuals and firms are willing and able to buy, all else held constant; usually downwards sloping because of the income effect, substitution effect, and diminishing marginal utility

price ceiling

a maximum legal price at which a good, service, or resource can be sold

nonbinding price ceiling

a maximum legal price that is set above the existing equilibrium price. Because the market equilibrium price is lower than the price ceiling, the ceiling has no effect on the market and is said to be nonbinding

binding price ceiling

a maximum legal price that is set below the existing equilibrium price. Because the market equilibrium price is greater than the price ceiling, the ceiling restricts trade and is said to be binding.

circular flow model

a model that concisely describes how goods, services, resources, and money flow back and forth in an economy (households and firms interacting with resource and product market) >households supply resources to firms through resource market, households receive income from firms, which are a cost to firms >firms use resources to produce goods and services, households use income to buy those from firms in the product market; these monetary payments are expenditures for households and revenues for firms >only by selling resources can households obtain the income they need to buy the products they want to consume; and only by buying resources can firms produce the output they will sell to households to generate revenue

subsidy

a payment made by the government that does not necessarily require an exchange of economic activity in return. Subsidies most often take the form of payments to businesses >All else held constant, supply increases when subsidies are provided to producers, shifting the supply curve to the right; supply decreases when subsidies are removed, shifting the supply curve to the left.

tax

a payment made to government that is the result of economic activity. Taxes are generally collected from both individuals and firms >All else held constant, the imposition of taxes on producers decreases supply, shifting the supply curve to the left; the reduction or removal of taxes on producers increases supply, shifting the supply curve to the right.

law of demand

a principle in economics that states that as the price of a good, service, or resource rises, the quantity demanded will fall, and vice versa, all else held constant; negative relationship between the price of an item and the quantity demanded

law of supply

a principle in economics that states that as the price of a good, service, or resource rises, the quantity supplied will increase, and vice versa, all else held constant

law of increasing opportunity cost

a principle in economics which holds that since some resources are better suited to producing one good or service than another as the production of a good or service increases, the opportunity cost of each additional unit rises; the PPF is curved outward to reflect the rising costs of increased production, opportunity cost can be found by determining the slope of PPF at the level of production >for example, a farmer has good, better, and best land. She starts with best, but when space runs out, she moves to better, where costs are a little higher. Then she moves to good, where costs are even higher >basic PPF assumes opportunity cost is constant, but in the real world since some resources are better suited for producing good or services than another, opportunity cost increases as production increases, known as increasing opportunity cost

shortage

a situation in which the quantity demanded is greater than the quantity supplied at the current market price; excess demand; markets respond to shortages by driving the price higher. Higher prices encourage suppliers to produce more and some consumers to buy less Qs-Qd < 0

surplus

a situation in which the quantity supplied is greater than the quantity demanded at the current market price; excess supply; markets respond to surpluses by placing downward pressure on price. As prices fall, suppliers reduce production and some consumers buy more of the good Qs-Qd > 0

supply schedule

a tabular representation of the relationship between the price of a good, service, or resource and the quantities producers are willing and able to supply

demand schedule

a tabular representation of the relationship between the price of a good, service, or resource and the quantity that individuals and firms are willing and able to buy, all else held constant

excise tax

a tax based on the number of units purchased, not on the price paid for a good or service >tax revenue: TR = Tax X Qt, where Qt is the quantity traded >when a good or service is taxed, the overall price paid by consumers rises and the price (net of the tax) received by producers falls. As a result, the quantity traded in the market also falls, and fewer units are traded >taxes on demanders cause the overall price paid by consumers (the good's price plus the tax) to rise and the price received by producers to fall. Higher prices for consumers and lower prices for producers result in a lower quantity traded in the market

change in supply

an increase or decrease in the quantity supplied of a good, service, or resource at every price. Graphically, such changes are represented by a shift of the supply curve. Changes in supply are caused by changes in a nonprice determinant of supply

land

all natural resources used in production; sometimes referred to as "gifts of nature"

labour

all physical and mental activity devoted to producing goods and services

efficient allocation of resources

allocation of resources in such a way that it is possible to increase the production of one good only by decreasing the production of another

inefficient allocation of resources

allocation of resources in such a way that it is possible to increase the production of one good without decreasing the production of another >for example, 16lbs oranges, 64lbs apples; how many apples at 25% PPF? 16lbs apples, 12lbs oranges >16 cups cake batter; 4 cups make 1 8" cake or 12 cupcakes; 48 cupcakes to 4 cakes

change in demand

an increase or decrease in the quantity demanded of a good, service, or resource at every price. Graphically, such changes are represented by a shift of the demand curve. Changes in demand are caused by changes in the nonprice determinants of demand

market

any place where buyers and sellers interact to trade goods, services, or resources, where prices are determined; for buyers, prices reflect willingness and ability to buy a product; for sellers, prices represent willingness and ability to sell; buyers seek to pay the lowest price possible and sellers seek to charge the highest price possible; competition from other sellers tends to drive prices lower, and competition from other buyers tends to drive prices higher; the price we observe in the market is agreeable to both buyers and sellers and maximizes the quantity traded

substitutes

goods, services, or resources that are viewed as replacements for one another >a decrease in the price of a substitute will cause a decrease in the demand for a good, shifting the demand curve to the left; an increase in the price of a substitute will cause an increase in the demand for a good, shifting the curve to the right

production possibilities frontier (PPF)

graph form of PPS that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology; PPF shows the production combinations that are both attainable and efficient >attainable if it is located inside/to the left of the PPF, unattainable if is located outside/to the right of the PPF >efficient or inefficient depending on whether it lands on the PPF curve

self-interest

idea that people choose to do things that interest them

optimisation

idea that people make choices in order to maximise the overall benefit, or utility, of an action subject to its cost; people with engage in an activity as long as the marginal benefit of it is greater than or equal to its marginal cost (if MB >/= MC, do it; if MB < MC, don't it)

complex changes in equilibrium

if changes to both demand and supply affect the price in the same way, then how the equilibrium price will change is known but how the equilibrium quantity will change is unknown, or indeterminate. Likewise, if changes in both supply and demand have similar effects on the equilibrium quantity, the direction of change for quantity is known but how price will change is unknown. If either price or quantity is indeterminate, whether it will increase, decrease, or stay unchanged depends on the relative magnitudes of the changes in demand and supply

microeconomics

individual households and markets; explore how market prices are determined and how they will adjust to a variety of different events (i.e. weather, government regulation, etc.)

sellers

market participants who are willing and able to sell goods, services, or resources >All else held constant, when the number of sellers in a market increases, the supply increases and the supply curve shifts to the right; when the number of sellers in a market decreases, the supply decreases and the supply curve shifts to the left.

buyers

market participants who seek to obtain goods, services, and resources >if the number of buyers increases, demand increases, shifting the demand curve to the right, if the number of buyers decreases, demand decreases, shifting the demand curve to the left

decreasing marginal benefit

negative relationship between the marginal benefit associated with the use of a good or service and the quantity consume; the more of a good or service that is consumed in a given period of time, the lower the marginal benefit associated with each additional unit > MB = (Change in Total Benefit)/(Change in Quantity) = ΔTB/ΔQ

increasing marginal cost

positive relationship between the marginal cost associated with the use of a good or service and the quantity produced; the more of a good or service that is produced in a given period of time, the higher the marginal cost associated with each additional unit (i.e. D.M.B. for each hour studied, I.M.C. for each hour spent not sleeping) > MC = (Change in Total Cost)/(Change in Quantity) = ΔTC/ΔQ

marginal decision making

process of making choices in increments by evaluating the additional, or marginal, benefit against the additional, or marginal cost of an action

rational decision making

process of maximising well-being given scarcity in order to make the best decision (based on self-interest, marginal decision making, and optimisation)

equilibrium

quantity supplied = quantity demanded >when the market is in equilibrium, the maximum number of trades occurs and anyone who wants to buy or sell a unit of the good can do so—at the market price

production possibilities schedule (PPS)

table that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology (production of one good causes a decrease in the production of another)

entrepreneurial ability

talent or ability to combine land, labour, and capital to produce goods and services; different from human capital in that it primarily involves assuming risk and organising resources into a productive process

comparative advantage

the ability to produce a good or service at a lower relative opportunity cost than that of another producer; if in the time it takes you to iron one shirt, you could wash 10 dishes, but in the same time, your roommate could wash 20 dishes; you have a comparative advantage in ironing shirts (you give up 10 dishes, she gives up 20) >to find comparative advantage, first solve for opportunity cost; the lowest opportunity cost has the comparative advantage

seller expectations

the anticipated future outcomes, including prices, that sellers associate with the production of a good, service, or resource >Expectations of future prices also affect the supply of output in the market, shifting the supply curve to the right or left. The direction of the change depends on the producers and the products being supplied.

expectations

the anticipation by individuals and firms of costs and benefits that lie in the future >if consumers expect an increase in the future costs associated with consuming a good, demand will increase, shifting the demand curve to the right today; if consumers expect a decrease in the benefits of consuming a good, demand will decrease, shifting the curve to the left today

gains from trade

the benefit, or wealth, that accrues to a buyer or seller as a result of trading one good, service, or resource for another; the wealth, or additional well-being, created by trade doesn't have to be monetary

change in quantity demanded

the change in the quantity of a good, service, or resource that consumers, firms, and governments are willing and able to buy due to a change in its price

income effect

the effect that a change in the price of a good, service, or resource has on the purchasing power of income. For example, when prices decrease, the purchasing power of income increases and consumers are able to purchase more goods, services, or resources >for example, suppose you have only $20 to spend on gasoline each week. When the price of gasoline rises from $2 per gallon to $4 per gallon, the purchasing power of that $20 falls from 10 to 5 gallons of gasoline. The resulting decrease in the quantity of gasoline demanded is due to the income effect

substitution effect

the effect that a change in the price of one good, service, or resource has on the demand for another. For example, an increase in the price of one good will increase the demand for its substitutes, and vice versa >for example, Victor usually eats an orange or an apple every day with his lunch. The substitution effect explains why, when he sees the price of oranges increase one week, he substitutes away from oranges and buys more apples instead

minimum wage

the lowest wage firms can legally pay employees in the labor market >In 2009, the U.S. government increased the federal minimum wage from $6.55 to $7.25. If you were being paid $7 per hour, the previous minimum wage was a nonbinding price floor; the new one is a binding price floor, raising your wage to $7.25

diminishing marginal utility

the negative relationship between the quantity of a good, service, or resource and the marginal utility obtained from each additional unit consumed in a given period of time >for example, for Monica, the first cup of coffee in the morning is worth $3; the second cup is worth only $1. So, if the price of coffee is $2 per cup, she buys one cup of coffee. Her first cup of coffee gives her a lot of satisfaction and is worth the price. She doesn't buy a second cup because of diminishing marginal utility: The second cup is worth only $1 to her, so she can't justify paying $2 to buy it

market demand

the overall or total demand for a good, service, or resource. It represents the summation of individual demand curves, whether they represent individuals, communities, states, or nations; numerically, a market demand schedule equals the summation of quantities demanded by each section of the market at each price, market prices are determined by market demand

market supply

the overall, or total, supply of a good, service, or resource. It represents the horizontal summation of the quantities supplied by individuals, firms, states, or even nations at each price over a fixed time period

tastes and preferences

the perception of the desirability associated with consuming a good, service, or resource >graphically, the increase in demand is represented by the demand curve shifting to the right; if perceived desirability decreases, demand will decrease, shifting the curve to the left.

specialisation

the practice of producing a single good or service rather than producing multiple goods or services; result of low-cost producers focusing all their efforts on producing a single good or service in order to increase productivity and potentially standards of living >to determine specialisation, first find the opportunity costs and determine the lower opportunity costs, the producer with the lowest relative opportunity cost has a comparative advantage and should specialise in the production of that good

equilibrium price

the price at which the quantity supplied of a good, service, or resource equals the quantity demanded; the price at which the demand and supply curves intersect. Also known as the market-clearing price

terms of trade

the price of one good, service, or resource in terms of another >for two individuals or firms trading one good for another, the price (terms of trade) must be less than the buyer's opportunity cost but greater than the seller's opportunity cost for both parties to be willing to trade

diminishing marginal productivity

the principle that if at least one input of production is fixed, the marginal productivity of additional variable resources will eventually fall, all else held constant

quantity demanded

the quantity of a good, service, or resource that consumers, firms, and governments are willing and able to buy at a given price, all else held constant

equilibrium quantity

the quantity traded when the quantity supplied of a good, service, or resource equals its quantity demanded

capital

tools, machinery, infrastructure, and knowledge used to produce good and services >physical capital - tangible items created to increase productivity >human capital - knowledge and skills that people acquire to increase productivity

opportunity cost

value of the next-best forgone alternative; the value of the opportunity that is given up upon choosing one activity/opportunity instead of another; recognise what is being given up by doing one thing instead of another; happens because resources are scarce and must be allocated between competing uses