micro final
inferior goods demand ____ as income _____
decreases, increases (ex: you dont keep buying ramen noodles when you gain money -- you buy real pasta instead)
when demand ___ demand curve shifts ____
decreases, left
when supply ____, supply curve shifts ____
decreases, left
perfectly elastic demand
demand curve is horizontal, demand could be any quantity at any given price, but drops to zero if the price increases (ex: cell phones)
unit-elastic
demand that has an absolute value of elasticity exactly = to 1
elastic
demand that has an absolute value of elasticity greater than 1.
inelastic
demand that has an absolute value of elasticity less than 1
an increase in _____ shifts the ____ curve ____, pushing ____ point along the ____ curve
demand, demand, right, equilibrium, supply
price elasticity of demand + supply describe what?
how much quantity demanded + quantity supplied change when price of a good changes
households provide ____ to firms, firms use _____ to produce goods + services
labor, labor
non-binding price ceiling
occurs if the ceiling is sets above equilibrium. doesn't restrict either parties behavior since current equilibrium is within range ceiling allows
competitive market
one is fully informed price-taking buyers/sellers easily trade a standardize good or service
supply curve
shows quantities of particular good/service that producers supply at various prices, shows producers willingness to sell
demand curve
shows the quantities of particular good/service consumers demand at various prices. shows willingness to buy at the highest amount consumers pay for any given quantity
college degree _____ to employers that youre intelligent, hardworking and able to complete assignments. many employers prefer candidates w college degrees. this is an example of _____
signaling
price elasticity of supply
size of change in quantity supplied of good/service when price changes. measures producers responsiveness to change in price rather than the consumers responsiveness to change in price
Your car will run on gas the same regardless if gas is from station A or B. this is an example of a ______
standardized good
adverse selection
state that occurs when buyers/sellers have different info about quality of a good or the riskiness of a situation. results in failure to complete transactions that would've been possible if both sides were equally informed
choosing between mcdonalds vs fajita grill. you know nothing about either, but you heard fajita is bomb. it makes sense to get fajita, but you may be unlucky and hate fajita. we generalize any observable characteristics we see/hear about things. this is an example of _______
statistical discrimination
benefits of a _____ are split between buyers/sellers depending on the _________ of demand/supply curves. the side thats more _____ receives a larger benefit
subsidy, relative elasticity, elastic
income elasticity of demand formula
% change in quantity demanded / % change in income
price elasticity of demand formula
% change in quantity demanded / % change in price
cross-price elasticity of demand between A + B formula:
% change in quantity of A demanded / % change in price of B
price elasticity of supply formula
% change in quantity supplied / % change in price
an increase in price affects total revenue in 2 ways:
- causes quantity effect or decrease in revenue from selling fewer units of the good - causes price effect or increase in revenue resulting from higher price for each unit sold
marginal utility
change in total utility that comes from consuming one additional unit of good/service
percentage change in price formula
[p2 - p1/p1] * 100
percentage change in quantity formula
[q2-q1/q1] * 100
comparative advantage
ability to produce good/service at a lower opportunity cost than others
absolute advantage
ability to produce more of a good or service than others can with given amount of resources
total producer surplus on a graph is:
above the supply curve, below the equilibrium price
Given the same # of workers USA can produce twice as many shirts or four times the amount of wheat as china because of technology. This is an example of what?
absolute advantage
signaling
action to reveal ones own private info
moral hazard is about _____ and occurs ____ parties have voluntarily entered into an agreement
actions, AFTER
diminishing marginal utility
additional utility gained from consuming successive units of a service/good is smaller than gained from previous unit. you get to zero marginal utility + then can reduce total utility which = negative marginal utility
lemon cars break down often. theres info asymmetry in used car market bc sellers of used car know a lot more about the truth of the car than potential buyers. buyers are well aware they're on the wrong end of asymmetry, therefore sellers of cars in perfect shape will be underpaid. this is an example of ____
adverse selection
law of demand
all else equal, quantity demanded rises as price falls
a doctor helps aid sick people, while the patients feel better the doctor feels benefited by helping them. this is an example of ______
altruism
total revenue
amount firm receives from sale of goods/services, calculated as quantity sold * price paid for each unit
quantity demanded
amount of a particular good that buyers will purchase at a given price during a specific period. For almost all goods, the lower the price goes, the higher the quantity demanded
quantity supplied
amount of particular good/service producers offer for sale at a given price during specified period
backward induction
analyzing a problem in reverse starting w the last choice, then the second to last to determine the optimal strategy
commitment device
arrangement entered into by individual w the aim of helping plan for future behavior that otherwise would be difficult
determinants of price elasticity of supply
availability of inputs, flexibility of production process, adjustment time, cross-price elasticity of demand
determinants of price elasticity of demand
availability of substitutes, degree of necessity, cost relative to income, adjustment time, scope of market
first mover advantage
benefit enjoyed by the player who chooses first + gets a higher payoff than those who follow
dominant strategy
best one for a player to follow no matter the strategy other players choose. not all game have a dominant strategy for each player
price taker
buyer or seller who cannot affect the market price
when supply + demand have the same relative elasticity, what happens w the tax burden?
buyers + sellers share it equally
because price _____ cause ____, goods must be rationed or allocated by first come/first serve
ceilings, shortage
substitution effect
change in consumption that results from change in relative price of goods
income effect
change in consumption that results from increased effective wealth due to lower prices. price decrease causes budget line to move outward
prof told students in class assignments can be done when they set the date to and wouldn't be penalized if it was done the last day. many chose those to and spaced assignments out instead. this is an example of a ________
commitment device
USA can produce 200 wheat/50 shirts = 4 wheat per shirt and china can produce 50 wheat/25 shirts = 2 wheat per shirt. USA has to give up more to make a shirt than china does. This is an example of what?
comparative advantage
5 determinants of demand
consumer preferences, price of related goods, incomes, expectations, number of buyers
transaction costs
costs incurred by buyer + seller in agreeing to and executing a sale of goods or services (EX: you can easily pick 1 of 4 stations for gas)
tax causes ______ & redistributes _____. ____ is lost to both buyers + sellers who would've been willing to make trades at pre-tax equilibrium price.
deadweight loss, surplus, surplus
_____ curve represents relationship between price + quantity demanded w everything else held constant. if everything isn't held constant, if one of the non price factors that determine _____ changes, the curve _____
demand, demand, shifts
when _____ is ____ elastic than _____, _____ have a larger tax burden then ______
demand, more, supply, sellers, buyers
tax wedge
difference between price paid by buyers + price received by sellers in presence of tax
when supply + demand shift together, its possible to predict __________ in the ____ or _________ in the ______
direction of change, quantity, direction of change, price
taxes _____ buying/selling of certain guides while subsides ____ buying/selling of certain goods
discourage, encourage
statistical discrimination
distinguishing between choices by generalized based on observable characteristics in order to fill in missing info
total utility curve slopes ____
downward
fungible
easily exchangeable/substitutable
with ______ demand, a given percentage change in price of a good will cause even larger % change in quantity demanded. A 40% change in price might lead to a 60% change in quantity demanded. this is an example of something being ____
elastic, elastic
supply + demand are more ____ over the ___ run than the ___ run
elastic, long, short
what happens to demand curve when one of nonprice determinants changes?
entire demand curve shifts right or left, horizontal instead of vertical because it affects quantity demanded at each price. quantity demanded at given price is now higher, so point on curve corresponding to that price is now further right.
cognitive biases
failing to ignore sunk costs + undervaluing opportunity costs
prisoners dilemma
game strategy where 2 people make rational choices that lead to a less than ideal result for both
standardized good
good for which any two units have the same features and are interchangable
outputs on circular flow model
goods & services that firms produce using factors of production
inferior goods
goods for which demand decreases as income increases
normal goods
goods for which demand increases as income increases
what shifts the ppf outward?
having more workers because more products can be produced, improvement in technology
increase in supply + demand independently lead to a ______
higher equilibrium
cody usually pays 15$ for each movie ticket, now they cost 10$, he is 5$ richer for each ticket he buys. this is an example of an ______
income effect
as price _____, quantity supplied ____
increases, increases
normal goods demand ____ as income ______
increases, increases
a given percentage change in price will cause smaller % change in quantity demanded. A 40% change in price might lead to a 20% change in quantity demanded. this is an example of something being ____
inelastic
when incomes rise, generic brands are replaced with more expensive brands. this is an example of an _____
inferior good
inputs on circular flow model
land, labor + capital
when prices are lower than market equilibrium = producers + consumers lose surplus from missed transactions. For transactions that still take place, consumers pay ____ + ___ surplus at expense of ____ who get paid ____ + ____ surplus
less, gain, producers, less, lose
budget constraint
line of all possible combos of goods/services a consumer can buy
artificially high price imposed on market = consumers ___ surplus due to reduced number of transactions + higher price buyers have to pay remaining transactions.
lose
artificially high price imposed on market = Producers ___ some surplus from transactions that would've taken place under equilibrium and no longer do. they ___ more surplus from higher price on transactions that still take place.
lose, gain
deadweight loss
loss of total surplus occurs because the quantity of a good thats bought + sold is below market equilibrium quantity
you love the 1st scoop of ice cream. the second scoop is a tad less yummy, and so on. the first scoop was the best, and it gets less enjoyable as you go on. this is an example of ____
marginal utility
price ceiling
max legal price good can be sold at. EX: price ceiling on staple foods, gas, electricity so people can afford bare necessities
willingness to pay
max price buyer would pay for good/service
efficiency
maximizing total surplus
total surplus
measure of combined benefits everyone receives from exchanges of goods/services
elasticity
measure of how much consumers + producers will respond to change in market conditions. can be applied to supply or demand, and to measure responses to change price of a good, change in price of non related good, or change in income
price elasticity of demand
measures consumers sensitivity to price changes. when consumers buying decisions are linked to price, we say their demand curve is more elastic meaning a small change in price causes a large change in quantity demanded.
income elasticity of demand
measures how much quantity demanded changes in response to consumers incomes
price floor
min legal price a good can be sold. (EX: farmers will always make an income bc of price floors, so even if weather isn't in their favor their crop cannot be sold too cheap)
willingness to sell
min price seller is willing to accept for good/service
sunk cost fallacy
money wasted on a ticket is only wasted if you walk out of movie, rather than money already being wasted if you hated it. do the future costs outweigh future benefits? if so do whatever maximizes your utility
employees slack off when their boss isnt watching because they are under contract and aren't being watched therefore they aren't violating anything since they arent caught. this is an example of _____
moral hazard
when supply is _____ elastic than _____, ______ have a larger tax burden than _____
more, demand, buyers, seller
altruism
motive for action in which a persons utility increases simply because someone elses utility increases
price elasticity of demand will always be a ____ # price & quantity demanded move in _____ directions. economists drop negative sign & express price elasticity of demand as a ____ number
negative, opposite, positive
non-cooperative equilibrium
negative-negative outcome bc participants act independently pursuing only their individual interests
effect of subsidy on a seller
new supply curve is below original supply curve, decreasing equilibrium price and increasing equilibrium quantity/supply demanded
efficient market
no exchange can be better for one person without someone else being worse off
if someone cant afford a phone, they're more than likely to once their income rises. this is an example of an ____
normal good
both necessities + luxuries are ____ goods. if a good is a luxury, income elasticity will be ____ but __ than 1. If the good is a necessity, income elasticity will be ____ but ___ than 1.
normal, positive, more, positive, less
rational utility maximizer
optimize constraints by spending resources on bundle of goods/activities that'll give highest possible utility
tit-for-tat strategy
player in a repeated game takes the same action his opponent did in the previous round, mimic the other player
commitment strategy
players agree to submit to a penalty in the future if they defect from a given strategy. by changing the payoffs, agreeing to future penalties can allow players to reach a mutually beneficial equilibrium that otherwise would be difficult to maintain
when supply + demand move opposite directions, change in price is ____ but not change in ____
predictable, quantity
when talking about law of demand, its implied nothing other than ____ changes
price
equilibrium price
price at which quantity supplied =quantity demanded
5 determinants of supply:
price of related goods, technology, price of inputs, expectations, number of sellers
If station A rises gas price, yet station B's price remains the same, station A will lose customers. Therefore market cannot be changed. This is an example of a _____
price taker
when demand is inelastic the ____ effect outweighs the ___ effect
price, quantity
you wont spend 399 on a cell phone until it goes down to 125. This is an example of _____
quantity demanded
taxes affect on supply/demand
quantity supplied + demand decreases
equilibrium
quantity supplied = quantity demanded (graphically this happens where demand curve intersects supply curve)
law of supply
quantity supplied rises as price rises (higher price of good -- more of the good producers want to sell)
when demand is elastic the ____ effect outweighs the ____ effect
quantity, price
nash equilibrium
reached when all players choose the best strategy they can, given the choices of the other plays. each play has no incentive to change their strategy given what other players are doing
price control
regulation setting max/min legal price for specific good. direct effect is to hold price up or down when the market shifts, preventing market from reaching a new equilibrium (price ceilings + price floors)
subsidy
requirement that government pays extra to producers/consumers of a good. encourages production/consumption of particular goods + used as alternative price control to benefit certain groups without shortage/excess supply
reciprocity
responding to anothers actions with similar actions, can be positive or negative. (EX: doing good things for people who do good things for us)
when demand increases, demand curve shifts ____
right
when supply increases, supply curve shifts ____
right
interviewing job candidates is a classic use of _____ to improve hiring decisions. this is an example of _____
screening
movies become cheaper relative to concerts, therefore cody chose more movies and fewer concerts. the good that is cheaper is his first choice. this is an example of an ______
substitution effect
how can you calculate deadweight loss?
subtract total surplus AFTER market intervention from total surplus @ market equilibrium BEFORE intervention, or by determining the area of triangle on the graph
what 2 things are more elastic in the long run rather than the short run?
supply, demand
an increase in supply shifts the ____ curve to the ____, pushing ____ point down along the _____
supply, right, equilibrium, demand curve
If you get something for less than expected/sell for more than minimum $ you would accept, thats good. the bonus value you would've paid if necessary but didn't have to is your _____. this is an example of _____
surplus, surplus
screening
taking action to reveal private info about someone else
moral hazard
tendency for people to behave in riskier ways or to resign contracts when they dont face the full consequences of their actions
perfectly inelastic demand
the demand curve is vertical, in a way such that quantity demanded is always the same no matter what the price (ex: bare necessities)
producer surplus
the net benefit a producer receives from the sale of a good/service, measured by difference between producers willingness to sell the actual price. EX: 110+60+0+0+0 = 170 (5 sellers in the market)
consumer surplus
the net benefit that a consumer receives from purchasing a good or service, measured by the difference between willingness to pay + the actual price
prices above and below market equilibrium reduce _______
total surplus
Any price above or below equilibrium price, sellers face incentive to raise/lower price. money making incentives drive market towards equilibrium price, where theres neither a surplus nor shortage. t/f?
true
Very few markets are truly competitive, always have various incentives/reasons for markets to be truly imperfect. t/f?
true
When 2 goods are substitutes, cross-price elasticity of demand is positive. an increase in price of one will cause increase in quantity demanded of another. Decrease in price of one good will cause decrease in quantity demanded of another. t/f
true
repeated play can change the outcome in sequential games by reducing first mover advantage. t/f?
true
strategies/incentives work quite differently when games are repeated. t/f?
true
we assume people are rational + act in their self interest, people maximize their utility. revealed preferences show us many people get utility from selfless acts. t/f?
true
you should always confess. t/f?
true
total consumer surplus on a graph is:
underneath demand curve + above equilibrium price
A 40% change in price leads to a 40% change in quantity demanded. this is an example of something being ____
unit-elastic
adverse selection relates to ______ of people/goods and occurs _____ parties have entered into an agreement
unobserved, BEFORE
firms pay ____ to households for their labor, households buy _____ from firms
wages, goods/services
complete info
when people are fully informed about choices that they/other relevant economic people face
zero-sum game:
whenever one person gains, another loses an equal amount -- net value of transaction = zero
