Micro Test 1

Suppose you have only $20 to spend on gasoline each week. If the price of gasoline is $2 a gallon how many gallons can you purchase? Now suppose the price of gasoline rises from $2 per gallon to $4 per gallon. You still have $20 to spend on gas each week, but now how many gallons can you purchase? This is the income effect

10 5; Notice that as the price increased, our quantity demanded decreased (from 10 gallons in the first question to 5 gallons in this question) because we had less purchasing power.

What do we mean by "Market Clearing" Price?

At price where the quantity demanded and the quantity supplied are equal.

Which of the following scenarios will not cause an increase in supply? Technology improves and drives down costs. The number of suppliers increases. The price of the product decreases. Taxes decrease.

C

Understand that Prices are set by interaction of Buyers and Sellers

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. In the end, the price we observe in the market is agreeable to both buyers and sellers and maximizes the quantity traded.

Disequilibrium--For any Price be able to tell if creates a Surplus, Shortage or Equilibrium.

If Surplus (above the equilibrium)-- Price Falls If Shortage (below the equilibrium)-- Price Rises

Marginal Analysis—what is it?

Marginal analysis is the process of comparing marginal benefit to marginal cost when choosing the optimal level of an activity.

With increased activity (law of Diminishing Marginal Returns)...

• MB tends to Fall • MC tends to Rise

What do you think happens to your ability to supply corn if a new super fertilizer is invented?

With an increase in technology, we'd get an increase in supply. At each price we can supply a higher quantity. We represent an increase in supply as a rightward shift of the supply curve.

What happens to the demand for bottled water on a really hot day at the beach? What happens to the demand for bottled water at the beach on a day where it rains off and on?

it'll move to the right, At every price people will demand more bottled water. It'll move to the left. At every price people will demand less bottled water. This is what we call a decrease in demand: an decrease in the quantity demanded of a good, service, or resource at every price. Graphically, a decrease in demand is represented by a leftward shift of the demand curve.

If your expectations are that your income could drastically fall in the future,

then your current demand for normal goods will decrease.

If the price of pizza dropped drastically from $4 per slice to $0.40 per slice, what would happen? Subsititution effect

your demand for pizza's substitutes would go down. You would eat less from the Bakery, or Chinese restaurant.

How does market supply differ from individual supply? Market supply is the sum of all individual suppliers. Markets are only concerned about individual suppliers. Individual suppliers do not supply the same quantities. Individual suppliers do supply the same quantities.

A

Other things remaining the same, an increase in the price of beach front condos: decreases the quantity of beach front condos supplied. increases the quantity of beach front condos supplied. decreases the supply of beach front condos. increases the supply of beach front condos.

A

Smaller, fuel efficient SUVs have become very popular. Many customers are trading in existing cars and buying new SUVs. As a result, the supply of used cars will ______ and the price of used cars will ______. Additionally, the demand for new SUVs will ______ and the price of new SUVs will ______. increase, decrease; increase, increase increase, increase; increase, decrease increase, decrease; increase, decrease decrease, decrease; increase, increase

A

What is Scarcity?

A condition that results from the inability of limited resources to satisfy unlimited wants. Since resources are scarce, they must be allocated among competing uses.

Expectations of higher prices in the future can increase or decrease supply depending on the situation and the product at hand. Explain what would happen with the higher and the lower

A higher expected price could cause a firm to hold back some of their product today, in the hopes of selling it later at a higher price. This would decrease supply. On the other hand, a higher expected price could also cause a firm to increase their supply today, as they are ramping up their production to sell more at a higher price.

Understand the law of supply and what it means

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. The law of supply formalizes the idea that when a product sells more a higher price, suppliers will be more likely to produce that product. Connection to Other Material: The law of increasing opportunity costs is part of the explanation behind the law of supply: All else held constant, firms will be willing and able to produce more output only when prices rise, precisely because their opportunity cost of production is increasing. The higher the price, the higher the quantity supplied. The lower the price, the lower the quantity supplied.

Understand the Law of Demand and what it means • What does it mean for the slope of the Demand curve • Why does it slope down?

A principle in economics which states that as the price of a good, service, or resource rises, the quantity demanded will decrease, and vice versa, all else held constant A demand curve or schedule represents the relationship between the price and quantity demanded, all else held constant. All else held constant, there is a negative relationship between the price of an item and the quantity demanded. So, as the price of a good rises, the quantity demanded falls. Demand curves are downward-sloping for three reasons: the income effect: As a price of a good goes down, the money that you have gains purchasing power - you can buy more stuff with the same amount of money. The opposite is of course also true. If a price goes up, the money you have loses purchasing power. Def: The effect that a change in the price of a good, service, or resource has on the purchasing power of income 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. the substitution effect: The effect that a change in the price of one good, service, or resource has on the demand for another.

Which of the following describes the relationship between price and quantity supplied? It is an inverse relationship. It is a direct relationship. Price and quantity supplied move in opposite directions. There is no concrete relationship between price and quantity supplied.

B

What do you do if you fear a good you desire will not be available in the future? What do you do if you fear the price is going to go up in the future?

BUY NOW

Change in Supply? What happens with an increase? Decrease?

Change in Supply (caused by a Change in a Nonprice factor—Supply shifter) An increase in supply: Definition: 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. A decrease in supply: Definition: An 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.

Circular Flow Model—what is it? What does it imply?

Circular Flow Model is a visual model of the economy that shows how dollars flow through markets among households and firms. - In firms: They first produce and sell goods and services; Hire and use factors of production - In households: Buy and consume goods and services; Own and sell factors of production

Decision Rule MB compared to MC?

Decision makers use marginal analysis to determine the optimal level of an activity. That level occurs when the marginal benefit of the last unit produced and consumed is equal to the marginal cost of that unit i.e. MB = MC.

When discussing changes in income, goods fall into two categories: Normal Inferior Def of each?

Definition: A good for which there is a direct relationship between the demand for the good and income. For normal goods, as income increases, demand increases too. With more income, the quantity of steaks you demand at every price goes up. And likewise, as income decreases, demand also decreases for normal goods. With less income, the quantity of steaks you demand at every price goes down. A good for which there is an inverse relationship between the demand for the good and income. One classic example of an inferior good is rice. As you become wealthier, you switch to eating other foods, like steaks. Further Examples: College students frequently consume more mac & cheese or ramen noodles (other examples of inferior goods), but once their income goes up after securing a great job out of college their demand for these goods decreases. For an inferior good, as income increases demand will fall. And the other way around too

How Income Determines Demand

Demand curves reflect the willingness and ability to buy a good, service, or resource, all else held constant. Income is one of the variables that is held constant, so if income changes, consumers' willingness and ability to buy a good, service, or resource changes as well, resulting in a new demand relationship. When consumers have more or less to spend, the demand curve shifts.

When the Economics Department serves all-you-can-eat ice cream at its annual spring student-recruiting event, you eat three ice cream cones. You really enjoy the first, the second is just okay, and the third is tasteless. Which one? Income Effect Diminishing Marginal Utility Substitution Effect

Diminishing Marginal Utility

In economics, goods that are closely related to one another fall into two broad categories: Substitutes Complements

Goods, services, or resources that are viewed as replacements for one another. Goods, services, or resources that are used or consumed with one another.

If you can sell your product for $5, and a resource (say, electricity) just became cheaper, do you think you will make more or less of your product? If you can sell your product for $5, and electricity just became more expensive, do you think you will make more or less of your product?

If your inputs become cheaper, at each price you can now produce a higher quantity. A reduction in the price of resources leads to an increase of supply. We represent an increase in supply as a rightward shift of the supply curve. If your inputs become more expensive, at each price you can now produce a lower quantity. An increase in the price of resources leads to a decrease of supply. We represent a decrease in supply as a leftward shift of the supply curve. At each price a lower quantity will be produced

Your parents gave you the $400 you thought you needed to purchase books for the semester. When you realized your books were much cheaper than you thought, you decided to purchase all of the required and recommended books instead of just a few. Which one? Income Effect Diminishing Marginal Utility Substitution Effect

Income effect

Buyers are market participants who seek to obtain goods, service, and resources. The number of buyers in a market will determine demand levels. An increase in buyers? A decrease in buyers? Demand for oil has increased recently?

Increase in demand decrease in demand as the number of buyers in developing countries like India and China has increased.

It is very important to understand the distinction between an increase and decrease in supply and an increase in quantity supplied.

Increases in supply come from nonprice changes that increase the quantity supplied at every price. Increases in quantity supplied come from a lowering of the price. Decreases in supply come from nonprice changes that decrease the quantity supplied at every price. Decreases in quantity supplied come from a raising of the price.

What does Scarcity make us do?

It makes you make choose one of your wants. You can't have all wants for there isn't unlimited resources available to have all.

Be able to identify Changes in Quantity demanded (Increase or Decrease) and Changes in Demand (Increase or Decrease) Look at picture for answer

Look at chart from review to understand more

What is Marginal Benefit (MB)? How do we apply?

Marginal benefit (MB) is the additional benefit associated with one more unit of an activity.

What is Marginal Cost (MC)? How do we apply?

Marginal cost is the additional cost associated with one more unit of an activity. The marginal cost (MC) of an activity can be found by calculating the change in total costs as the level of the activity increases by one unit.

How are Households and Firms connected in through these two Markets?

Market for Good and Services: - Firms sells ( Walmart) - Households buy ( Customers) Market for Factors of Production: - Households sell - Firms buy

If consumers' taste or preference for a good or service changes, so too will its demand. The greater the preference for an item, the further out its demand curve will shift. More popular? Less Popular? Kale has become popular as a super food. What happens?

More it will shift to right increase less it will go left decrease Thus, the demand for kale has shifted to the right.

What does the Production Possibilities Frontier (PPF) show? • What points are possible but Production Inefficient? • What points are possible and Production Efficient? • What points are impossible

PPF shows the combination of output that the economy can possibly produce given the available factors of production and the available production technology. - Possible but Inefficient: Below the curve - Possible but Efficient: Along the curve - Impossible: Outside the line

What are assumptions for decision making?

Rational decision making is a term used to describe decisions that have three characteristics: decisions are made based on the self-interest of the chooser; they involve marginal analysis; and they are part of an overall pattern of choices that optimizes the overall well-being of the chooser. Rational decision making is one of the key assumptions in economics.

The second category of non-price determinants that shift the supply curve is resources and technology. Define Resource Cost and technology?

Resource cost: The inputs used to produce goods and services; also known as factors of production. , resources fall into one of four categories: land, labor, capital, and entrepreneurial ability. Technology: The knowledge, inventions, and innovations that can potentially increase resource productivity.

Changes in the number of sellers and the expectations of future prices can change our ability to supply today. Number of sellers and expectations of future prices

Sellers are market Participants who are willing and able to sell goods, services, or resources. The anticipated future outcomes, including prices, that sellers associate with the production of a good, service or resource.

What is opportunity cost?

Since resources are scarce and must be allocated between competing uses, there is always a cost associated with using a resource for any given purpose - the opportunity cost. Opportunity cost is the value of the next-best forgone alternative; the value of the opportunity that you gave up when you chose one activity, or opportunity, instead of another.

When the price of strawberries is high in the winter you purchase apples, but in the summer when the price of strawberries drops you purchase strawberries. Which one? Income Effect Diminishing Marginal Utility Substitution Effect

Subsititution effect

How does the Supply curve slope and why?

Supply Curve Definition: 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. On this slide we can see the basic shape of a supply curve. There is a positive relationship between the price of an item and the quantity supplied.

Discuss the differences between supply, the supply curve, and the supply schedule.

Supply refers to the definition of the Law of Supply, which states the quantities of a good, service, or resource sellers are willing and able to offer for sale at a variety of different prices over a fixed time period, everything else remaining constant. The supply curve demonstrates the various prices and quantities that are offered for sale in a graphical format. The supply schedule demonstrates the various prices and quantities that are offered for sale in a tabular format. The supply curve and schedule represent the same information, just in different formats.

What are the Supply determinants (6 of them in all)? Understand how they can change Supply

Taxes Subsidies Resource Costs Use of Technology Number of Sellers Expectations of Future Prices

One category of non-price determinants that shift the supply curve is taxes and subsidies. Define Taxes and Subsidies

Taxes: A payment made to government that is the result of economic activity. Taxes are generally collected from both individuals and firms. Taxes make it more costly to supply goods or services at each quantity, causing our supply curve to shift to the left. Subsidies: Definition: 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. Subsidies make it less costly to supply goods or services at each quantity, causing our supply curve to shift to the right.

A decrease in Ashley's income has caused the change in the graph below. (moved to the left) The good depicted must be: Normal Inferior

The correct answer is a) Normal. For normal goods, as your income decreases, your demand also decreases.

An increase in Ashley's income has caused the change in the graph below. (It moved to the left) The good depicted must be: Normal Inferior

The correct answer is b) Inferior. For inferior goods, as your income increases, your demand decreases.

An increase in the price of dinners at fancy restaurants would likely cause the demand for babysitters to __________. This is because fancy dinners and babysitting services are likely _____________. increase; substitutes increase; complements decrease; substitutes decrease; complements

The correct answer is d) decrease; complements. Parents who hire babysitters are likely to go out on dates to places such as fancy restaurants. These two goods have a direct, or complementary, relationship. Thus, an increase in the price of one will decrease the demand for the other.

What is the Law of Increasing Opportunity Cost? • What does it imply about the shape of out PPF

The law of increasing costs is a principle that states that once all factors of production are at maximum output and efficiency, producing more will cost more than average. As production increases, the opportunity cost does as well.

If you add another seller to the market, what happens to the market supply schedule?

The market supply curve is shifted to the right, as quantities increase. Look at the market totals. With 2 firms the totals were 17, 15, 13, and 11; with a third firm, they are now greater than before. At each price we now have access to the quantities of three suppliers, not just two. With the new firm in place, the market total decreases by 3 units with each price drop of $2 (instead of decreasing by 2). If you add additional suppliers to the market supply curve it will become flatter and flatter. The opposite will also be true; as you take suppliers out of the market, the supply curve will become steeper and steeper. If you add another seller to the market, the market supply will increase. We represent an increase in the market supply with a rightward shift of the supply curve.

Where does the Market Supply curve come from?

The market supply for a good, service, or resource represents the overall supply of output in a market at different prices over a fixed time period, all else held constant. We can calculate the market supply by horizontally summing the quantities supplied by each individual seller at each possible price. You add both subjects qualities together to get the market supply curve. Meaning when you add the qualities you plot the new points and it'll show the market supply curve

What happens when the price of a good drops from $5 to $3? With what we know so far you can imagine a supply curve. On that supply curve, what happens when the price drops?

When the price drops the quantity producers are willing and able to create will decrease. This is what we call a change in quantity supplied. Does anything happen to the curve itself? Does it move out or get steeper? No. A price change within the market you are talking about creates a move along the curve and not a move of the curve.

Understand difference between a Change in Quantity demanded

caused by a Change in Price of this good

Change in Demand

caused by a Change in a Nonprice factor—Demand shifter. When one of the non-price determinants of demand changes, the demand curve and schedule change as well. Graphically, an increase in demand is represented by the demand curve shifting to the right, while a decrease in demand is represented by the demand curve shifting to the left. Do not confuse a change in quantity demanded, due to a change in price, with a change in demand, due to a change in a nonprice determinant.

If dorm prices rise, the demand for college classes will....

decrease

What is economics?

is the study of how individuals and societies allocate scarce resources among many competing uses.

What are the Demand determinants (5 of them in all)? Understand how they can change Demand

• In terms of Income changes on Demand, understand difference between Normal and Inferior goods • Tastes and Preferences • Number of Buyers • In terms of Prices of Related goods changes on Demand, understand Substitutes and Complements and the way they can Increase or Decrease Demand • Expectations

What is the difference between micro and macroeconomics?

- Microeconomics studies the economy at the small-scale level, examining individuals and specific markets. - Macroeconomics studies the economy at a large-scale level, examining the total output, the price level, and other aggregate measures of the economy.

Resources-what are they?

- land - labor - capital - entrepreneurial ability. Land includes all-natural resources, or "gifts of nature". Labor is a human effort, both physical and mental. Capital consists of the tools, machinery, infrastructure, and knowledge used to produce goods and services. Finally, the entrepreneurial ability is the talent to combine the land, labor, and capital into a productive process.

Where does The Market Demand curve come from?

The overall, or market, demand for a good, service, or resource is equal to the sum of the willingness and ability to buy the item of all market participants. Graphically, the market demand curve equals the horizontal summation of individual demand curves.

What happens on the demand curve when the price drops from $5 to $3?

When the price drops the quantity increases. This is what we call a change in quantity demanded. Does anything happen to the curve itself? Does it move out or get steeper? No. A price change within the market you are talking about creates a move along the curve and not a move of the curve.

You have two options for transportation: the bus or the subway. If the price of taking the bus goes up, what do you think happens to your demand for the subway?

Your demand for the subway should rise. graph would be left

How do you calculate multiple individual demand?

add both quantities of both people together

What is the Resource Market and what is the Product Market?

- A resource market is a market where a business can go and purchase resources to produce goods and services. - The product market is the marketplace in which final goods or services are offered for purchase by businesses and the public sector.

What is Market Equilibrium?

- Market equilibrium is the point at which the supply and demand curves intersect - Market equilibrium is the price and quantity where the market will naturally go to.