ECO 203 - Unit 1
What are the unexploited gains from trade at the free market equilibrium?
$0 - it is at equilibrium
Expectation (Demand Shift)
Fear of future disruptions encouraged businesses and governments to buy more oil now and increase emergency stockpiles. - The expectation of a reduction in the future oil supply increased the demand for oil today.
Ann better at producing fish than bananas. What is her opportunity cost?
Her opportunity cost to gather banana's is even higher (aka it is more cost effective because she is "losing" more resource time doing something she isn't good at)
The statement, "at $55 per barrel, consumers are willing and able to purchase 5 million barrels of oil per day", is an example of reading a demand curve:
Horizontal
How to trade lettuce benefit from the advantages and specialization?
If people can't trade for other Goods, they won't specialize in producing just one good. Thus, trade is necessary if people are to benefit from specialization
Martha Stewart can run her network at a _____ opportunity cost than anyone else
LOWER - thus, she has a high opportunity cost to do anything else (such as iron)
Ebay exchange results in better matching buyers leads to...
Lower-valued goods are transformed into higher-valued goods
MC = ___ ___ + ___ ___ MC = market competition
quantity supplied; quantity demanded
Sellers compete with other _____; buyers compete with other _______
sellers; buyers
Decrease in Demand Graphic Representation
shifts the demand curve INWARD (0,0), DOWN, and to the LEFT SOUTHWEST
Increase in Demand Graphic Representation
shifts the demand curve OUTWARD, UP, and to the RIGHT NORTHEAST
What does specialization do to productivity? Why?
specialization increases productivity because it increases knowledge
Developing economies are less ________, poorer
specialized - brain power in economy is not high enough
Benefit of trade
take advantage of difference
marginal cost
the additional cost from producing a little bit more
marginal revenue
the additional revenue from producing a little bit more
Economics definition
the branch of knowledge concerned with the production, consumption, and transfer of wealth. - scarcity
Consumer Surplus
the difference between what you are willing to pay and what you must pay (the price) -* Consumers gain from exchange*
scarcity
the inevitability of trade-off is the consequence of a big fact about the world
"Law of demand"
the lower the price, the greater the quantity demanded
opportunity cost
the most desirable alternative given up as the result of a decision - the value of the opportunities lost. Important because: 1. First, recognizing trade-offs is the fist step in making wise choices. 2. Second, most of the time people do respond to changes in opportunity costs—even when money costs have not changed—so if you want to understand behavior, you need to understand opportunity cost.
Suppose a famous baseball player, Jacob deGrom, hires a high-school student to paint his house. Explain the opportunity cost.
the opportunity cost of painting a house is higher for Jacob than for the high school student
Without ______, specialization is not possible
trade
T/F: An increase in demand includes a shift of the demand curve northeast.
true
T/F: no individuals or countries are so productive or so unproductive that they cannot benefit from inclusion in the worldwide division of labor.
true
T/F: there are unexploited gains from trade at any quantity less than the equilibrium quantity
true
MB>MC indicates what
unexploited gains from trade
The "gains from trade" can be defined as: the difference between a good's ______ and its ____.
value; cost
MC>MB indicates what
waste
absolute advantage
when a country can produce the same good using fewer inputs than another country. *Example:* even if the United States did have the world's best climate for growing sugar, it might still make sense for Brazil to grow sugar and for the United States to design iPads, if the United States had a bigger advantage in designing iPads than it did in growing sugar.
Normal good
when an increase in income increases the demand for a good Ex: cars, electronics, restaurant meals Ex 2: NAME BRAND cereal
____________(verb) people is essential in smooth economic movement
incentivizing Example: pirate ship get paid when travelers SAFELY arrive (incentive to keep others alive)
Inferior Good
increase in income decreases the demand Ex: STORE BRAND cereal
As competition pushes prices down, the quantity demanded will _______ and the quantity supplied will _____.
increase; decrease
As prices are pushed up, the quantity supplied _______ and the quantity demanded ______ until at a price of $30 there is no longer an incentive for prices to rise and equilibrium is restored.
increase; decreasse
Specialization →______ ______ → increased productivity
increased knowledge
Normal good: demand ______ when income increases
increases
Specialization ____________ productivity
increases
In addition to the dollar cost of inputs, the use of inputs also imposes an opportunity cost because
inputs could instead be used in the production of other goods
Medical specialization increases medical ___________, which increases medical ________, which increases medical __________
knowledge; productivity; output
Absolute Advantage derives from -- the __________ cost of production
lowest
_______ ______ brings about an equilibrium in which the quantity supplied is equal to the quantity demanded.
market competition
For a particular producer, producer surplus can be calculated as the difference between: the _____ price and the ____ price at which producers would be willing to sell a given quantity
market; minimum
Reading a Demand Curve (Vertical): the _____ price that buyers are willing to pay for a given unit of oil
maximum
supply curve tells us the _______ quantity that suppliers will supply at different prices or the ______ price at which suppliers will sell different quantities.
maximum; minimum
Producer surplus + consumer surplus = ?
measure of the total gains from trade to market participants
The y-axis of a demand curve is _____
price
More generally, the difference between the lowest price that a producer is willing to sell a good for and the actual price is the ______ ______
producer surplus
When self-interest aligns with the broader ______ interest, we get good outcomes
public
Reading a Demand Curve (Horizontal): the ______ buyers are willing and able to purchase at a given price
quantity
The x-axis of a demand curve is _____
quantity
What will happen to the supply of a good if the price of an input rises?
Supply will decrease because sellers are willing to sell less at any given price.
If the price of oil is $40 per barrel and Saudi Arabia can produce oil at $2 per barrel. What is Saudi Arabi's producer surplus?
$38
If furniture prices rise, which of the following would happen as a result?
-The supply of goods with inputs similar to furniture will decrease.
Important Demand Shifters
1. Income 2. Population 3. Price of substitutes 4. Price of complements 5. Expectations 6. Tastes
Supply Shifters
1. Input prices 2. Technology 3. Number of sellers 4. Expectations 5. Taxes and Subsidies 6. entry or exit of producers 7. changes in opportunity costs
Three Benefits of Trade
1. Trade makes people better off when preferences differ 2. Trade increases productivity through specialization and the division of knowledge 3. Trade increases productivity through specialization according to comparative advantage
What happens if the central bank prints too much money?
1. increase in general level of prices 2. people may find it difficult to figure out the real value of goods 3. people may feel poorer
Rachel has just graduated from college in the United States. Although she has a job offer for $50,000 a year as an editor of a small technology magazine, she is considering taking a year to travel across India. Which of the following will increase Rachel's opportunity cost of traveling through India? A. an increase in the cost of living in the US B. an additional $5,000 sign-on bonus C. an increase in the cost of food in India D. a decrease in the cost of international airplane tickets
B. an additional $5,000 sign-on bonus Note: opportunity cost increases because Rachel now has more to lose if she misses out on taking the job
Jan is a buyer in Vernon Smith's classroom experiment of the market model. Which does she know? A. every seller's willingness to sell B. her own willingness to buy C. the market equilibrium price D. the market equilibrium quantity
B. her own willingness to buy
If Carl voluntarily sells a set of skis to Lathika for $200, it must be that: A. the skis must provide exactly $200 in value to Carl. B. the skis must provide exactly $200 in value to Lathika. C. Carl and Lathika value the skis differently. D. Carl and Lathika value the skis identically.
C. Carl and Lathika value the skis differently.
The financial crisis of 2008-2010 had a huge impact on the U.S. housing market, causing the number of uninhabited houses to be far greater than the number of people able and willing to buy a house. What probably happened in the housing market during this time? A. Demand for houses rose, and the supply of houses fell. B. The quantity of houses bought and sold increased. C. Housing prices rose. D. Housing prices fell.
D. Housing prices fell.
Substitute - Demand Shift
Decrease in the price of a substitute will TYPICALLY decrease demand for the other good *Ex:* decreasing price in Pepsi, decreases demand in CocaCola
Complements - Demand Shift
Demand for a good INCREASES when the price of a complementary good decreases *Ex:* If hot dogs are on sale, the complementary good (hot dog buns) sale demand will increase [even though the buns aren't on sale].
What is the great economic problem?
how to arrange our scarce resources to satisfy as many of our wants as possible.
What explains why local restaurants provide better customer service than cable companies?
incentives
(NOT/YES) everyone benefits from increased trade
NOT - HOWEVER, overall, greater trade increases total wealth
Resveratrol (found in the plant knotweed) has been shown to increase life expectancy in worms and fish. What are your predictions about the price and quantity of the Japanese knotweed?
Quantity demanded will increase - graph shift northeast Equilibrium price will increase on supply end
Supply Curve Horizontal Reading
Read "horizontally," Figure 3.8 shows that at a price of $20 per barrel suppliers are willing to sell 30 million barrels of oil per day.
Demand Curve Horizontal Reading
Read "horizontally," we can see from Figure 3.2 that at a price of $20 per barrel demanders are willing and able to buy 25 million barrels of oil per day.
Supply Curve Vertical Reading
Read "vertically," the supply curve tells us that to produce 30 million barrels of oil a day, suppliers must be paid at least $20 per barrel.
Demand Curve Vertical Reading
Read "vertically," we can see that the maximum price that demanders are willing to pay for 25 million barrels of oil a day is $20 per barrel.
The demand and supply curves show how buyers and sellers ________; the interaction of buyers and sellers ________.
Respond to prices; determines the prices
What part of the supply curve represents the location of higher cost oil.
Right-most part of the supply curve
In a market where a good has one price for all consumers, which consumer gets the most consumer surplus from the good?
The consumer who values the good the most
If competition pushes the price down whenever it is above the equilibrium price and it pushes the price up whenever it is below the equilibrium price, what happens at the equilibrium price?
The equilibrium price is stable surplus - goes down shortage - goes up thus, even now
"law of supply"
The higher the price, the greater the quantity supplied—this is often called the
At quantities lower than the equilibrium quantity, what is true?
There are unexploited gains from trade because buyers are willing to pay more than sellers require for another unit.
Matilda sells her iPhone, which she considers worthless, to Gabriel for $200. Explain the trade value.
This trade created value because Gabriel is buying the iPhone for more than Matilda thinks it is worth
Usain Bolt is the world's fastest human. You say you could probably mow his lawn very quickly, much more quickly and at least as well as Harry, who mows Lawns for a living. Why would you Bolt pay Harry to mow his lawn rather than do it himself?
Usain Bolt has a comparative advantage in running but Harry has a comparative advantage in mowing. Harry faces a much lower opportunity cost of mowing lawns than Usain Bolt does
Trade based on absolute advantage (WOULD/WOULD NOT) occur in a case where one party can outproduce the other in all goods
WOULD NOT
Total producer surplus -- area ______ the supply curve and _____ the price
above; below
Markets find equilibrium, and maximize gains from trade, when:
buyers and sellers act in their own self interest.
Total consumer surplus
calculated by adding up consumer surplus for each consumer and for each unit - On graph area shaded beneath the graph.
Trade based on ______ _____ allows us to produce and consume more, even if no one ever gets better at producing
comparative advantage
_________ ________ explains why some countries are richer.
comparative advantage - Although ALL countries have the advantage with trade, one country will always come out with quantitatively more product. They are wealthier.
theory of __________ _________ says that when people or nations specialize in goods in which they have a low opportunity cost, they can trade to mutual advantage.
comparative advantage - not only explains trade patterns it also tells us something remarkable: A country (or a person) will always be the low-cost seller of some good.
____ will push prices up whenever there is a shortage.
competition
______ will push prices down whenever there is a surplus.
competition
The reason the fewer barrels of oil are demanded at higher prices is that:
consumers would rather forgo some low value uses for oil rather than pay high prices. - Recall, low value uses can easily be substituted
Economic growth in the modern era is primarily due to the: ____ ___ ____ ___
creation of new knowledge
Flooding in Iowa destroys some of the corn and soybean crop. What will happen to the price and quantity for each of these crops?
crop will have a decrease in supply - decrease in supply will lower the equilibrium quantity and increase the equilibrium price
Inferior good: demand _____ when income increase
decreases
Gains from trade are maximized when: the market price is _________ (less,higher,equal) to the equilibrium price.
equal
T/F: An increase in quantity demanded includes a shift of the demand curve northeast.
false - movement along a FIXED demand curve
"High value" use of oil -- means use for oil which has ____ (few/many) substitutes
few Example: oil for jet fuel
Supply Curve
function showing the quantity of oil that supplies would be willing and able to sell at different prices Y axis: price X axis: quantity a function that shows the quantity that suppliers would be willing and able to sell at different prices
At the equilibrium price for oil, only the ____ value buyers buy oil and only the _____-cost sellers sell oil.
high; low