ECON 1110 Prelim 1
price elasticity of demand
- (Percent change in quantity demanded)/(percent change in price) as you move along the demand curve mathematically(midpt. Or "arc" method) Always technically negative
perfectly competitve
- -where price determined by the market, no buyer or seller controls market price, they get the market price, and react to it Not perfectly competitive-somebody can set the price for themselves
in right situation, markets
- Allocate goods to those that value them most (as measured by highest WTP) - Allocate sales to those that can do it at lowest cost - Make sure that in every transaction, the buyer values the good more than the seller (making everyone happy about the deal) - Makes sure any buyer that doesn't buy values the good less than any seller that doesn't sell (e.g., no surplus-generating deals remain) - Any party that didn't sell/buy didn't want to - Any way you tweak it, messing with what a working market does on its own will lower surplus - even if it makes SOMEONE better off, it does it at the cost of someone else - And since efficiency means you can't make anyone better offwithout making someone else worse off . . .
price ceiling
- Artificial restriction on price, not allowed to rise above ceiling/go above certain level - Anti-price gouging laws, rare in US today - Used to prevent group from gaining large profits in times of unexpected shortage - Rent control - City council sets max legal rent at $1000 month Below free market equilibrium-> Quantity demanded-400->600, Quantity supplied-400->200 - Difference btw. Demanded and supplied-200, 400 more people that want to rent an apt at $1000 than ppl willing to supply apt at $1000 - Market equilibrium quantity=200, doesn't matter, 400 ppl still want apt. - Generates market inefficiency-blocking transactions that would've made both parties happy - inefficiently low quality also occurs
when tweak perfectly competitive markets
- Assume if left everything alone, market would be efficient-no market power, perfect info on all sides, identical products sold, etc. - Either be surplus loss bc some transacitions didn't happen, or did, and too many transactions happened
factors that influence price elasticity of demand
- Availability of close substititues-more of close substitutes, more elastic demand is - Necessity or luxury-> More need it, less elastic demand is - Share of income spent on good-> If doesn't represent big share of spending, less elastic - Short vs. long run, more elastic in long run bc then can change your behavior
factors that influence price elasticity of supply
- Availability of inputs-> Harder to ramp up production supply if inputs hard to come by - Diamond mine-changes in price of diamonds not going to affect supply as much bc hard to find more diamond mind ridesharing->more responsive to price, more available input is, more elastic it is - Short vs long run->Short run supply is less elastic, Long run, supply is more elastic - Longer to resp. To price change, more responsive, so more elastic in long run
same shift in demand, buy supply curves w/different elasticities, how does that drive price/quantity change
- Can get v diff new equilibrium driven by relative elasticity of supply and demand in these markets - If supply elastic-price inc. a lot, quantity dec. a little as demand changes
directions of supply/demand curve
- Downward demand curve, upward supply curve - price inc., quantity supplied inc.
9. when markets don't achieve efficiency, govt. can step in to help
- Drivers have no incentive outside of govt. To think about car's emissions impact health of those around them
Arc elasticity vs. general elasticity of a curve
- Gen. elasticity of curve-general demand overall, what expect demands to do overall - Above calc is arc elasticity-elasticity at certain pt
graphical equilbrium
- Happens when quantity supplied = quantity demanded - Supply curve shows quantity supplied - Demand curve shows quantity demanded
core principles of economics
- How do people make decisions? - How do the choices of individuals interact when they make decisions? - How does all that play out in the economy as a whole?
shifts in demand and elasticities
- If demand elastic, large ∆ in quantity, smaller ∆ in price - Price rising a lot->small change in quantity, large change in price - If demand ineqlastic, small change in quantity, and big inc. in price
7. resources should be used efficiently
- If econ. Is efficient, no trade leftover that would be voluntary->no one left willing to trade - Efficiency means nothing abt equity/fairness, but heads a lot - So really, resources should be used as efficiently as possible to achieve society's goals and one of these goals might be efficiency, but one of them might be equity - How to make pie as big as possible on what makes society happy and glad - Maximizing the surplus-total gain to firms and individuals - Making pie bigger->theoretically make everybody at least as well off as they used to be, nobody worse off bc more pie than they used to be - But often gains unevenly distributed IRL, also sometimes pie gets bigger, some get worse off, some better off, but diff. Btw. two enough that pie inc. overall
shift in demand: changes in income
- If ppl have more money want more/less of smth - Normal good: If income goes up, demand more of that good, even at the same price, willing to buy more expensive apartment as get higher paying job - Inferior goods: As income goes up, want less of it, Income inc., demand dec., Like how much ramen you buy bef./after you get an actual job-> Something you want less bc you have more money - Price didn't change, but desire to buy more/less of them change
if quota
- If quota-forcing transactions that wouldn't happen on their own devices - Subtract from social surplus-> People being forced to sell below price want to pay and people being forced to buy above WTP
consequences of price floors
- Inefficient allocation among sellers - Always sellers have cost lower than those who don't - Not always case that those that seel are those that have lowest cost of selling - Wasted resources->harder bc less jobs - Quality too high-firms start offering things you don't want, bc can't lower price-> Useless bonuses, try to attract ppl in other way besides lower price - Black market-ppl working for wages under table
consequences of price ceilings
- Inefficient allocation of resources->bef.price guarantees ppl who value it most get it - Price mechanism usually allocates scarce resources to those that value them more - Wasted time, effort, money, etc in transactions - Those that get good have to work harder to get it - If constrained number of transactions, work harder-> Do this via queuing, another way of allocating good, not necessarily most efifcient - Beneficial quality improvements may not happen-bc no way to recoup good, no way to recuperate good, no way to recoup cost, bc can't charge higher price, no incentive to do repairs, prevent quality improvements - Black markets-constrained market/quantity, don't operate in standard market form anymore, ppl illegally sublet apt, ppl doing things under the table
supply and change in input prices
- Input: good/servie sed to produce other good/service Input price goes up ->supply dec. Input prices falling->supply inc Cocoa beans cheaper, cheaper to make more chocolate
price elasticity and law of demand
- Law says that as price rices, quantity demanded falls, and vice versa, meaning ∆Q and ∆P always opposite signs
when doing combined ppf
- Look at each PPF->see how many each can do at a point - Example: if lseeing if 11 charts and 14 notes possible, see if combined there's a point where together they can produce 11 charts and 14 notes
are markets great at everything
- Lots of requirements for perfectly competitive markets to work correctly Everyone is a price "taker" - Lots of buyers, sellers, homogenous product, free entry/exist, perfect common information - But also as society worry about efficiency and equity - Efficiency good toll when: Find desired goal, then most efficient way to get there->highest efficiency given your constraint
consumer surplus in larger markets
- Make quantities larger and steps in demand curve appear smaller and smaller - Eventually get a more standard looking smooth demand curve - Ender's game for all customers
changes in number of producers and supply
- More ppl., more supply at any given price
gains from voluntary trade
- No one takes trades that make them worse off voluntarily - Never accept a trade worse that your own opportunity cost
elasticity of demand: income
- Now percentage change in quantity demanded w/percentage change in come - How does how much you want something as income changes - Help you determine normal vs. inferior good - Inc. elasticity>0 ->normal - Inc. elasticity<0 ->inferior Like ramen - Based on size of elasticity also know if luxury or necessity - income -inelastic normal goods (income elasticity of demand<1) ->necessity - Income-elasttic normal goods (income elasticity of demand>1) ->luxury
5. there exist gains from trade
- Option to trade won't make anyone worse off but might make somebody better off - Ppl can benefit from specialization-ppl. - - Focus on different tasks and then trade your skills w/other ppl, bc ppl can benefit from trade - Why don't have to create all the things you want, economy creates them for you and you can trade w/otehr ppl to get those things that you want
basic principles of micro
- People maek choices to solve the "limited resources/unlimited wants" problem - The true cost of any choice is the option you gave up(opp. cost) - "How much/how many" choices are made on the margin" - People respond to incentives - Trade can make everyone better off - Markets move toward equilibrium - Resources should be used efficiently (within society's equity goals) - Markets usually push us toward efficiency and when they don't, maybe the government can help
elasticity extremes for demand
- Perfectly inelastic demand-if apply force, demand doesn't change(Insulin, salt); Demand has not response to price changes; quantity demand of good is largely no responsive to price; demand is straight vertical line - very elastic demand, very responsive to price changes bc indiff. btw. two goods->dollar bills, pink v green tennis balls, horizontal line
price impacts total revenue:
- Price effect-change in revenue due to price - Quantity effect-change in revenue due to quantity that results from change in price - Bc price rising means quantity falls, quantity and price always moving in opposite directions
prices as economic signals
- Price tells the seller whether or not selling is a good idea-> Is it greater than your cost? - Price tells the buyer whether or not buying is a good idea-> Is it worth more to your than the price - Sometimes price fails as true signal->Asymmetric information-one party knows more
traits of efficient markets
- Property rights-who legally owns right to sell things - Goods have specific owners that can seel them as they please - Economic signals-> Something provides information to let people make the right economic decision(usually price) - Conveys information very quickly, efficiently - wages/choice of major
quota rents
- Quota rents-surplsu gains to individuals holding right to sell under quotas - Consider diff. Btw. WTP and cost at lower Q - One could have licenses and rent them to ppl, where price is determined by diff btw buyer price and seller price at quota limit - buy/sell quotas-medallion process - per unit amount that the license holder earns from owning the license equal to the difference btw. the demand and supply price
forcing/prevent transactions
- Removing two parties that perfectly happy w/stuff changing hands - If we prevent a sale that would have happened, we remove someone with WTP ≥ price and someone with cost ≤ price, meaning we remove a transaction where WTP ≥ cost, and society would have gotten surplus it now can't - If we force a sale that wouldn't have happened, we force a transaction where WTP < price and cost > price, meaning we generate a transaction where WTP < cost, and society would have had more surplus if it had never happened - Ignore best choice is to not buy - Require to force some people with higher WTP to buy than and lower Price than expected to sell->results in negative consumer surplus
8. markets, when left to their own devices, will usually lead to efficiency
- Since markets let ppl trade until they're at least as happy as they were before, maybe happier, and efficiency is when no more trades are left that ppl want to do - Indiv. Acting in their own best interest trying to maximize own well being will also maximize social benefit->make pie as big as possible in trying to improve own situation - But doesn't acct for diff. Btw. model and real world
not all advantages the same
- Slopes and ratios show comparative advantage in each good - comparative advantage ≠absolute advantage - Absolute advantage: someone (or country) has absoluteadvantage in something if they can produce more of it than other people (or countries), given who you are, can you produce more of something - Can have absolute advantage in everything
loss v transfer and price ceilings
- Some of DWL is strict loss, surplus that's no longer possible, bc transactions no longer happening - Some of the changes are transfers(moving $ around), reallocation of existing surplus - Does anyone gain from a price ceiling? - Some buyers win(lower prices->higher individual CS) - Some buyers lose(lower quantity->some used to get CS>0, now get CS = 0, bc didn't get apt) - All sellers lose-> Lower prices->less PS for those that still sell; Lower quantity->loss in PS for those that can't sell anymore
welfare of sellers when price inc.
- Some sellers that didn't sell now do, get new PS - Some that used to sell still do but get more PS then before bc of higher price
what keeps price ceilings around?
- Someone is winning-those who get to buy, now at a lower cost - People fear the unknown(market outcome) Sometimes ppl understand the consequence - Also trading efficiency for equity?
changes in price of related goods/services affecting supply
- Subsititutes in production If price of good A inc.-> production of good B dec. Even though nothing happened to price of good B, prod. dec. - deciding in building civics or accords
shift in demand: number of consumers
- Take individual demand curves for a particular good and to get market demand curves - More people = more demand (or at least no less at any given price - Have certain amt of demand at a particular price, and more people show up, no way demand goes down - Market demand curve-individual demand curves, as more people com einto that market for any given price, demand can only rise
What happens when individual decisions interact
- Trade can make them better off - Markets let people trade until they don't want to anymore - Markets usually mean when people don't want to trade anymore, the economy is operating effciently - But when it isn't, the government might have a role in fixing the problem - People have to make choices, which they do by considering the true costs and benefits of their actions.Those choices, at large, occur in markets, which drive people to act in ways resulting in the most efficient use of resources by changing their behavior to make themselves as well off as possible. Sometimes those markets fail, meaning that the result is inefficient, and then the government can step in and try to fix things.
shifts in demand: changes in price of related goods/services
- Two different kinds of goods that are related to other goods,substitutes/complments - Substitutes-price of good A inc., demand for good B goes up - Good where price of good A going up means demand for other good also rises - If a price of good A rises, demand for good B rises, all else constant, even if price of that good didn't change - Ex: if deciding btw. Going to movies/watching netflix and discovering movie ticket price tripled - Complements-price of good A inc., demand for good B dec. - Stuff usually consumed together-DVD/DVD players - If price of hot dogs rise, demand for hot dog buns dec. - Bc price of associated good has inc., want fewer of other good - At same price, the quantity you want has changed->change in demand
DWL and price ceilings
- Two types of surplus vanish - Demand-ppl w/WTP above old price that no longer buy - Supply: ppl w/costs below old price that no longer sell - Supply curve doesn't shift bc change in price->movmeent on curve - Calc dwl-using triangles - consumer surplus greater proprtion tha producer surplus
cross price elasticity
- Very similar to own price, now percentage change in quantity A demanded w/percentage change in price of good B, now two letters invovled - Sign tells us what type of good - If good substitutes, positive elasticity-> Inc. in price of B, quantity demanded of good A also rises, positive/positive, like chicken/beef -If goods compliments-> negative elasticity-> If price of good B rises, demand of good A dec., bc less need for hot dog buns if inc. in price in hot dogs
price will move until
- We define equilibrium with two pieces of information - Equilibrium price (sometimes called market clearing price) - Equilibrium quantity
surplus and shortage and price
- When there's a surplus (q supplied > q demanded), the price drops - When there's a shortage (q supplied > q demanded), the price rises
shift in demand:changes in expectations
- World hasn't changed yet, but you expect it to change - Day if you get the call for a new job->Start buying nice things/nice dinner, bc expecting change in income to happen, demand changes now
making ppf for entire houshold
- aim for lowest opportunity cost, Whoever makes coffee cheaper, whoever has the comparative coffee advantage - Combine to most efficient, use one on top w/the lowest opportunity cost for cappucinos, and on bottom use the line for the person w/the lowest opportunity cost of coffee - When combining to PPFs, make sure one w/smaller slope on top, bc the opportunity cost for that is lower, has, comparative advantage
all else constant when supply curve shifts out(right)
- an inc. in supply, to reach a new equilibriu, price dec. quantity inc. - Supply curve shifts in(left), vice versa
supply and change in technology
- anything that improves efficiency - As get better technology, supply inc.
graphically, producer surplus
- area above supply curve and under price
6. markets move toward equilibrium
- as long as benefit exists and desire exists) - market is chance for 2 ppl to talk to each other -prices push people to equilibrium->give information, can also be time, (inc. prices tell u if have car, good time to get rid of it) - People are going to alter their behavior until altering behavior doesn't make sense anymore from their point of view( Switching lines in grocery store when new line opens up) - since ppl respond to incentives and use all opportunities to make themselves better off - If someone is willing to pay for a good/service and someone thinks they can benefit by offering that good or service, they will
why even if have absolute advantage, don't mean have comparative advantage
- because even if absolute advantage greater, look at comparative advantage, curve flatter, opportunity cost for thing on x axis greater, why US trades w/Malaysia, bc they have comparative adv. in things like clothing
do price ceilings and floors always mean lower surplus
- binding->actually constrain market behavior - price ceiling can't be above equilibrium price/price floor below equilibrium price
CS and welfare
- can quantify now how much cs changed when price inc./dec. - if price inc., then some ppl who still buy lose cs, and some just don't buy anymore
price floor
- cer- Artificial restriction on price, not allowed to fall below floor - Common in agricultural goods, where price of commodity can't fall below certain level - Minimum wage law You-selller, selling labor, firms-buying labor - Market for labor-price floors->higher wage->better for workers? - Example-govt sets min. Wage at $10-> Surplus of labor supply bc qs>qc Number of transactions = 300 - Equilibrium quantity determined by lesser of 2 groups - certain transactions still don't happen-> DWL - Price floor-> PS inc., CS dec.(ps-you, employee) - Price ceiling vice versa
shifts in demand
- change in demand-Movement of the curve, Outside factors, Anything that changes demand except the price, Changed by: price of related goods, income, tastes/preferences, expectations, number of customers, Requires you to redraw curve, draw new lines - change in quantity demanded->movemenet along the curve, moving up/down curve, as price rise/falls, people want more/less of something
elastic, inelastic, and unit elastic
- elastic= |Elasticity|>1 _> 1% inc in price-> more than 1% dec. in quantity - inelastic = Quantity demanded doesn't move a lot, small responses to price changes; |Elasticity|<1 _> 1% inc in price-> less than 1% dec. in quantity demanded - unit elastic = |E|=1 -> 1% inc in price-> exactly 1% dec. in quantity demanded
reallocation in buying
- everyone who didn't buy at 25 has WTP lower than price - ΔCS=(WTPdidn′t−P)−(WTPdid−P) -> WTPdidn′t−WTPdid<0
what can demand curve tell us
- graphical relationship btw. Price and quantity demanded - Can quantity demanded change w/o price changing - What make make the market demnand less at any given price If quality changes
PPF and opportunity cost
- haven't put dollar sign, but still have cost - gives you tradeoff ratio btw. two goods, get one good in terms of another
law of demand
- higher the price, all else equal, the lower quantity demanded If only the price inc., then ppl want less of it - Some people don't buy something at all until the price goes low enough - individuals will buy more of something when it's cheaper - a decrease in price increases quantity demanded
household ppf
- how much I can produce given resoruces - each pt rep. diff. thing, highest point Highest point on y axis represents how many cappucinos can make if all of time and energy goes towards two, and x axis is opposite -variables rep. tradeof
if supply and demand move in opposite directions
- know what happens to price, not to quantity, need to know magnitude of shifts - Effects are in opposite directions - Shift out in demand raise price and raise quantity, shift down in supply will raise christ and lower quantity - Price effects agree and the quantity effects fight - shift up in demand
change in expectations and supply
- knowing when demand for something peaks(storing gas to sell in the summer), an increase in the anticipated future price of a good or service reduces supply today, a leftward shift of the supply curve - fall in the anticipated future price increases supply today, a rightward shift of the supply curve
quality controls(quotas)
- limit on number of transactions, distorts market outcomes by restricting number of transactions via systems like licenses, certifications - Still causes DWL, moves us away from efficient outcome - Any time diff. Btw. seller price and buyer price, surplus to be made - Black market problems-ppl do transactions under table - Dec. total surplus, ppl who have right to make sales can charge higher price
unit elastic demand and price dec. and revenue
- loss from price = gain from quantity -> no change
elastic demand and revenue when price dec.
- loss from price<gain from quantity-> revenue inc
deadweight loss
- loss in total social surplus when something moves quantity of transactions away from socially efficient quantity DWL
supply and changes in price of complements in production
- lumber and sawdust - If price of good A inc.->production of good B inc.
how to determine if willing to trade
- make sure never get deal worse than trading w/self, Look basically at slope of each curve
reallocation in selling
- meawhile everyone who didn't sell has cost higher than price - ΔPS=(P−costdidn′t)−(P−costdid) -> =−costdidn′t+costdid<0
changing opportunity cost
- moving resources from one good to another doesn't always get the same ratio - World of guns and butter - Get best engineers and move them from farmer - At B1, Take people who were bad at making butter, bc ones who shifted attention bad at initial task, get huge gain - At a closer to left, give up A and get very little in B2, bc running out of farmers, getting to good farmers, and asking them to become bad engineers, becomes small gains, big losses - Curved PPF illustrates as move from extreme to another extreme, at first moving a little costs little, gain a lot, as continues to the left, dec. - Moves from what ppl are worst at to what ppl are good at, bc at first only telling ppl bad at smth to
comparative advantage of a good
- opportunity cost of producing it is lower than other people's, has to be comparative, - By allowing each other to negotiation, can use comparative advantage, and produce more goods overall - One can make smth cheaper than what they sacrifice than the other
combining cs and ps
- perfectly competitive market, CS above equilibrium, PS below - people in bottom right triangle, didn't buy bc didn't want to - existence of ticket market->consumer and producer surplus - Everyone that buys a ticket has a WTP≥P, everyone that doesnm't have must have a WTP<P - Everyone that sells a ticket has a cost ≤ P, and everyone that don'ts has a cost > P - The market allocated ticket sales to people that can give them up the easiest - Any attempt to deviate from that lowers total surplus
extremes of price elasticity of supply
- perfectly inelastic-> 0, given yrs' flue vaccine, fresh fish at market, only certin amt available, verticle straight line - perfectly elastic->infinite supply, horizontal line
price supply elasticity
- positive, higher price, greater quantity supplied
total revenue
- price X quantity, money take in
what happens if demand and supply inc., but demand up a lot more
- price and quantity inc.
three manners of government intereference
- price ceiling, price floor, and quality controls(quotas)
combining supply demand and equilibrium
- price driving factor towards equilibrium - some Price results in some situation where no buyer/seller wants to change their behavior given the price they see->equlibrium
demand types of elasticity
- price elasticity of demand, cross price elasticity of demand, income elasticity of demand
supply side elasticity types
- price elasticity of supply
elasticity
- responsiveness to price, point of comparison btw goods btw. Goods and which ones r more/less responsive to price
markets fail when:
- side effects(externalities) - Where costs/benefits are felt by ppl who are not inside the system - Market power-when firms get big and can influence prices on their own - Goods ill suited for efficient markets (national defense)
why price floors?
- some sellers win big - Policy makers don't understand markets - Might be willing to give up efficiency for equity - Min. wage important, sacrifice some things to get another - Monopsony model of min. Wage-> if empoyers have market power->price floor can inc. wages and employment
for linear demand curves, elasticity
- starts above 1 at lower Q, crosses 1, then goes below 1 at higher quantity
if reallocate surplus by force
- taking transaction from buyer that got a ticket when P = 25 and give to one that didn't, taking transaction from seller that sold a ticket when P = 25 to one that didn't, and forcing different number of ticket deals all lower surplus
slope of ppf
- tells us about opportunity cost of changing production levels between efficient points How much of good A do we give up to get one more unit of good B
producer surplus
- the amount a seller is paid for a good minus the seller's cost of providing it - price minus cost - Net gain seller gets from selling good - assume sellers sell if the transaction gives PS≥0 - No one will sell if cost>price, not going to be less off
willingness to pay
- the maximum amount that a buyer will pay for a good - >max price at which someone will purchase a good - Demand curve/schedule built up from WTP - If know WTP< know at what price decide to buy or not - If know certain ppl's WTP, then can tell at certain price, how many people WTP at a given price
opportunity cost
- the most desirable alternative given up as the result of a decision - next best option
economics
- the study of how society manages limited resources when faced w/unlimited wants/needs
trade in a ppf world
- there exist potential gains from trade - Makes sense to specialize and trade w/someone else for other goods/services
if demand is unit elastic
- they cancel each other out and total revenue is unchanged
elasticity across demand curve
- w/a linear demand curve(not perfectly elastic or inelastic) , moving down(lower price) the demand curve means calculated elasticity going to change at each point-> Bc relationship btw ∆Q, ∆P vs percentage ∆s - Starts elastic at top, becomes unit elastic halfway down, then inelastic toward bottom-> As go down demand curve, elasticity dec. - Linear demand means ∆Q/∆P a constant-> As move down demand curve, P is dec., Q is inc.; Numerator of epsilon is constant, denominator is growing
how can inc. beyond initial ppf
- when econ. growth occurs, PPF shifts outward, can now produce more w same outputs - through specialization and trade, can consume a combination of goods beyond their initial PPF
When markets fail
- when markets inefficient - when markets fail-> Market power-buyers/sellers influences, Externalities, Public goods/common resources, Private information - sometimes political pressure makes governemnts or other powers interfere, sacrificing efficiency for other goals
equlibrium
- when price and lbs demanded and lbs supplied the same
Production Possibilities frontier and trade
- world w/two goods to illlustrate economic trade-offs - shows maximum producible amount of one good, given some level of production for the other - ex. coffee and cappucino - limited resources to produce eitehr one-only so many time
inelastic demand and price dec. and revenue
->loss from price>gain frmo quantity ->revnue dec.
economic growth
-expands out ppf somehow
figuring out joint ppfs
1. Find opportunity costs and identify comparative advantage 2. Consider extremes(provides intercepts, both parties producing solely the same thing) 3. Consider who should move away frmo each extreme first 4. Whoever ahs comparatie advantage in the ting we're now starting to produce 5. if you want to draw it, find where that person's time "runs" out 6. Start the OTHER person's PPF there, connect to other axis
four core ideas about how individuals make deicsions
1. choices are necessary- have to give/pick up things, must make choices, hinges on idea that resources are scarce, but we want it all 2. it's all about opportunity cost- rank all choices, opportunity cost of top choice = giving up next best choice, what matters is deff. btw. choices, sometimes opp. cost and price match up nicely, epxplains why more educated women have children later in life 3. people make quantity choices "on the margin"-for questions that aren't binary, ppl. make decisions in incremental steps, at each stage in the trade-off decision, ppl compare costs and benefits of doing a little bit more/less, marginal analysis: study of marginal decisions 4. people respond to incentives that motivate people to action and exploit opportunities, ppl will take advantage of opportunities to make themselves better off until these opportunities no longer exist, incentive motivates ppl to action, fund. assumption of econ. behavior, ppl make decisions by weighing costs against benefits and picking what makes them best off (why injury rates inc. as better NFL equipment)
normative economics
Benefits from trade aren't automatically distributed evenly, economics should value statements, judgments, and opinions on economic policies, statements, and projects - evaluates situations and outcomes of economic behavior as morally good or bad.
Change in Supply vs. Change in Quantity Supplied
Change in supply means shift of whole curve, Change in the Quantity Supplied means shift along the curve - Change in supply: input prices, price of related goods, technology, expectations, numbers of producers, Shift of supply curve - Change in quantity supplied-price
elasticity, price, and quantity effect
E<1 ->size of price effect> size of quantity effect E>1-> size of price effect<size of quantity effect E = 1-> size of price effect = size of quantity effect
positive vs. normative economics
In a competitive market, all of the chocies along the PPF display productive efficiency, while the specific choice on the frontier that society picks is the one with allocative efficiency
Will producers sell if: P < Cost P > Cost P = Cost
P < Cost --> no P > Cost --> yes P = Cost --> also yes
When ↑ D and ↓ S,
P ↑ but Q is ambiguous
When ↓ D and ↑ S,
P ↓ but Q is ambiguous
When ↑ D and ↑ S
Q ↑ but P is ambiguous
When ↓ D and ↓ S,
Q ↓ but P is ambiguous
if current price above market price
Results in a surplus, bc very few want to buy
shift in demand: changes in tastes
Stuff you like/dislike, taste change as world changes->Introduction of teen paranormal romance section in bookstore
Consumer surplus
WTP-price if you buy - Net gain a consumer gets from purchasing the good - Total household consume surplus= adding up all consumer surplus, how much better off is family after trip to bookstore
graphic consumer surplus is
area under demand curve and above price
if curves move together, quantity and price...
can tell you what happens to quantity, not to price, need to know magnitude of shifts
supply shift
change in quantity demanded to get to new equilibrium
marginal decisions
choices abt how to value the next___ of whatever talking about, like next hr of sleep, next muffin
linear ppfs
constant opportunity cost
if Price<williingness to pay?
do buy
calculating ∆in revenue just from the increased quantity as prices dec. from 16-14
do inc. in quantity X new price of dvds)
if P>willingness to pay?
don't buy
market =
horizontal sum of individual demand curves
ppf shows
how much of two goods someone or an economy produce/given resources
partial equlibrium effects
impact on just one market, If this happens in one market, what happens/how impacts policies/actions in one market
if demand inc., quantity of supply
increases
general equlibrium
interaction between many different markets, a lot more complciated
efficiency in allocation
is doing most in giving society what they want, also efficient in production
is trade always good
models show both benefits, but doesn't promise we share the benefits of trade "fairly"
if one curve shifts, what happens to other curve?
move along the other curve
are inferior goods income elastic or income inelastic?
neither
efficient in allocation
no other efficient in production point other efficient in production point would be better from society's point of view
comparative advantage
opportunity cost of each unit produced
in perfect world, if quantity supplied doesn't meet quantity demanded
price goes up
efficient in production
resoruces used such that couldn't produce more of anything w/o giving up something else
why is the ppf often curved instead of straight
some resources are better suited for producing one good than another(only so many farmers that switch to producing guns are actually good at making guns), means there are diminishing returns when moving such resources away from producing what they are best suited for
p = wtp, then?
still buy
social surplus
sum of consumer and producer surplus
equilibrium
supply = demand
if demand is elastic>1,
then the quantity effect dominates and total revenue dec. when price rises
if demand is inelastic<1,
then theprice effect dominates and total revenue increases when price rises
demand curve
visual rep. of how much of ___ do consumers want at a given price
prices serve as
way to allocate scarce resources->those who get good/service are ones w/highest WTP
equlibrium price and quantity
where the price ends up