ECON 2102 Test 1 (Chapters 1/3/4)

a "leftward shift" in a supply curve also can be viewed as an ___

"upward shift" in the same curve. The first corresponds to the horizontal interpretation of the supply curve, while the second corresponds to the vertical interpretation

price elasticity of demand formula:

% change in quantity demanded / % change in price

percent change

(New Amount - Old Amount) / Old Amount

price elasticity of demand at point A on the demand curve equation:

(price / quantity) * (1 / slope) > all the values are taken at A

Factors that cause an increase (rightward or downward shift) in supply:

1. A decrease in the cost of materials, labor, or other inputs used in the production of the good or service. 2. An improvement in technology that reduces the cost of producing the good or service. 3. An improvement in the weather (especially for agricultural products). 4. An increase in the number of suppliers. 5. An expectation of lower prices in the future. When these factors move in the opposite direction, supply will shift left.

Factors that cause an increase (rightward or upward shift) in demand:

1. A decrease in the price of complements to the good or service. 2. An increase in the price of substitutes for the good or service. 3. An increase in income (for a normal good). 4. An increased preference by demanders for the good or service. 5. An increase in the population of potential buyers. 6. An expectation of higher prices in the future. When these factors move in the opposite direction, demand will shift left.

3 Determinants of elasticity

1.) # of substitutes (more substitutes = more elastic) 2.) how much of your income is used/spend (more of income = more elastic) 3.) the time you have to make the purchase (more time = more elastic)

prozac and wellbutrin are both prescription medications to treat depression. If the price of Prozac increases, then this should lead to

> an increase in the price of wellbutrin > an increase in the number of people who use wellbutrin

failure to achieve economic efficiency means that

> everyone in the economy could be made better off > total economic surplus is not maximized

Changes in ___ and ___ are two of the most important factors that give rise to shifts in supply curves.

> input prices > technology

steeper slope means ___ flatter slope means ___

> less elastic > more elastic

a price movement of a given absolute size is ___ a quantity movement of a given absolute value is ___

> small in percentage terms when it occurs near the top of the demand curve, where price is high, but large in percentage terms when it occurs near the bottom of the demand curve, where price is low. > large in percentage terms when it occurs near the top of the demand curve, where quantity is low, and small in percentage terms when it occurs near the bottom of the curve, where quantity is high.

if people tend to go swimming more in the summer than in the winter then we would expect

> the price of swimsuits to be higher in the summer > the demand for swimsuits to be higher in the summer > the quantity of swimsuits bought and sold to be higher in the summer

Scarcity Principle

Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another.

The Effect of an Increase in the Vertical Intercept:

An increase in the vertical intercept of a straight line produces an upward parallel shift in the line

The Cost-Benefit Principle:

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

Pitfall #3

FAILURE TO THINK AT THE MARGIN When deciding whether to per- form an action, the only costs and benefits that are relevant are those that would result from taking the action. It is important to ignore sunk costs

Pitfall #2

IGNORING IMPLICIT COSTS

Pitfall #1

MEASURING COSTS AND BENEFITS AS PROPORTIONS RATHER THAN ABSOLUTE DOLLAR AMOUNTS

efficiency (or economic efficiency)

a condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels

supply curve

a graph or schedule showing the quantity of a good that sellers wish to sell at each price

___ are opportunity costs

all costs—both implicit and explicit—are opportunity costs

a simultaneous increase in demand and increase in supply at the same time cause ___

an increase in the equilibrium quantity but the equilibrium price could go up or down, since you don't know how much each curve has shifted > both curves shift the same amount then just the quantity changes > supply shifts more then price goes down and quantity goes up > demand shifts more then price goes up and quantity goes up

an extraordinary feature of private markets for goods and services is their

automatic tendency to gravitate toward their respective equilibrium prices and quantities Ex. Pizza sellers lowering the prices of their pizza until it becomes appealing enough for consumers to buy enough to reduce the excess supply

actual buyer

buyer who is OK with the existing price

demand will tend to be more elastic with respect to price for products for which ___

close substitutes are readily available Ex. Salt, but not specific brands

market

combination of all the potential buyers and all the potential sellers of something

The elasticity of demand thus ___ as we move downward along a straight-line demand curve.

declines steadily

perfectly elastic demand

demand is perfectly elastic with respect to price if price elasticity of demand is infinite > horizontal demand curve

perfectly inelastic demand

demand is perfectly inelastic with respect to price if price elasticity of demand is zero > vertical demand curve > Ex. Water / Oxygen

actual price

market price > same for all buyers > actual price = MC

average cost

the total cost of undertaking n units of an activity divided by n

price elasticity of demand must be ___ at any point below the midpoint. price elasticity must be ___ for any point above the midpoint.

> less than 1 > greater than 1

The only costs that should influence a decision about whether to take an action are ___. Similarly, the only benefits we should consider are ___

> those we can avoid by not taking the action > those that would not occur unless the action were taken

excess demand

the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price

excess supply

the amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price

marginal benefit

the benefit of an additional unit of the activity

income effect

the change in the quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power

substitution effect

the change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes

marginal cost

the cost of an additional unit of activity

total daily expenditure

the daily number of units bought times the price for which it sells

elastic

the demand for a good is elastic with respect to price if its price elasticity of demand is greater than 1

inelastic

the demand for a good is inelastic with respect to price if its price elasticity of demand is less than 1

unit elastic

the demand for a good is unit elastic with respect to price if its price elasticity of demand equals 1

buyer's surplus

the difference between the buyer's reservation price and the price he or she actually pays

total surplus

the difference between the buyer's reservation price and the seller's reservation price

seller's surplus

the difference between the price received by the seller and his or her reservation price

total expenditure (total revenue)

the dollar amount that consumers spend on a product (P x Q) is equal to the dollar amount that sellers receive

The larger the share of your budget an item accounts for, ___

the greater is your incentive to look for substitutes when the price of the item rises > big ticket items have higher elasticity

the method of simultaneous equations

the intersection of Line 1 and Line 2 can be calculated by Line 1 - Line 2 and then solving for X, then plugging that X back in to find Y

buyer's reservation price

the largest dollar amount the buyer would be willing to pay for a good > measurement of marginal benefit

reservation price

the max price a buyer is willing and able to pay for something > measurement of the marginal benefit received by the buyer > different buyers have different reservation prices

total revenue is highest at ___

the midpoint

next best option refers to ___

the most valuable alternative option

price elasticity of demand (Ed) (Eqxpx)

the percentage change in the quantity demanded of a good or service that results from a 1 percent change in its price > a measure of the responsiveness of the quantity demanded of that good to changes in its price > Ex. if the price of beef falls by 1 percent and the quantity demanded rises by 2 percent, then the price elasticity of demand for beef has a value of ~2.

equilibrium price and equilibrium quantity

the price and quantity at the intersection of the supply and demand curves

socially optimal quantity

the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good

opportunity cost

the value of what you must sacrifice to take an action

Economics

the study of how people make choices under conditions of scarcity and of the results of those choices for society.

seller's reservation price

the smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost > measurement of marginal cost

Does a decrease in the wage rate of carpenters have any effect on the demand curve for houses?

A decline in the wage rate of carpenters reduces the marginal cost of making new houses, and this means that, for any given price of houses, more builders can profitably serve the m arket than b efore. Diagrammatically, this means a rightward shift in the supply curve of houses, from S to S9. (A "rightward shift" in the supply curve also can be described as a "downward shift.")

The Incentive Principle:

A person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises. In short, incentives matter.

The Effect of an Increase in the Charge per Minute:

Because the fixed monthly fee continues to be $4, the vertical intercept of the new plan is the same as that of the original plan. With the new charge per minute of 40 cents, the slope of the billing plan rises from 0.20 to 0.40

inferior good

a good whose demand curve shifts leftward when the incomes of buyers increase and rightward when the incomes of buyers decrease

principle of increasing opportunity cost

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

parameter

a quantity in an equation that is fixed in value, not free to vary

demand curve

a schedule or graph showing the quantity of a good that buyers wish to buy at each price

change in demand

a shift of the entire demand curve > caused by a change in marginal benefit (MB) > increase in MB = right shift > decrease in MB = left shift

sunk costs

costs that are beyond recovery at the moment a decision is made, regardless of which option is chosen, and as such are irrelevant to the decision

A fundamental property of the demand curve is that it is ___ with respect to price

downward-sloping

when demand shifts left and supply shifts right, ___

equilibrium price falls

price elasticity of demand for any good or service will be ___

higher in the long run than in the short run. > substitution of one product or service for another takes time

slope

in a straight line, the ratio of the vertical distance the straight line travels between any two points (rise) to the corresponding horizontal distance (run)

vertical intercept

in a straight line, the value taken by the dependent variable when the independent variable equals zero

equation

is a simple mathematical expression that describes the relationship between two or more variables

The Efficiency Principle: Efficiency

is an important social goal because when the economic pie grows larger, everyone can have a larger slice.

a price increase will produce an increase in total revenue whenever ___

it is greater, in percentage terms, than the corresponding percentage reduction in quantity demanded

positive economic principle

one that predicts how people will behave

normative economic principle

one that says how people should behave

rational

people have well-defined goals and try to fulfill them as best they can

variables

quantities that are free to assume different values in some range

economic surplus

the benefit of taking an action minus its cost (when benefit - cost is a positive number)

microeconomics

to describe the study of individual choices and of group behavior in individual markets.

complements

two goods are complements in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease causes a rightward shift)

Markets ask:

1) what to produce = how much? 2) how or by whom? 3) for whom?

simultaneous changes in curves

> when one curve (demand or supply) shifts we can always determine two outcomes (price / quantity) > when two curves shift we can only determine one outcome, the other an go either way depending on the values

scarcity

There is never enough time, money, or energy to do everything we want to do or have everything we'd like to have.

normal good

a good whose demand curve shifts rightward when the incomes of buyers increase and leftward when the incomes of buyers decrease

price ceiling

a maximum allowable price, specified by law

change in the quantity demanded

a movement along the demand curve that occurs in response to a change in price > caused by a change in supply

change in the quantity supplied

a movement along the supply curve that occurs in response to a change in price

change in supply

a shift of the entire supply curve > caused by a change in marginal cost (MC) > increase in MC = left shift > decrease in MC = right shift

abstract model

a simplified description that captures the essential elements of a situation and allows us to analyze them in a logical way

independent variable

a variable in an equation whose value determines the value taken by another variable in the equation

dependent variable

a variable in an equation whose value is determined by the value taken by another variable in the equation

the price elasticity of demand will always be negative (or zero) because ___

price changes are always in the opposite direction from changes in quantity demanded. So for convenience, we drop the negative sign and speak of price elasticities in terms of absolute value.

substitutes

two goods are substitutes in consumption if an increase in the price of one causes a rightward shift in the demand curve for the other (or if a decrease causes a leftward shift)

A fundamental property of the supply curve is that it is ___ with respect to price

upward-sloping

the supply curve is upward-sloping because

when the price of skateboards is low, only those potential sellers whose marginal cost of making skateboards is low can sell boards profitably, whereas at higher prices, those with higher marginal costs also can enter the market profitably