Macroeconomics
Moving to Equilibrium: Maximum and Minimum Prices
Buyers and sellers trade money for goods as long as both benefit from the trade. Mutually beneficial trade drives the market to equilibrium.
Buyers and Higher and Lower Prices
Buyers prefer lower prices to higher prices, ceteris paribus, but they don't necessarily prefer price ceilings to equilibrium prices.
Do Buyers Prefer Lower Prices to Higher Prices?
Buyers prefer lower prices to higher prices, ceteris paribus, but they don't necessarily prefer price ceilings to equilibrium prices.
What does Ceteris Paribus Mean?
Ceteris paribus means all other things held constant, or nothing else changes. Invoking this assumption allows us to clearly designate what we believe is the correct relationship between two variables.
Economics is:
The study of how individuals and societies deal with the fact that wants are greater than the limited resources available to satisfy those wants.
Resource X is necessary to the production of good Y. If the price of resource X rises:
The supply curve of Y shifts leftward.
ARE RENTERS BETTER OFF?
The supply curve of apartments will shift upward and to the left if evicted renters have 90 days as opposed to 30 days to vacate an apartment. As a result, renters will pay higher rent when they have 90 days to vacate an apartment.
The Straight-Line PPF: Constant Opportunity Costs
A straight-line PPF indicates that the opportunity cost of producing additional units of output is fixed.
At a price above the equilibrium price, there is:
A surplus
The Language of Supply and Demand: A Few Important Terms
A surplus (excess supply) exists if quantity supplied is greater than quantity demanded. A shortage (excess demand) exists if quantity demanded is greater than quantity supplied. The price at which quantity demanded equals quantity supplied is the equilibrium price or market-clearing price. Any other price is a disequilibrium price. The quantity that corresponds to the equilibrium price is the equilibrium quantity.
Profit and a Lower Cost of Living
Another way to view the gains from specialization is in terms of profit and a lower cost of living.
Price as a Rationing Device
As a result of scarcity, a rationing device is needed to determine who gets what of the available limited resources and goods. Price serves as a rationing device. It rations resources to the producers who pay the price for the resources. It rations goods to those buyers who pay the price for the goods. It is true that dollar price discriminates against the poor, but every rationing device discriminates against someone, and none is clearly superior to dollar price. Also, without dollar price a rationing device there would be no incentive for anyone to produce the good.
What is the special characteristic of a 45 degree line?
At any point on the line, the values of X and Y are the same
SUPPLY AND DEMAND ON A FREEWAY
At zero money price, there is a shortage of freeway space during rush hour, which shows up as freeway congestion. Tolls deal with the congestion problem by adjusting price to its equilibrium level. Building more freeways increases supply. More carpooling reduces demand.
Bar Graphs
Bar graphs are used to convey relative relationships.
Periods Relevant to Trade
Before a trade is made, a person is said to be in the ex ante position. Individuals will trade only if they believe ex ante that the trade will make them better off. The second relevant period is at the point of trade, where a person's actions reflect his valuations. After the trade is made, a person is said to be in the ex post position.
To an economist, freeway congestion is a sign that the price to drive on the freeway is:
Below its equilibrium level.
At a price for which quantity demanded exceeds quantity supplied, a __________ is experienced, which pushes the price __________ toward its equilibrium value.
Shortage; upward
DO YOU PAY FOR GOOD WEATHER?
Since people are willing to pay more for housing in good climates than they are for housing in bad climates, the housing price differential is the price one pays for good weather.
The concept that relates how much one variable changes as another variable changes is:
Slope
Five Myths about Economics and an Economics Major
Some things that people think about an economics major and about a career in economics are not true.
Four Ways to Represent the Law of Demand
The law of demand can be represented in words, in symbols, in a demand schedule, and as a demand curve.
The Law of Demand
The law of demand states that as the price of a good rises, the quantity demanded of the good falls, and as price falls, quantity demanded rises, ceteris paribus.
The Law of Supply
The law of supply states that as the price of a good rises, the quantity supplied of the good rises, and as price falls, quantity supplied falls, ceteris paribus. The law of supply does not hold if there is no time to produce more units, or if no more can be produced over any period of time.
The higher the opportunity cost of attending college:
The less likely an individual will go to college.
The following explains changes in opportunity costs and changes in behavior: The higher the opportunity cost of doing something:
The less likely it will be done
The Minimum Wage
The minimum wage is an example of a price floor. It affects the market for unskilled labor. Overall, the effects of the minimum wage are (1) a surplus of unskilled workers and (2) fewer workers employed.
If the minimum wage law sets a wage floor above the equilibrium wage in the unskilled labor market:
The minimum wage will create a surplus of labor.
Opportunity Cost
The opportunity cost of anything is the most highly valued opportunity or alternative forfeited when a choice is made.
Moving to Equilibrium: What Happens to Price When There is a Surplus or Shortage?
The price falls when there is a surplus and rises when there is a shortage.
The Production Possibilities Frontier
The production possibilities frontier is a framework in which to examine production; it represents the combination of two goods that can be produced in a certain period of time, under the conditions of a given state of technology and fully employed resources.
If you Plot the following data, specify the type of relationship that exists between the two variables. (Hint: Place "Price" on the vertical axis and Quantity Supplied on the horizontal axis). ___________________________________________ Price of Quantity Supplied | Apples ($) of Apples 0.25 | 350 0.50 | 400 0.70 | 500 0.95 | 700 1.00 | 800 1.10 | 1,000
The relationship is direct or positive, the variables move in the same direction
Efficiency
The right amount of anything is the optimal or efficient amount: the amount for which the marginal benefits equal the marginal costs. Net benefits are maximized when efficiency is achieved.
Slope of a Line is Constant
The slope between any two points on a straight line is always the same as the slope between any other two points on that line.
The Slope of a Curve
The slope of a curved line at any given point is equal to the slope of a straight line tangent to the curve at that point.
Slope of a Line
The slope of a line is the ratio of the change in the variable on the vertical axis to the change in the variable on the horizontal axis, and is used to learn how much one variable changes as the other variable changes.
If the workers of a firm successfully negotiate an increase in wages, which of the following is most likely to happen?
The supply curve of the product the firm produces shifts leftward.
Trade and the Terms of Trade
The terms of trade refer to how much of one thing is given up for how much of something else.
As the price of good X rises, the demand for good Y falls. Therefore, goods X and Y are:
Complements
Unintended Effects
Economists try to look at the unintended effects of an action.
The Purpose of Trade
People trade to make themselves better off.
Chapter 1: What Economics Is About- Key Ideas
1. Economics is the science of scarcity. 2. Economists think in terms of key concepts. 3. Economics is sometimes broken down into different categories. 4. [Appendix A] Economists work with diagrams. 5. [Appendix B] Economics can be a viable major.
Chapter 3 Key Ideas
1. Economists build theories. 2. Markets have two sides. One side of a market is the demand side and the other is the supply side. 3. Movements along a demand curve are called changes in quantity demanded, while shifts to new demand curves are called changes in demand. 4. Movements along a supply curve are called changes in quantity supplied, while shifts to new supply curves are called changes in supply. 5. Market adjustment will eliminate shortages and surpluses. 6. A change in a factor of demand or a factor of supply (or both) will change the point of market equilibrium in a predictable way. 7. Sometimes the government does not allow price to be a rationing device.
Chapter 5 Key Ideas
1. One theory widely used by economists to explain and predict is the theory of supply and demand.
Chapter 4 Key Ideas
1. Price performs two major jobs. 2. Sometimes the government does not allow price to be a rationing device. 3. Economists often distinguish the absolute, or money, price of a good from the relative price of a good.
Chapter 2 Key Ideas
1. The PPF is a framework used to examine production. 2. The PPF can be used to demonstrate several economic concepts. 3. The purpose of trade is for people to make themselves better off. 4. Individuals can make themselves better off by specializing in production according to their comparative advantages, and then trading for other goods.
Refer to Exhibit 2-1. The opportunity cost of moving from point A to B is:
20,000 units of guns
Why Most Supply Curves are Upward Sloping
An upward sloping supply curve reflects the fact that costs rise when more units of a good are produced.
Consider two points on the PPF: point A, at which there are 10 apples and 20 pears, and point B, at which there are 7 apples and 21 pears. If the economy is currently at point A, the opportunity cost of moving to point B is:
3 apples
Speed of Moving to Equilibrium
Not all markets equilibrate at the same speed.
Refer to Exhibit 1-1. The student whose study habits are illustrated here will maximize the net benefits of studying when she has studied:
6 hours
Determine which of the following will decrease the supply of personal computers
A and C only: A rise in wage rates; A tax placed on the production of computers.
When Claudia trades $100 for good X, economists assume that she is:
A and C: Trading something of less value to her for something of more value to her; Trading something that gives her less utility for something that gives her more utility.
The Bowed-Outward (Concave-Downward) PPF: Increasing Opportunity Costs
A bowed-outward PPF indicates that the law of increasing opportunity costs holds, that is, for most goods, opportunity costs increase as more of the good is produced. The law of increasing opportunity costs holds because people have varying abilities, so that they aren't equally adept at producing all goods.
A Change in Supply versus a Change in Quantity Supplied
A change in quantity supplied refers to a movement along a supply curve, and occurs when the price of the good (or own price) changes.
All sellers may be tempted to raise the price of what they sell, but an unintended effect of raising the price could be __________ in units sold large enough to __________ their total revenue.
A decrease; lower
Producing and Trading
A person who can produce a good at a lower cost than another person can is said to have a comparative advantage in the production of that good. Individuals can make themselves better off by specializing in the production of goods that they have a comparative advantage in, and then trading for other goods.
Costs of Trades
A potential trade might not become an actual exchange if transaction costs are too high. Transaction costs are the costs associated with the time and effort needed to search out, negotiate, and consummate a trade. One role of an entrepreneur is to try to turn potential trades into actual trades by lowering transaction costs.
Price Ceiling: Definition and Effects
A price ceiling is a government mandated maximum price above which legal trades cannot be made. Price ceilings lead to shortages, fewer exchanges, nonprice rationing devices, illegal market transactions, and tie-in sales.
Price Ceiling: Definition and Effects
A price ceiling is a government mandated maximum price above which legal trades cannot be made. Price ceilings lead to shortages, fewer exchanges, nonprice-rationing devices, buying and selling at prohibited prices, and tie-in sales.
Price Floor: Definition and Effects
A price floor is a government mandated minimum price below which legal trades cannot be made. Price floors lead to surpluses and fewer exchanges.
If the quantity demanded is greater than the quantity supplied then:
A shortage exists
Refer to Exhibit 4-2, which shows supply and demand for freeway space at both 8 a.m. and 11 p.m. A toll of P1 creates __________ at 8 a.m. and __________ at 11 p.m.
A shortage; a surplus
Freeway congestion is considered a result of disequilibrium in the market place when the demand for space is greater than the supply of space in which economists propose that which of the following might correct this?
A toll price that will bring equilibrium.
What is the opportunity cost of going to college for four years?
All of the above may be the opportunity costs of college because they are the things that you are giving up to attend college. All of the above: Cost of tuition, School fees, supplies and books, Relaxing in France, and Working as a legal secretary.
Determine which of the following will increase the demand for personal computers?
All of the above will increase the demand for personal computers except B: A rise in incomes ( assuming computers are a normal good); Cheaper Software; Simpler-to-operate computers.
With respect to each of the following changes, identify whether the demand curve will shift rightward:
All of the above: An increase in income (the good under consideration is a normal good); A rise in the price of a substitute good; A fall in the price of a complementary good.
If scarcity did not exist, neither would which of the following:
All of the above: Choice, Competition, A rationing device, and Economics
Many movie theaters charge a lower admission price for the first show on weekday afternoons than for a weeknight or weekend show. Which of the following might explain why:
All of the above: The theatre owner does not want to have a surplus of seats so he charges a lower admission during these times; The theater owner knows usually younger people or older people with fixed incomes go to movies at these times; The quantity demanded of seats during these times may be lower than the quantity supplied of seats.
Supply and Demand at Work at an Auction
An auctioneer will adjust the price of a product to sell all of the product offered.
Productive Efficiency
An economy is productive efficient if it is producing the maximum output with given resources and technology (that is, if it is producing at a point on the frontier), and is productive inefficient if it is not.
Individual Demand Curve and Market Demand Curve
An individual demand curve represents the price-quantity combinations of a particular good for a single buyer, while a market demand curve represents the same thing for all buyers.
The Market Supply Curve
An individual supply curve represents the price-quantity combinations of a particular good for a single seller, while a market supply curve represents the same thing for all sellers.
If Maxs demand for hot dogs falls as his income rises, then for Max hot dogs are:
An inferior good
Which of the following defines a market?
Both A and B: Any opportunity or place where people come together to trade with one another; A buying side and a supplying or selling side.
A Dell computer is a substitute for a Hewlett-Packard computer. What happens to the demand for Hewlett-Packard computers and the quantity demanded of Dell computers as the price of a Dell falls?
Both B and C: There is an increase in the Quantity demanded of Dell computers; The demand for HP computers falls.
Are most production possibilities frontiers for goods bowed outward (concave downward) or form a straight line?
Bowed outward because resources to produce goods are costly
What Factors Cause the Demand Curve to Shift? Part 1
Changes in income, preferences, prices of related goods, the number of buyers, or expectations of future price will cause the demand curve to shift.
What Factors Cause the Demand Curve to Shift? Part 2
Changes in the prices of relevant resources, technology, the number of sellers, expectations of future price, taxes, subsidies, or government restrictions will cause the supply curve to shift.
Chapter 1: What Economics Is About
Chapter 1 introduces students to economics as a way of thinking—a set of techniques used to observe, analyze, and identify problems and their possible solutions. First, the chapter introduces a few key economic concepts and then incorporates knowledge of these concepts into a definition of economics. The chapter introduces the economic way of thinking by presenting key concepts in economics and categories of economics. There are two appendices to this chapter. Appendix A covers working with graphs—teaching the student how to read a graph, how to derive the slope of both a line and a curve, and introducing the student to bar graphs, pie charts, and line graphs. Appendix B discusses economics as a major and careers for economics majors.
Chapter 2: Economic Activities-Producing and Trading
Chapter 2 introduces the basics of the PPF, comparative advantage, and trade. This is not exactly a "tools of economics" chapter; instead it explores basic premises that underlie the economic analysis presented throughout the text.
Decision making "at the margin" means making a choice based on __________ of a decision.
Comparing the additional benefits and the additional costs of an activity.
When economists speak of scarcity, they are referring to the:
Condition in which peoples wants are greater than the limited resources available to satisfy those wants.
Viewing Equilibrium in Terms of Consumers' and Producers' Surplus
Consumers' surplus is the difference between the maximum buying price and the price paid by the buyer. Producers' surplus is the difference between the price received by the producer or seller and the minimum selling price. At equilibrium the sum of consumers' and producers' surplus is maximized.
The PPF between goods X and Y will be a downward-sloping:
Curve that is bowed outward if increasing opportunity costs exist.
Decisions Made at the Margin
Decision making at the margin is characterized by weighing additional (marginal) benefits of a change against the additional (marginal) costs of a change with respect to current conditions.
WHAT WILL HAPPEN TO THE PRICE OF MARIJUANA IF THE PURCHASE AND SALE OF MARIJUANA ARE LEGALIZED?
Decriminalizing the purchase and sale of marijuana is likely to shift both the demand and supply curves to the right. What happens to the price of marijuana depends on the relative sizes of the shifts.
What Is Demand?
Demand refers to the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period.
Economic Growth
Economic growth refers to the increased productive capabilities of an economy, and is illustrated by a shift outward in the PPF. An increase in the quantity of resources or an advance in technology will lead to economic growth.
_________________ is the study of how society or individuals deal with the fact that wants are limitless, but the resources available to satisfy those wants are limited.
Economics
What Awaits You as an Economics Major?
Economics majors learn quantitative skills, writing skills, and thinking skills.
Benefits and Cost
Economists are careful to think in terms of both costs and benefits.
A Note About Theories
Economists build theories to answer questions that do not have obvious answers. When they build a theory they leave out certain things and focus on the major factors or variables that they believe will explain the phenomenon they are trying to understand.
TWO PRICES: ABSOLUTE AND RELATIVE
Economists often distinguish the absolute, or money, price of a good from the relative price of a good.
Goods and Bads
Economists talk about goods (anything that gives a person utility) and bads (anything that gives a person disutility). People want goods and they do not want bads.
What Do Economists Do?
Economists work in many varied fields and do a myriad of things.
If it is impossible to produce more of one good without getting less of another, then the economy is operating:
Efficiently
Which of the following statements is false?
Elementary education at public schools is usually free.
What Can Change Equilibrium Price and Quantity?
Equilibrium price and quantity are determined by supply and demand. Whenever one changes or both change, equilibrium price and quantity change.
Identify what happens to equilibrium price and quantity in the following case: Demand falls by less than supply rises.
Equilibrium price falls and equilibrium quantity rises.
Identify what happens to equilibrium price and quantity in the following case: Supply falls and demand is constant.
Equilibrium price rises and equilibrium quantity falls.
Identify what happens to equilibrium price and quantity in the following case: Demand rises and supply is constant.
Equilibrium price rises and equilibrium quantity rises.
Exchange
Exchange or trade is the process of giving up one thing for something else. People enter into exchanges in order to make themselves better off.
If demand increases by a lesser amount than supply increases, then equilibrium price __________ and equilibrium quantity __________.
Falls; rises
Demand refers to the willingness of buyers to purchase different quantities of a good at different prices during a specific time period. Be able to explain your answer.
False
As the price of a good falls, the supply of that good falls, ceteris paribus? (Remember that you must be able to explain your answer).
False: This is a movement along the curve only.
If people begin to favor science fiction novels to a greater degree than previously, the demand curve for science fiction novels:
Shifts rightward
As the price of oranges rises, the demand for oranges falls, ceteris paribus. Be able to explain your answer for test purposes.
False: You recognize that this is just a movement along the demand curve, represented by a price change only. Something other than the price of oranges changing would affect the demand for oranges which would then be represented by a shift in the curve.
Freeway space on the interstate is considered___________________ so that the supply of freeway space is:
Fixed, Vertical
C. Law of Increasing Opportunity Costs
For most goods, the opportunity costs increase as more of the good is produced.
________________ is an example of an intangible good.
Friendship
GOVERNMENT, EASIER LOANS, AND HOUSING PRICES
Government set out to make buying a home easier for more people by passing laws that forced lenders to accept lower down payments and interest rates. But making it easier for individuals to get loans had the effect of raising the demand for and the prices of houses. Higher house prices made it harder for people to buy homes.
Macroeconomics is the branch of economics that deals with:
Highly aggregated markets or the entire economy.
Chapter 1: What Economics Is About- Outline
I. A Definition of Economics A. Goods and Bads B. Resources C. Scarcity and a Definition of Economics II. Key Concepts in Economics A. Opportunity Costs B. Benefits and Cost C. Decisions Made at the Margin D. Efficiency E. Unintended Effects F. Exchange III. Economic Categories A. Positive and Normative Economics B. Microeconomics and Macroeconomics IV. Appendix A: Working With Diagrams A. Two-Variable Diagrams B. Slope of a Line C. Slope of a Line is Constant D. The Slope of a Curve E. The 45 Degree Line F. Pie Charts G. Bar Graphs H. Line Graphs V. Appendix B: Should You Major In Economics? A. Five Myths about Economics and an Economics Major B. What Awaits You as an Economics Major? C. What Do Economists Do?
Chapter 3 Outline
I. A Note About Theories II. What Is Demand? A. The Law of Demand B. What does Ceteris Paribus mean? C. Four Ways to Represent the Law of Demand D. Two Prices: Absolute and Relative E. Why Does Quantity Demanded Goes Down as Price Goes Up? F. Individual Demand Curve and Market Demand Curve G. A Change in Quantity Demanded H. A Change in Demand I. What Factors Cause the Demand Curve to Shift? III. Supply A. The Law of Supply B. Why Most Supply Curves are Upward Sloping C. The Market Supply Curve D. Changes in Supply Mean Shifts in Supply Curves E. What Factors Cause the Demand Curve to Shift? F. A Change in Supply vs. a Change in Quantity Supplied IV. The Market: Putting Supply and Demand Together A. Supply and Demand at Work at an Auction B. The Language of Supply and Demand: A Few Important Terms C. Moving to Equilibrium: What Happens to Price When There is a Surplus or Shortage? D. Speed of Moving to Equilibrium E. Moving to Equilibrium: Maximum and Minimum Prices F. Viewing Equilibrium in Terms of Consumers' and Producers' Surplus G. What Can Change Equilibrium Price and Quantity? V. Price Controls A. Price Ceiling: Definition and Effects B. Do Buyers Prefer Lower Prices to Higher Prices? C. Price Floor: Definition and Effects
Chapter 4 Outline
I. Price A. Price as a Rationing Device B. Price as a Transmitter of Information II. Price Controls A. Price Ceiling: Definition and Effects B. Buyers and Higher and Lower Prices C. Price Ceilings and False Information D. Price Floor: Definition and Effects E. The Minimum Wage F. Price Floors, Changes in Consumers' and Producers' Surplus, and Deadweight Losses III. Two Prices: Absolute and Relative A. Absolute (Money) Price and Relative Price B. Taxes on Specific Goods and Relative Price Changes
Chapter 2 Outline
I. The Production Possibilities Frontier A. The Straight-Line PPF: Constant Opportunity Costs B. The Bowed-Outward (Concave-Downward) PPF: Increasing Opportunity Costs C. Law of Increasing Opportunity Costs D. Economic Concepts Within a PPF Framework 1. Scarcity 2. Choice and Opportunity Cost 3. Productive Efficiency 4. Unemployed Resources 5. Economic Growth II. Trade or Exchange A. The Purpose of Trade B. Periods Relevant to Trade C. Trade and the Terms of Trade D. Costs of Trades E. Trades and Third-Party Effects III. Production, Trade, and Specialization A. Producing and Trading B. Profit and a Lower Cost of Living C. A Benevolent and All-Knowing Dictator vs. the Invisible Hand
An increase in the quantity of resources:
Shifts the PPF outward.
What exactly allows individuals to consume more if they specialize and trade than if they don't?
If a person specializes, he produces the goods only that he is able to produce at a lower opportunity cost as does the other individual and this "releases" resources to produce more goods, which then leads to greater consumption for both
Trades and Third-Party Effects
If someone other than the parties involved in an exchange is affected by that exchange, then the trade is said to have third-party effects.
What condition must hold for the production possibilities frontier to be bowed outward (concave downward)?
If the PPF is bowed outward, it means that the opportunity cost of producing good x is increasing and more and more of good y has to be given up for producing additional units of good x.
What type of relationship would you expect between the following: The sales of toothbrushes and sales of cat food?
Independent
A line is parallel to the vertical axis. The slope of the line is:
Infinite
The law of demand states that price and quantity demanded are:
Inversely related, ceteris paribus.
If variable X goes up as variable Y goes down, then X and Y are:
Inversely related.
Resources
It takes resources to produce goods. Economists divide resources into four broad categories: land, labor, capital, and entrepreneurship.
Refer to Exhibit 3-1. At a price of $2 there is a:
Shortage of 200 units.
Line Graphs
Line graphs are useful for illustrating changes in a variable over some time period, but convey different messages depending on the measurement scale used. Sometimes two line graphs are shown on the same axes to draw attention to the relationship or the difference between the two variables.
A price ceiling is a government-mandated:
Maximum price above which legal trades cannot be made.
______________________ is the study of human behavior and choices as it relates to relatively small units such as an individual or a firm.
Microeconomics
Microeconomics and Macroeconomics
Microeconomics is the study of human behavior and choices as they relate to relatively small units, such as an individual, a firm, an industry, or a single market. Macroeconomics is the study of human behavior and choices as they relate to an entire economy.
COLLEGE SUPER ATHLETES
NCAA rules in effect set a ceiling on what a college or university can pay any athlete, equal to the full tuition for that college. This effects a transfer from athletes (who are worth more to a college than its full tuition rate) to the college they attend.
A friend pays for your lunch. Is this an example of a free lunch?
No, this is not free because she has to pay for it. Someone has to and resources have to be used to supply this lunch even her time and yours!
Colleges and universities use such things as grade point averages and standardized test scores as:
Non-price rationing devices.
Chapter 3: Supply and Demand-Theory
One of the most famous and widely used theories in economics is the theory of supply and demand. This chapter examines supply and demand and the factors that affect supply and demand. It discusses disequilibrium and movements to market equilibrium, how changes in factors affect the market equilibrium, and the consequences of price ceilings and price floors.
Unemployed Resources
One reason that an economy may exhibit productive inefficiency is that it is not using all its resources.
WHY IS MEDICAL CARE SO EXPENSIVE?
Payments for medical care are often made, not by the person who buys the medical care, but buy a third party such as an insurance company. Once a person has paid her (medical) insurance premium, the price she pays for medical care may amount to no more than a minimal copayment. For all practical purposes, the dollar amount she has to pay out of pocket to get medical care is zero. We expect the quantity demanded of medical care to be greater than at some positive dollar amount and this pushes up the demand, and therefore the price, for any specific component of medical care (such as X-rays).
One major reason for the law of demand is that:
People substitute relatively lower-priced goods for relatively higher-priced goods.
Pie Charts
Pie charts are used to demonstrate how the parts of a whole are distributed.
Oil producers expect that oil prices next year will be lower than oil prices this year. As a result, oil producers are most likely to:
Place more oil on the market this year, thus shifting the present supply curve of oil rightward.
Positive and Normative Economics
Positive economics addresses what is, while normative economics attempts to determine what should be. This book mainly deals with positive economics.
________________ is a government mandated minimum price that below which no legal trades can occur.
Price Floor
Price Ceilings and False Information
Price ceilings distort the flow of accurate information to buyers. Buyers get a false view of reality; they then base their buying behavior on incorrect information. Problems follow, and the unintended, unexpected, and undesirable effects of price ceilings are soon incurred.
Price Controls
Price is not always allowed to be a rationing device. Sometimes price is controlled.
Price
Price performs two major jobs: It acts (1) as a rationing device and (2) as a transmitter of information.
Price as a Transmitter of Information
Price transmits information that often relates to the relative scarcity of a good. A market system is powerful enough to have people respond in appropriate ways to the information that price is transmitting, even if the people do not fully hear or understand it. When relative scarcity drives up a good's price, people cut back on the consumption of that good, conserving that good.
A Change in Quantity Demanded
Quantity demanded is the number of units of a good that individuals are willing and able to buy at a particular price, and changes when the price of the good changes. A change in quantity demanded is represented by a movement from one point to another point on the same demand curve.
________________ is a condition that exists when there are not enough resources to satisfy all of the wants of the people.
Scarcity
Scarcity and a Definitions of Economics
Scarcity is the condition where our wants are greater than the limited resources available to satisfy them. Scarcity is the basic economic problem confronting all individuals and societies. For this reason, economics is defined as the science of how individuals and societies deal with the fact that wants are greater than the limited resources available to satisfy those wants. Three effects of scarcity are (1) the need to make choices, (2) the need for a rationing device, and (3) competition. Competition occurs because of scarcity, and takes the form of people trying to get more of the rationing device.
A Benevolent and All-Knowing Dictator versus the Invisible Hand
Self-interest guides individuals to make decisions that happen to be best for society.
War or even an economic depression could cause the PPF to:
Shift inward.
Supply
Supply refers to the willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific time period.
The 45º Line
The 45º line is a straight line that bisects the right angle formed by the intersection of the vertical and horizontal axes.
Scarcity
The PPF separates two regions: an attainable region, which consists of the points on the PPF and all points below it, and an unattainable region, which consists of all points above and beyond the PPF.
Two Prices: Absolute and Relative
The absolute price of a good is its price in money terms, while the relative price of a good is its price in terms of another good.
Absolute (Money) Price and Relative Price
The absolute price of a good is its price in money terms, while the relative price of a good is its price in terms of another good. If the absolute price of an item rises by less than the absolute price of some other item, the relative price of the first item falls.
Transaction costs are:
The costs associated with the time and effort needed to search out, negotiate, and consummate an exchange.
SOUTHWEST AIRLINES AND THE PRICE OF AN AISLE SEAT
The demand for aisle seats is higher than the demand for middle seats on airplanes. Rather than ration seats by setting different prices for aisle seats and middle seats, Southwest Airlines rations its seats by charging extra for priority boarding, realizing that the people who board the plane first will probably choose the aisle seats.
A Change in Demand
The entire demand curve represents demand. When demand increases, the entire demand curve shifts rightward. When demand decreases, the entire demand curve shifts leftward.
If the purchase and sale of marijuana become legalized:
The equilibrium quantity will rise, but the change in equilibrium price depends upon whether the demand curve shifts more or the supply curve shifts more.
Why Does Quantity Demanded Goes Down as Price Goes Up?
The first reason for the inverse relationship between price and quantity demanded is that people substitute lower priced goods for higher priced goods. The second reason has to do with the law of diminishing marginal utility, which states that for a given time period, the marginal utility gained by consuming equal successive units of a good will decline as the amount consumed increases.
Chapter 5 Outline
The following applications have all been chosen to see how supply and demand can be used to either explain or predict things. I. WHY IS IT SO HARD TO GET TICKETS TO THE TAPING OF THE BIG BANGTHEORY II. GOVERNMENT, EASIER LOANS, AND HOUSING PRICES III. SOUTHWEST AIRLINES AND THE PRICE OF AN AISLE SEAT IV. WHY IS MEDICAL CARE SO EXPENSIVE? V. WHY DO COLLEGES USE GPAs, ACTs, AND SATs FOR PURPOSES OF ADMISSION? VI. SUPPLY AND DEMAND ON A FREEWAY VII. ARE RENTERS BETTER OFF? VIII. DO YOU PAY FOR GOOD WEATHER? IX. COLLEGE SUPER ATHLETES X. 10 A.M. CLASSES IN COLLEGE XI. WHAT WILL HAPPEN TO THE PRICE OF MARIJUANA IF THE PURCHASE AND SALE OF MARIJUANA ARE LEGALIZED?
WHY DO COLLEGES USE GPAs, ACTs, AND SATs FOR PURPOSES OF ADMISSION?
The tuition that students pay to attend colleges and universities is usually less than the equilibrium tuition, leading to a shortage. Tuition and scores on GPAs and college entrance exams are used to ration the available space.
If you Plot the following data, what type of relationship would you find between the two variables? (Hint: Place "Price" on the vertical axis and Quantity Demanded on the horizontal axis). ______________________________________ Price of Quantity Demanded | Apples ($) of Apples 0.25 | 1,000 0.50 | 800 0.70 | 700 0.95 | 500 1.00 | 400 1.10 | 350
There is an inverse or negative relationship between the two variables
Which of the following is true about the relationship between price and quantity supplied?
There is usually a direct relationship.
Chapter 5: Supply, Demand and Price-Applications
This chapter applies the theory of supply and demand to such things as home-buying, freeway congestion, medical care, and more. The key to finding one's own supply and demand applications is to observe things around you and then ask questions (where does the supply come from and where does the demand come from, or are there shortages or surpluses) about the things you observe.
Chapter 4: Prices-Free, Controlled, and Relative
This chapter discusses two key "jobs" that price performs: rationing goods and services and transmitting information. It also discusses government controls (price ceilings and price floors) that can be imposed on price and two types of price: absolute and relative.
Price Floors, Changes in Consumers' and Producers' Surplus, and Deadweight Losses
This section examines a price floor on an agricultural foodstuff and shows that the overall effect of such a price floor is that (1) consumers lose, (2) producers gain, and (3) society (which is the sum of consumers and producers) loses. The loss in total output is called a deadweight loss.
WHY IS IT SO HARD TO GET TICKETS TO THE TAPING OF THE BIG BANGTHEORY
Tickets for The Big Bang Theory are free (the ticket price is $0) and are rationed on a first-come-first-served basis. Because of the popularity of the show, the demand for tickets exceeds the supply at the ticket price of $0, leading to a shortage.
Tina can produce any of the following combinations of goods X and Y: (a) 100X and 0Y, (b) 50X and 25Y, and (c) 0X and 50Y. David can produce any of the following combinations of goods X and Y: (a) 50X and 0Y, (b) 25X and 40Y, and (c) 0X and 80Y. Who has a comparative advantage is in the production of good X? of good Y? Be able to explain your answer.
Tina should produce X and David should produce Y
Colleges and Universities use GPAs, ACTs and SATs for admission as a non-price rationing device to determine who will enroll when a disequilibrium exists such that there is a shortage (excess quantity demanded) of spaces for students.
True
Points outside (or beyond) the PPF are:
Unattainable
10 A.M. CLASSES IN COLLEGE
Universities charge the same price for classes held at different times, but, since the demand for 10 o'clock classes is higher, these classes must be rationed.
"As the price of apples goes up, the demand for apples goes down." The author of this statement:
Uses the word "demand" when he should use the words "quantity demanded."
Two-Variable Diagrams
Variables may be directly related (when one changes, the other changes in the same way) or inversely related (when one changes, the other changes in the opposite way). Variables can also be independent of each other. This condition exists if as one variable changes, the other does not.
How are prices determined in our marketplace?
When supply equals demand, the price is set by buyers and sellers in our market place.
Changes in Supply Mean Shifts in Supply Curves
When supply increases, the entire supply curve shifts rightward. When supply decreases, the entire supply curve shifts leftward.
Taxes on Specific Goods and Relative Price Changes
When the government imposes a tax on a good, it makes that good relatively more expensive than other goods. As a result, consumers buy relatively less of that good and relatively more of other goods.
Choice and Opportunity Cost
Within the attainable region, individuals must choose which combination of goods they want to produce. There is an opportunity cost associated with each choice whenever there is a movement along a PPF.
Economists say that people make decisions at the margin, what does this mean? If Marshal stops studying before the point at which his marginal benefits of studying equal his marginal costs, is Marshall forfeiting any benefits? Be able to explain your answer.
Yes, he is forfeiting some benefits if he stops studying before marginal benefits equal marginal costs.
The latest Beyonce' album is available to be downloaded for $15.99. Is this price a rationing device?
Yes, many will not buy the album because they are unwilling to sacrifice other things $15.99 will buy.
