ECO201 Exam 1

Demand shifter 6: Type and number of buyers

If the composition of the market changes, market demand will also change. Market demand increases over time as the population grows.

Scarcity

Occurs because resources are limited

Price taker

an actor who charges the market price and whose actions do not affect the market price.

Market

any setting that brings together potential buyers and sellers

You expect the price cars to go down next year (compared to before) as supply chain problems ease. What does that do to demand for cars today?

decrease demand today

Market forces

driving price and quanitity to equilibrium

equilibrium

how markets bring supply and demand into balance - quantity supplied = quantity demanded

Demand shifter 5: Congestion and network effects

How other people use goods can affect demand curves

Rational rule

If something is worth doing, keep doing it until your marginal benefits equal your marginal costs. Don't do it if MB<MC - following this rule maximizes your economic surplus

Suppose your income goes up. What will happen to your demand for a tesla?

Increase

A beach resort in Bali builds 24 villas with private pools. They also establish two restaurants using state-of-the-art equipment (such as multipurpose ovens, freezers, and food processors). Meals are prepared using organic, locally sourced vegetables and meat. The hotel also uses water from the town supplier. Based on this scenario, what are the variable costs for the beach resort?

organic vegetables and water

Variable costs

vary with output and are included in marginal cost

The cost benefit principle

- Costs and benefits are the incentives that shape all decisions - You should evaluate the full set of costs and benefits of any choice - Pursue only the choices with a benefit greater than or equal to their cost - Every decisions you make will yield larger benefits than costs EX: You walk into the building and need to decide whether to buy a Kit-Kat out of the vending machine. The Kit-Kat costs $1.35. You should buy the Kit-Kat if the benefit is at least as large as the cost of $1.35.

The marginal principle

- Decisions about quantities are best made incrementally - Useful for how many decisions

Marginal benefit

The extra benefit from one unit

willingness to pay

- The most you would be willing to pay in order to obtain a particular benefit or avoid a particular cost. - How much you value the good - The amount you're willing to pay depends on how much you like whatever you're buying, not the price

Economic surplus

- The total benefits minus the total costs flowing from a decision - Measure of how much your decision has improved your well being

opportunity cost

- The true cost of something is the next best alternative you must give up to get it - Arises due to scarcity

Interdependence Principle

- Your best choice depends on the other choices you make, the choices others make, developments in other markets, and expectations about the future.

Shifts/Movements along supply curve:

1. input price 2. productivity and technology changes 3. prices of related outputs 4. expectations 5. the type and number of sellers

Four core principles provide a systematic framework for making decisions:

1. the cost-benefit principle. 2. the opportunity cost principle. 3. the marginal principle. 4. the interdependence principle.

Sunk cost

A cost that has been incurred and cannot be reversed

Normal good

A good for which higher income causes an increase in demand.

Market supply

Add up all the individual supply curves

Perfect competition

All firms in the industry sell an identical good. There are many buyers and many sellers, each of whom is small relative to the size of the market.

Rational rule for buyers

Buy more of an item if its MB is greater than or equal to its price. Keep buying until price = MB

Demand shifter 3: Prices of related goods

Complementary goods: goods that go together - Your demand for a good will decrease if the price of its complementary good rises Substitute goods: goods that replace each other - your demand for a good will increase if the price of substitute good rises

Suppose your income goes up. What will happen to your demand for ramen noodles?

Decrease

Fixed costs

Don't vary with output and not included in marginal cost

Demand shifter 4: expectations

Expectations, especially about the future, can shift demand curves

Demand shifter 1: Individual Demand

Quantity of an item that someone plans to buy, at each price - maintain other things constant - we want to know what happens when only the price changes

Demand shifter 2: Your preferences

Social pressure or information can shift your demand curve

Law of supply

Supply curves are upward sloping because the higher the price, the higher the quantity supplied

Marginal cost

The extra cost from one extra unit

The law of demand

The quantity demanded is higher when the price is lower

Congestion effect

When a good becomes less valuable because other people use it - If more people buy products, your demand for it will decrease (roads)

Network effect

When a good becomes more useful because other people use it - if more people buy a good, your demand for the good will also increase (social media)

Inferior good

a good that consumers demand less of when their incomes increase

A new report of a severe Winter snow storm is announced. What does that do to demand for milk today?

increase demand today