ECON 200

Change in demand

A demand shift (caused by a violation of the ceteris paribus condition) can happen with changes in factors other price such as weather, education etc.

Price Ceiling

A legal maximum on the price at which a good can be sold. Price ceiling is below the equilibrium price which results in more quantity being demanded than quantity being supplied which results in a shortage

Price floor

A legal minimum on the price at which a good can be sold. Price floor is above the equilibrium price which results in more quantity being supplied than quantity demanded which results in a surplus.

Socialist Cooperative

Members of the cooperative share equally in the value of everything produced. Members decide how many people will join the cooperative.

Private Property Regime

resource owners have incentives to maximize rents, which leads to efficient use of the resources (EX: owners of firms have incentives to maximize seller's rents)

Taxes

taxes raise money for government and raise the cost of supplying/purchasing a good or service

Comparative Advantage

the ability of a individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors

Absolute Advantage

the ability of an individual, a firm, or a country to produce more of good or serivce than competitiors, using the same amount of resources

Marginal Product

the additonal value created when an additional unit of labor is applied

Total Product

the sum of the marginal products of each worker, or the difference between all the workers or none.

rules of elastic demand

with elastic demand, as P changes, the percentage change of Q is greater - when P falls by 1%, Q rises by a larger % so total revenue of seller increases - when P rises by 1%, Q falls by a larger % so total revenue of seller decreases

rule of inelastic demand

with inelastic demand, as p changes the quantity changes at a smaller percentage -when P falls by 1%, Q rises by small % so total revenue of seller decreases -when P rises by 1% Q falls by small % so total revenue of seller increases

Income elasticity of demand

measures the responsiveness of changes in income to changes in consumption of a good n = (% change in quantity demanded)/(% change in income) If n<0, the good is an inferior good (consumption decreases as income increases) If n>0, the good is a normal good (consumption increases as income increases)

Cross Elasticity of Demand

measures the responsiveness of the quantity demanded of a good to change in the price of another good. Exy = (% change in quantity demanded of good x)/(% change in price of another good y) If Exy > 0, the two goods are substitutes If Exy < 0, the two goods are complements

relative elasticity of supply and demand

Perfectly inelastic: - demand: not find easy substitutes (medicine) - supply: fixed quantity (# doctors) Perfectly elastic: - demand: find perfect substitutes (pepsi and coke) - supply: competitive market (Eq Price is set for all suppliers)

in the production of a good, as the marginal product of employment of additional units of labor______the marginal cost of production of this good______

decreases, increases

Capital

* Physical capital: such as machines * Human capital: such as knowledge and skill

Price signals when the prices are high?

* consumers who might have otherwise purchasesd a good don't buy (decrease in quantity demanded) * producers who might not have otherwise produced a good enter the market (increasein quantity supplied) * In the long run, prices return to equilibrium

The law of Demand

"As the price of a good or service increases, the quantity demanded of that good or service will decrease, and vice versa, ceteris paribus."

The law of Supply

"As the price of a good or service increases, the quantity of that good or service that suppliers offer will increase, and vice versa, ceteris paribus."

Price signals when prices are low?

* consumers who might not have otherwise purchased a good do buy (increaase in quantity demanded) * producers who might have otherwise produced a good exit the market (decrease in quantity supplied) * In the long run, prices return to equilbrium

Input factors and MPL

- Factors are inputs in the production process (labor, capital, machinery) -Definition: The marginal product of an input labor is the additional products (output) produced by an additional unit of labor (applied to a given amount of other inputs) - marginal product is diminishing because other things equal, the more of a particular input, the less marginal product it generates (too crowded) -Total product of labor: the difference in the output when some units of labor are used versus no labor used at all

Upward sloping marginal cost at the intensive and extensive margin

-MC increases at the intensive margin (When some inputs are fixed, marginal products of variable inputs, are decreasing so MC or production is increasing) -MC increase at the extensive margin (after more suitable resources are employed (also less suitable for production of other goods), the less suitable is employed (also the more suitable for production) Thus MC in terms of goods forgone increases - supply curve is upward there are rents

Rent

-payments to resoruce owners in excess of what is necessary to call forth production -under private property regime resource owners have incentives to maximize rents which leads to efficient use of the resources

Specialization

-the development of skills in a specific kind of work - requires trade -specialization will result in a more efficient economy

What are the cost of price supports (lost gains from trade with a price floor)?

-to the left of equilibrium: lost gain from trade; too little consumed -trapezoid below supply curve; efficiency loss due to, too many resources produced

As the price of coffee increases, consumers choose less of that good; they reduce the quantity demanded. 1.) how does this effect the demand curve of substitutes? 2.) how does this effect the demand curve of complementary goods?

1.) The demand curve for substitute goods such as tea shifts out and up in response b/c at the same price of tea, a greater amount is demanded. 2.) The demand curve for a complementary good such as cream or sugar shifts to the left (in) and down in repsonse since with less coffee consumed the amount od cream demanded is less at the same price of cream.

1.) When the demand for a good is relatively inelastic more of the tax will be paid by? 2.) When the demand for a good is relatively elastic more the tax will be paid by?

1.) buyers 2.) sellers The relatively inelastic side of the market will pay more of the tax

1.) When the demand for a good is relatively inelastic more of the subsidy will be received by the? 2.) When the demand for a good is relatively elastic more of the subsidy will be received by the?

1.) buyers 2.) sellers The relatively inelastic side of the market will receive more of the subsidies

1.) if some good experiences a decrease in supply, the market price of that good will? 2.) the demand for substitutes will_____, increasing the market price in those markets. Likewise, the demand for complements will decrease, causing lower market prices for those goods.

1.) increase 2.) increase

1.) if a sales tax is imposed on a good the market price in general will? 2.) the flatter the slope of the supply curve relative to the demand curve, the more will be passed on to? 3.) if the supply curve is vertical the entire tax is paid by?

1.) increase by less than the full amount of the tax 2.) consumers 3.) the seller

1.) lowering middleman costs ____ the mutually advantageous trade that can occur. 2.) with lower transaction costs, the sellers receive a ______ price and consumers pay a _____price

1.) increases 2.) higher, lower

The city government increases the highway toll by a small percentage. If the revenues of the city government increase, it reflects the fact that the residents have an -------- demand for highways. If the revenues of the city government fall, then it reflects the fact that residents have an --------- demand for highways.

1.) inelastic 2.) elastic

Fundamental concepts: 1.) Scarcity and choice 2.) Concept of OC 3.) Concept CS 4.) Concept of PS

1.) need to consider alternatives 2.) cost of the best alternative forgone 3.) MV is diminishing 4.) MC is rising

1.) Effect of subsidy on a seller 2.)Effect of subsidy on a consumer

1.) rule: produce/offer Q such that P+subsidy=MC or P=MC-subsidy. On a graph the supply curve inclusve of the subsidy will shfit down and to the right (quantity will increase). More will be produced b/c it will be cheaper (gov help) 2.) rule: purchase Q such that P-subsidy=MV or P=MV+subsidy . On a graph the demand curve incusive of the subsidy will shift up and to the right (quantity wil increase). More will be consumed because value of good/service is increasing.

1.) Effect of tax on a seller 2.)Effect of tax on a consumer

1.) rule: sell quantity Q such that P-tax=MC or MC+tax=P. On a graph the supply curve inclusive of the tax is shifted up and to the left of the orginal supply curve. This is b/c tax discourages sellers (cost more to sell) reducing the amount of quantity produced (supply decreases). 2.) ruel: purchase Q such that P+tax=MV or P=MV-tax. On a graph the deamand curve inclusive of the tax is shift down and to the left of the original supply curve. This is b/c tax discourages consumption so demand decrease (quantity also decrease).

1.) As the price of gasoline increases the demand for gas guzzling cars? -What happens to the quantity and price of gas sold? 2.) As the price of chicken falls what is the effect on the demand for turkey? 3.) How does unfavorable weather affect the market supply of wheat? 4.) With the passing of Roe v Wade the ____ of adoptable babies will? -what will happen to the number of adoptable babies and the cost of adoption?

1.) the demand for gas guzzling cars decreases. Demand Shift to inward (complementary goods) -the quantity and price of gas sold will increase 2.) the demand for turkey decrease shift inward (substitutes) 3.) the supply of wheat decreases supply shift inward 4.) The supply of adoptable babies will decrease - the number of adoptable babies will decrease while the cost of adoption will increase

Change in the quantity demanded

A change along an existing demand curve

Pareto Efficiency

An exchange-only market is pareto efficient (or Pareto optimal) when it is in equilibrium and, barring a violation of the ceteris paribus condition, it is not possible to make any individual better off without making someone else worse off.

Common types of taxes

An income tax is a direct tax on the gross income of citizens and residents A corporate tax is a direct tax on the profits earned by corporations A sales tax is an indirect tax on retail transactions A tariff is a tax on an imported good levied by customs authorities upon import

The Marginal Cost Curve

As the quantity produced of a good increases, the best resources for producing that good become employed and inferior resources must be used, increasing the marginal cost with each unit produced - rising marginal cost implies that there is rent (consumer surplus)

Common Property

Land is not owned; workers will crowd onto the land unitl their average product falls to their alternative wage. This leads to an inefficent level of production, because the value of the worker's arginal product will be less than what the workers could produce anywhere else, measued by their wage. If some workers were to leave the firm and work elsewhere they would increase the total output of the economy.

How do you maximize total value of an output with scarce resources?

MP/W equal for all variable inputs

tax revenue

Quantity demanded multiplied by the tax

efficient allocation of two or more resources in production

Rule: marginal profit of good 1 = marginal profit of good 2

Violation of ceteris paribus

Something other than price and quantity changes. This results in the demand or supply curve to shift.

Total value

TV is the sum of the marginal values for all units consumed, or is what one is willing to give up of other goods and services to have all those units rather than nothing at all

Ceteris Paribus

The laws of supply and demand hold true when the ceteris paribus condition holds true. EX: when Marc's grocery puts beef on sale (i.e. the price of beef has decreased), the quantity demanded of that beef will increase.

What is the relationship between a person's comparative advantage and his or her marginal cost of producing some good relative to some other person's marginal cost?

The lower the marginal cost of producing a good, the more comparative advantage this person/country has. Comparative advantage motivates trades.

Marginal Value

The marginal value of a good is what one is willing to give up of other good and service to have another unit of that good Ceteris paribus: the MV ofa good decreases as the amount consumed increases

In which situation would a firm owner stop employing​ workers?

The value of the marginal product of labor falls lower than the cost of labor.

Many argue against free international trade: We lose out jobs due to lower wage countries! is it beneficial to trade?

Yes! because although one country may have lower wages and comparative advantage is not seen at first it will ventually show. Wage is not the reason we lose our jobs but instead it is the productivity of workers.

Yunmi is a lawyer earns $150 per hour. Also is a good typist. 15 pages per hour. Employs typist who is slow 5 pages per hour. Pays employee $10 per hour. Should Yunmi do her own typing?

Yunmi shoud not do her own typing because she has comparitive advantage in law. (yes also typing but not benefit her in long run). (think of the idea of opportunity cost) It cost Yunmi more to type her own work because each page cost her $10 per page (giving up opportunity to practice law)

Substitutes

a good that can be used instead of another good (EX: Coca-Cola and Pepsi)

Complements

a good that is generally consumed with another good (EX: cars and gasoline)

producer surplus (rent)

a payment larger than that which would be required to produce a good or service rents provice an incentive for producers to produce what consumers wnat in the quantities they want

demand curve is relatively inelastic while supply is relatively elastic. The government imposes a tax a $1. The market price of the good is currently $4. What will occur if the tax is: a.) collected (taxed) on to the seller b.) collected (taxed) on to the buyer

a.) In this situation the tax is collected by the seller making the supply curve shift up. The market price is now $5 which consumers pay. Producers receive $5 but pay $1 tax so same as before. Consumers are left to pay all of the tax b.) In this situation the tax is collected by the buyer making the demand curve shift down. However because the demand is perfectly inelastic the new and old demand curves are in the same location. Consumers pay $4 and $1 tax. Producers receive pre-tax price. Therefore consumers pay all the tax.

Law of Diminishing Marginal Product

addintonal units of any factor are added to fixed amounts of the other factors, the marginal product of the variable input eventually declines

Communist systems (without property rights)

all property was owned by the state (no private property rights existed). All citizens were dependent on the state, and the state determined who would produce what, where it would be produced, how much would be produced, and what citizens could use. This eliminates some important incentives: * producers only had to meet quotas, and didn't produce as much or as well as they could have produced * property users had no incentive to ensure the long-term sustainability of the property, creating long-term costs

firms hire extra labor while also gaining a maximum rent by?

at the input level where W = P(price of output)MP(marginal product of labor). If the value of the addtional output an input produces (MP) is greater than the cost of hiring that extra unit (w) it clearly increases the firm's rents to hire that extra input.

average product of labor

calculated as the total output produced by a firm divided by the quantity of workers (Q/L)

transaction costs

can be time consuming and inefficient when trying to maximize rents. Transaction cost consist of information cost, quality of good, property rights. Institutions help lower these cost.

Marginal Product

change in the total product that occurs when an additonal unit of that input is added to a fixed amount of the other factors

non-price competition

competition based on factors other than price. When there is a price ceiling and price floor demanders and supplier find non-price ways to compete with each other. (Queuing, corruption, bundling)

Production function

consider two inputs - labor (L) and capital (K) Our producton fucntion is expressed as y= f (L, K)

Inferior good

consumption decrease as income increases EX: cup of noodles, beans low cost items with more quality substitutes

Normal goods

consumption increases as income increases EX: house, salmon, named brands Average items that are averagely priced

Subsidies

government payments (to suppliers or consumers) that lower that cost

A firm with ten workers has a total value of product of​ $500. Each worker has a labor cost of​ $40. Under which of these conditions would the firm hire an eleventh​ worker?

if the worker increases total product by more than​ $40

elasticity of goods and services

product more subsituitable (short-term) is more elastic -gas, electricity, water are inelatic goods -coffee, rice, sneakers are elastic goods -specific goods have a higer elasticity (EX: coffee is less elastic than starbucks coffee)

price elasticity of demand

the percentage change in quantity demanded relative to a percentage change in price Eq: change in Q/ change in P * (P/Q)

Lost gains form trade in the case of a subsidy involves too much trade

too much of the subsidezed good and too little of other goods are being produced. MV of consumers is less than MC of sellers.