ECON 2001.01

Price Elasticity of Supply

Depends on how easily--and therefore how quickly--producers can shift resources between alternate uses.

Ceteris Paribus

Everything is constant, nothing is changing.

Macroeconomics

Examines either the economy as a whole or its basic subdivisions or aggregates, such as the government, household, and business sectors.

Positive Economics

Focuses on facts and cause-and-effect relationships. Avoids value judgements. Tries to see economy as it is.

How Economists Use The Scientific Method

Form and test hypothesis of cause-and-effect relationships to generate theories, laws, and principles. Often theories are combined into representations called models.

Society's Economizing Problem

Has scarce economic resources, needs to use them to produce as many goods and services as possible.

Cross Elasticity - Substitute Goods

If cross elasticity is positive, (if X and Y move in the same direction) then X and Y are substitute goods.

Economic Perspective/Way Of Thinking

Includes three elements: scarcity and choice, purposeful behavior, and marginal analysis. It sees individuals and institutions making rational decisions based on comparisons of marginal costs and marginal benefits

Normative Economics

Incorporates value judgements about what the economy should be like or what particular policy actions should be recommended to achieve a desired goal.

General Relationship Between Investment and Economic Growth

Investing more in the economy brings more economic growth.

The Resource Categories

Land, Labor, Capital, and Entrepreneurial Ability

Individual's Economizing Problem

Limited income, unlimited wants. We must create a budget line and try to get the most for our money.

Purposeful Behavior

Making rational decisions based on self interest. People make decisions with a desired outcome in mind.

Cross Elasticity of Demand

Measures how sensitive consumer purchases of one product are to change the price of another product.

Income Elasticity

Measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good.

Total Revenue Test

Note what happens to total revenue when price changes. If total revenue changes with price, then demand is inelastic. If it changes in the opposite direction as price, demand is elastic. No change=unit elastic.

Microeconomics

The part of economics concerned with decision making by individual customers, workers, households, and business firms.

Allocative Efficiency

The particular mix of goods and services most highly valued by society (minimum cost production assumed).

Productive Efficiency

The production of any particular good in the least costly way. Ex. Wheat/minimum wage

Economics

The study of how best to allocate scarce resources among competing uses.

Cross Elasticity - Complementary Goods

When cross elasticity is negative, we know that X and Y go together; and increase in the price of one decreases the demand for the other.

Price Ceiling

A maximum price set by the government designed to help consumers. Ex. Rent controls

Price Floor

A minimum price set by the government designed to aid producers.

Change in Quantity Supplied

A movement from one point to another on a fixed supply curve caused by a change in price.

Change in Quantity Demanded

A movement from one point to another point--from one price-quantity combination to another--on a fixed demand curve.

Law of Demand

A price falls, quantity demanded increases; as price rises, demand decreases.

Definition of Supply

A schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specified period.

Definition of Demand

A schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each series of possible prices during a specified period of time.

Budget Line

A schedule or curve that sows various combinations of two products a consumer can purchase with a specific limited income.

Cross Elasticity - Independent Goods

A zero or near-zero cross elasticity suggests that the two products being considered are unrelated or independent goods.

Law of Supply

As price rises, quantity supplied rises; as price falls, the quantity supplied falls.

Real World Applications of Production Possibilities Curve

Assessing costs and benefits of the Iraq War using "defense goods" and "civilian goods"

Scarcity and Choice

Because we can't have it all, we have to decide what we'll have and what we give up; opportunity costs.

Consequences of Government Set Prices

Black Markets, counterfeits, decreased supply as investors look to other more profitable options.

Marginal Analysis

Comparisons of marginal benefits and marginal costs, usually for decision making

Determinants of Supply

Resource prices, technology, taxes & subsidies, prices of other goods, producer expectations, and number of sellers.

Price Elasticity

Responsiveness of consumers to a price change.

Determinants Of Price Elasticity

Substitutability, proportion of income, luxuries vs. necessities, and time.

Determinants of Demand

Tastes, number of buyers, income, prices of related goods, and consumer expectations.

Rationing Function of Prices

The ability of the competitive forces of supply and demand to establish a price at which selling and buying decisions are consistent.