ECON 202 FIRST EXAM

Income elascity

% change in QD/ % change in QS

Elasticity of supply

% change in QS/ % change in price

The nature and determinants of market supply and demand

1. The price of the commodity 2. The prices of other commodities 3. The prices of factors of production 4. The objectives of producers, and 5. The state of technology (or the art of production).

Circular flow

2 markets and 4 participants:

How to calculate and interpret price elasticity of demand

Average Qd= After=Before/2 Divide the change in quantity by this average to get the percentage change in quantity Average Qd: % change in Qd=After-Before/ After+Before/2

opportunity cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

Elasticity of supply looks at

How responsive sellers are to a change in price.

The law of demand

In a given time period the quantity demanded of a good increases as its price falls

utility- maximizing rule

MU/P

How supply and demand determine equilibrium price and quantity

Set QD=QS,

The basic formula for price elasticity of demand is

The basic formula for price elasticity of demand is

A grocery store put salt on sale but found that total revenues fell. This can be explained by which of the following?

The demand for salt is inelastic

The roles of the market and the government

The government may also ensure national security by not allowing businesses to transact with enemy countries

Why demand curves are downward-sloping

The law of diminishing marginal utility

Supply is very inelastic if the quantity supplied cannot respond quickly to an increase in price.

True

The three key questions every society must answer

What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services?

Three basic decisions

What to produce?, How to produce?, For whom to produce

elastic demand

a fall in price leads to a rise in total revenue

perfectly elastic

a given price change will result in the same revenue change

inelastic demand

a rise in price leads to a rise in total revenue

An increase in output occurs from

an expansion of production possibilities

the World View "Rebounding Oil Price Spurs More Rigs" related to oil prices and oil rigs suggests.

as the price of oil increases, there is an increase in oil rigs and the amount of quantity supplied, supply therefore is elastic

How consumers maximize utility

consumers decide to allocate their money incomes so that the last dollar spent on each product purchased yields the same amount of extra marginal utility.

Higher prices will increase total revenue if

demand is inelastic

The nature and source of consumer surplus

economic measure of consumer benefit, shows the relationship between the price of a product and the quantity of the product demanded at that price

Points on the PPC are

efficient and attainable

If the price elasticity of demand is equal to 2, the good has _____ demand.

elastic

positive economics

fact based

A demand curve that is completely elastic is

horizontal

The role of markets, and the circular flow

households- product market- businesses- factor market (circular model)

Points inside the PPC are

inefficient but attainable

normative economics

intrepretation/ opinion

Factors of production

land, labor, capital, entrepreneurship

Limits to outputs

limits resources requires choices and tradeoffs to be made

Businesses in the economy

maximize profits by selling goods that satisfy while keeping costs low

Government in the economy

maximize the general welfare of society

Consumers in the economy...

maximize the utility they can get from available incomes

Efficiently

maximum output of a good from the resources used in production

Want to consume goods:

necessity, enjoyment, to display status or identity

equilibrium price

one price and quantity combination that is compatible with the intentions of buyers and sellers (where the demand curve and supply curve intersect)

marginal utility

satisfaction or usefulness obtained from acquiring one more unit of a product

decrease in demand

shift the curve left

increase in demand

shift the entire curve right

Factors that set demand behavior (determinants of demand)

tastes, income, expectations, (substitutes/compliments), number of buyers

Ceteris paribus

the assumption that nothing else is changing

production possibilities

the combinations of final goods and services that could be produced in a given time period with all available resources and technology

Sarcity

the condition of limited resources and unlimited wants

law of diminishing marginal utility

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

Macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

Microeconomics

the study of how households and firms make decisions and how they interact in markets

total utility

the total amount of satisfaction obtained from consumption of a good or service

market mechanism (invisible hand)

the use of market prices and sales to signal desired outputs and resource allocations

When marginal utility is more than 0

then total utility increases

When marginal utility is less than 0

total utility decreases

When marginal utility equals 0

total utility maxes out

Points outside the PPC are

unattainable

A demand curve that is perfectly inelastic is

vertical

Demand to consume goods:

willingness and ability to purchase specific quantities of goods at a given time across a range or process, all else equal