Econ Chapter 2, Econ Chapter 3, ECON Chapter 1

example of absolute advantage and comparative advantage

- A person who has an absolute advantage does not have a comparative advantage in every activity. - John Grisham is a better lawyer and a better author of fast-paced thrillers than most people. He has an absolute advantage in these two activities. But compared to others, he is a better writer than lawyer, so his comparative advantage is in writing.

positive statement

- A positive statement is about what is. It says what is currently believed about the way the world operates. - A positive statement might be right or wrong, but we can test it by checking it against the facts. - "Our planet is warming because of the amount of coal that we're burning" is a positive statement. We can test whether it is right or wrong.

A choice is a tradeoff

- Because we face scarcity, we must make choices. And when we make a choice, we select from the available alternatives - For example, you can spend Saturday night studying for your next economics test or having fun with your friends, but you can't do both of these activities at the same time. When you choose how to spend your Saturday night, you face a tradeoff between studying and hanging out with your friends.

Prices of Related Goods Produced

- For example, if the price of an energy drink rises, firms switch production from sugary drinks to energy drinks. The supply of sugary drinks decreases - Sugary drinks and energy drinks are substitutes in production—goods that can be produced by using the same resources. - If the price of beef rises, the supply of cow-hide increases. Beef and cowhide are complements in production—goods that must be produced together.

the state of nature

- Good weather can increase the supply of many agricultural products and bad weather can decrease their supply. Extreme natural events such as earthquakes, tornadoes, and hurricanes can also influence supply. - Icy weather early spring - decrease in supply of peaches in summer - Weather and climate

the prices of related goods

- Substitute is a good that can be used in place of another good. - For example, if the price of an energy drink rises, people buy fewer energy drinks and more energy bars. The demand for energy bars increases. - Complement - is a good that is used in conjunction with another good. - Energy bars and exercise - If the price of an hour at the gym falls, people buy more gym time and more energy bars.

Prices of Factors of Production

- To see this influence, think about the supply curve as a minimum-supply-price curve. If the price of a factor of production rises, the lowest price that a producer is willing to accept for that good rises, so supply decreases. - For example, during 2008, as the price of jet fuel increased, the supply of air travel decreased. Similarly, a rise in the minimum wage decreases the supply of hamburgers.

allocative efficiency

- a situation in which goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit. We cannot produce more of any good without giving up some of another good that we value more highly

relative price

- if the price of a good is measured in terms of a quantity of others good It is an opportunity cost example: beanbags per corn hole board -

normative statement

- is about what ought to be. It depends on values and cannot be tested. - policy goals are normative statements. - "We ought to cut our use of coal by 50 percent" is a normative policy statement.

minimum supply price

- marginal cost - If a small quantity is produced, the lowest price at which someone is willing to sell one more unit is low. But as the quantity produced increases, the marginal cost of each additional unit rises, so the lowest price at which someone is willing to sell an additional unit rises along the supply curve.

the cost of economic growth

- technological change - capital accumulation - The amount by which our production possibilities expand depends on the resources we devote to technological change and capital accumulation

marginal benefit

- the benefit that a person receives from consuming one more unit of a good or service. It is measured as the maximum amount that a person is willing to pay for one more unit of the good or service

a change in supply

- the prices of factors of production - the prices of related goods produced - expected future prices - the number of suppliers - technology the state of nature

quantity demanded

- the total amount of a good or service that consumers PLAN TO BUY DURING A GIVEN TIME PERIOD At a particular price "Plan to buy" - The quantity demanded is not necessarily the same as the quantity actually bought. Sometimes the quantity demanded exceeds the amount of goods available, so the quantity bought is less than the quantity demanded. - refers to a point on a demand curve at a particular price

example of relative price

: relative price of oranges when measured in terms of apples? = number of apples that you had to give up in order to have 1 orange If an orange costs $4 and an apple costs $1 (money prices), what is the relative price of an orange? Number of apples you have to give up to get the price 4 apples per orange

Trade along the PPF

A choice along the PPF involves a tradeoff. Tradeoffs like that between cola and pizza arise in every imaginable real-world situation in which a choice must be made.

absolute advantage

A person who is more productive than others - Absolute advantage involves comparing productivities—production per hour—whereas comparative advantage involves comparing opportunity costs. - Tom does his math homework in 2 hours while Harry takes only 30 minutes to do the same task

production efficiency

A situation in which goods and services are produced at the lowest possible cost. If this is the case, we are not wasting or misallocating any resources - there are multiple points on PPF that show efficiency

technology

A technology change occurs when a new method is discovered that lowers the cost of producing a good. For example, new methods used in the factories that produce computer chips have lowered the cost and increased the supply of chips. - Marginal costs decrease - Supply increases

allocative efficiency and the PPF

At the best point on the PPF, we cannot produce more of one good without giving up some other good that provides greater benefit. - We are producing at the point of allocative efficiency—the point on the PPF that we prefer above all other points.

demand

Demand reflects a decision about which wants to satisfy - If you demand something, then you Want to Can afford it Plan to buy it - the entire relationship between the price of the good and the quantity demanded of it when all other influences on buyers plans remain the same

How do economists measure benefit

Economists measure benefit as the most that a person is willing to give up to get something. You are willing to give up a lot to be in school. But you would give up only an iTunes download for a slice of pizza.

market equilibirum

Equilibrium is a situation in which opposing forces balance each other Equilibrium price is the price at which quantity demanded equals the quantity supplied

example of marginal cost

Foryou, the marginal cost of studying one more night is the cost of not spending that night on your favorite leisure activity.

Circular Flows Through Markets

Households specialize and choose the quantities of labor, land, capital, and entrepreneurial services to sell or rent to firms. Firms choose the quantities of factors of production to hire. These (red) flows go through the factor markets. Households choose the quantities of goods and services to buy, and firms choose the quantities to produce. These (red) flows go through the goods markets. Households receive incomes and make expenditures on goods and services (the green flows).

supply

If a firm supplies a good or service, the firm - Has the resources and technology to produce it - Can profit from - producing it Plans to produce and sell it - Supply reflects a decision about which technologically feasible items to produce. - refers to the entire relationship between the price of a good and the quantity supplied of it

the principle of decreasing marginal benefit

It is a general principle that the more we have of any good or service, the smaller is its marginal benefit and the less we are willing to pay for an additional unit of it It is the reason why we like variety

economist as policy adviser

It is a toolkit for advising governments and businesses and for making personal decision All the policy questions on which economists provide advice involve a blend of the positive and the normative. Economics can't help with the normative part—the policy goal. But it can help to clarify the goal and achieve the goal

why does a higher price increase quantity supplied?

It is because marginal cost increases

opportunity cost is a ratio

It is the decrease in the quantity produced of one good divided by the increase in the quantity produced of another good as we move along the production possibilities frontier. Because opportunity cost is a ratio, the opportunity cost of producing an additional can of cola is equal to the inverse of the opportunity cost of producing an additional pizza.

preferences

Preferences determine the value that people place on each good and service. Preferences depend on such things as the weather, information, and fashion.

gains from trade

Producing only one good or a few goods is called specialization. We are going to learn how people gain by specializing in the production of goods in which they have a comparative advantage and trading with others.

What is inefficient on the PPF

Production inside the PPF is inefficient because resources are either unused or misallocated or both. - Resources are unused when they are idle but could be working. - Resources are misallocated when they are assigned to tasks for which they are not the best match.

what does the PPF illustrate?

The PPF illustrates scarcity because the points outside the frontier are unattainable. These points describe wants that can't be satisfied.

Opportunity cost along the PPF

The PPF makes this idea precise and enables us to calculate opportunity cost. Along the PPF, there are only two goods, so there is only one alternative: some quantity of the other good. To produce more pizzas we must produce less cola. The opportunity cost of producing an additional pizza is the cola we must forgo. And vice versa if we move from point C to point D, we produce an additional 1 million pizzas but 3 million fewer cans of cola. The additional 1 million pizzas cost 3 million cans of cola. Or 1 pizza costs 3 cans of cola. - some productions combinations are impossible

the number of suppliers

The larger the number of firms that produce a good, the greater is the supply of the good. As new firms enter an industry, the supply in that industry increases. As firms leave an industry, the supply in that industry decreases.

population

The larger the population, the greater is the demand for all goods and services; the smaller the population, the smaller is the demand for all goods and services. Also, the larger the proportion of the population in a given age group, the greater is the demand for the goods and services used by that age group.

increasing opporunity cost

The outward-bowed shape of the PPF reflects increasing opportunity cost. The PPF is bowed outward because resources are not all equally productive in all activities.

property rights

The social arrangements that govern the ownership, use, and disposal of anything that people value

willingness and ability to pay

The willingness and ability to pay is a measure of marginal benefit If a small quantity is available, the highest price that someone is willing and able to pay for one more unit is high. But as the quantity available increases, the marginal benefit of each additional unit falls and the highest price that someone is willing and able to pay also falls along the demand curve

expected future prices

They buy more of the good now before its price is expected to rise (and less afterward), so the demand For example, suppose that a Florida frost damages the season's orange crop. You expect the price of orange juice to rise, so you fill your freezer with enough frozen juice to get you through the next six months. Your current demand for frozen orange juice has increased, and your future demand has decreased.d for the good today increases. - PEople buy less of the good now before its price is expected to fall, so the demand for the good decreases today and increases in the future.

How do you make your decisions based off of marginal benefit and marginal cost

To make your decisions, you compare marginal benefit and marginal cost. If the marginal benefit from an extra night of study exceeds its marginal cost, you study the extra night. If the marginal cost exceeds the marginal benefit, you don't study the extra night.

The PPF and marginal cost

We calculate it by calculating the slope of the PPF As the quantity of pizzas produced increases, the PPF gets steeper and the marginal cost of a pizza increases

What are attainable points on the PPF

We can produce at any point inside the PPF or on the PPF. These points are attainable

income effect

When a price rises, other things remaining the same, the price rises relative to income. - Faced with a higher price and an unchanged income, people cannot afford to buy all the things they previously bought. They must decrease the quantities demanded of at least some goods and services. - Example: an energy bar initially sells for $3 and then the price doubles to $6. People now buy fewer energy bars and more energy drinks—the substitution effect. And faced with a tighter budget, people buy even fewer energy bars—the income effect. The quantity of energy bars deman

expected future income and credit

When expected future income increases or credit becomes easier to get, demand for a good might increase now For example, a salesperson gets the news that she will receive a big bonus at the end of the year, so she goes into debt and buys a new car right now, rather than waiting until she receives the bonus.

income

When income increases, consumers buy more of most goods; and when income decreases, consumers buy less of most goods. - . As incomes increase, the demand for air travel (a normal good) increases and the demand for long-distance bus trips (an inferior good) decreases.

the law of demand

When the price of a good goes up, the quantity demanded goes down When the price of a good goes down, the quantity demanded goes up This is true as long as nothing else changes besides the price of a good

law of supply

When the price of a good goes up, the quantity supplied goes up. When the price goes down, the quantity supply goes down

substitution effect

When the price of a good rises, other things remaining the same, its relative price - its opportunity cost - rises. Although each good is unique, it has substitutes - other goods that can be used in its place As the opportunity cost of a good rises, the incentive to economize on its use and switch to a substitute becomes stronger.

You and your neighbor pick apples and cherries. If you can pick apples at a lower opportunity cost than your neighbor can, which of the following is true?

You have a comparative advantage in picking apples.

preferences

a description of a person likes and dislikes and the intensity of those feelings

Specialization and the gains from trade make the economy PPF outward bowed because​ _______.

a good is initially produced by producers with lower opportunity costs and eventually produced by producers with higher opportunity costs

inferior good

a good that consumers demand less of when their incomes increase

normal good

a good that consumers demand more of when their incomes increase

In a​ low-income country,​ _________. As a country invests in capital and uses more advanced technologies​ _______.

agriculture accounts for a large percentage of total​ production; manufacturing becomes a greater percentage of total production and agriculture shrinks

firms

an economic unit that hires factors of production and organizes them to produce and sell goods and services - coordinate a huge amount of economic activity. - For example, Walmart buys or rents large buildings, equips them with storage shelves and checkout lanes, and hires labor.

What conditions must be satisfied if resources are used​ efficiently? Suppose a country produces only pencils and erasers. Pencil production is efficient if the marginal​ _______ a pencil equals the marginal​ _______.

benefit​ from; cost of a pencil

rational choice

choosing the alternative that has the greatest value from among comparable-quality products - a choice that compares costs and benefits and achieves the greatest benefit over cost for the person making the voice

examples of opportunity cost

choosing to buy a movie ticket instead of a book

total gains from trade

equilbrium price

factors bring change in demand

expected future prices - the prices of related goods - income - expected future income - population - preferences

marginal benefit

from a good or service is the benefit received from consuming one more unit of it. This benefit is subjective. It depends on people's preferences—people's likes and dislikes and the intensity of those feelings.

In the circular flow model, which of the following refers to markets where goods such as computers or services such as medical treatment are offered?

goods markets

economic growth

h increases our standard of living, but it doesn't overcome scarcity and avoid opportunity cost. Economic growth: the expansion of production possibilities

The marginal benefit curve you have drawn illustrates that the greater the quantity of yoga mats we​ have, _______. A. the smaller the marginal cost of producing a yoga mat B. the greater the opportunity cost of a yoga mat C. the more protein shakes people are willing to pay for an additional yoga mat D. the fewer protein shakes people are willing to pay for an additional yoga mat

he fewer protein shakes people are willing to pay for an additional yoga mat

expected future prices

if the expected future price of a good rises, the return from selling the good in the future increases and is higher than it is today. So supply decreases today and increases in the future

comparative advantage

in an activity if that person can perform the activity at a lower opportunity cost than anyone else. - A person has a comparative advantage when that person's opportunity cost of producing a good is lower than another person's opportunity cost of producing that same good. - Example: Joe's opportunity cost of producing a salad is only 1/5 of a smoothie, while Liz's opportunity cost of producing a salad is 1 smoothie. So Joe has a comparative advantage in producing salads.

investment in capital and advancements in technology

increase industrial production but decrease industrial jobs. Jobs are created in the service industry but many workers lack the necessary skills or are unwilling to relocate

As an economy experiences economic growth, shares of production shift:

initially from agriculture to industry and then from industry to services

tradeoff

is a constraint that involves giving up one thing to get something else

marginal benefit curve

is a curve that shows the relationship between the marginal benefit from a good and the quantity consumed of that good

economic model

is a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand. - A model is tested by comparing its predictions with the facts. But testing an economic model is difficult because we observe the outcomes of the simultaneous change of many factors.

markets

is any arrangement that enables buyers and sellers to get information and to do business with each other - An example is the world oil market, which is not a place but a network of producers, consumers, wholesalers, and brokers who buy and sell oil. Enterprising individuals and firms, each pursuing their own self-interest, have profited by making markets

money

is any commodity or token that is generally acceptable as a means of payment. The "invention" of money makes trading in markets much more efficient.

marginal cost

is the lowest price at which someone is willing to sell

Monday Island produces only potatoes and bananas. Complete the following sentence. The marginal cost of a potato is the number of bananas that​ ______ to get one more​ ______.

must be​ forgone; potato

quantity supplied

of a good or service is the amount that producers plan to sell during a given time period at a particular price. The quantity supplied is not necessarily the same amount as the quantity actually sold.

demand curve

shows the relationship between the quantity demanded of a good and its price when all other influences on Vertical axis - price Horizontal axis - quantity demanded

supply curve

shows the relationship between the quantity supplied of a good and its price when all other influences on producers planned sales remain the same

The principle of increasing opportunity cost states that the more resources devoted to any activity, the __________ the payoff to devoting additional resources to that activity.

smaller

Preference and Marginal benefit

stand in sharp contrast to marginal cost and production possibilities. Preferences describe what people like and want and the production possibilities describe the limits or constraints on what is feasible.

why does a higher price reduce the quantity demanded

substitution effect income effect

competitive market

t has many buyers and many sellers for the xat same thing The result: no single buyer or seller affects the price - many don't fit in compeitive

In a​ high-income country like the United States​ _______.

technological advances release labor from industrial production and move the labor into service production

benefit

the benefit of something is the gair or pleasure that it brings and is determined by preferences - what you gain

Production Possibilites frontier

the boundary between those combinations of goods and services that can be produced and those that cannot. To illustrate the PPF, we look at a model economy in which the quantities produced of only two goods change, while the quantities produced of all the other goods and services remain the same. - only two types of goods

opportunity cost

the highest valued alternative that we must give up to get something - To make the idea of opportunity cost concrete, think about your opportunity cost of being in school. It has two components: the things you can't afford to buy and the things you can't do with your ti

money price

the number of dollars that must be given up in the exchange for a good servce

marginal cost

the opportunity cost of an increase is an activity. It is the best alternative for forgone. It is calculated as the increase in total cost divided by the increase in output - the opportunity cost of getting one more/unit

Market

the place in which you find them Buyers and sellers For goods, services, factors of production

Which of the following is critical to the success of the market system?

to allow individuals or firms to have exclusive use of their property

how to calculate relative price

we divide the money price of a good by the money price of a "basket" of all goods (called a price index). The resulting relative price tells us the opportunity cost of the goods in terms of how much of the "basket" we must give up to buy it. - Relative Price of good A in terms of good B = price of good A/money price of good B

margin

when a choice is made by comparing a little more of something with its cost, the voice is made at the margin

opportunity cost always gets greater as

you go along the ppt from a to b to c

all or nothing costs

you're either in school or not in school. Most situations are not like this one. They involve choosing how much of an activity to do.

Example of predicting self interested choices that people make by looking at the incentives they face

your economics instructor gives you a problem set and tells you these problems will be on the next test. Your marginal benefit from working these problems is large, so you diligently work them. In contrast, your math instructor gives you a problem set on a topic that she says will never be on a test. You get little marginal benefit from working these problems, so you decide to skip most of them.

example of marginal benefit

your marginal benefit from one more night of study before a test is the boost it gives to your grade. Your marginal benefit doesn't include the grade you're already achieving without that extra night of work.

The production possibilities frontier is the boundary between those combinations of goods and services that can be​ _____ and those that​ ______.

​produced; cannot be produced