Econ. Exam 1 Material
Percentage change in price
%Δ price = (new price - initial price) / (initial price) x 100%
Define how (5) expectations and (6) tastes shift demand
(5) Expectations - The expectation of a reduction in future supply increases the demand today (6) Tastes - Changes in tastes caused by fads, fashions, and advertising can all increase or decrease demand
How does population shift demand?
. Population •An increase in population will increase demand generally. •A shift in subpopulations will change the demand for specific goods and services.
What are the 2 kinds of economic models?
1.) The Circular Flow Diagram 2.) The Production Possibilities Frontier
How does (2) Taxes and Subsidies affect the supply curve?
2. Taxes and Subsidies •A tax on output has the same effect as an increase in costs. •A subsidy is the reverse of a tax.
How does (3) Expectations change the supply curve?
3. Expectations •Suppliers who expect prices to increase will store goods for future sale and sell less today. •The expectation of a future price increase therefore decreases current supply. •Supply curve shifts to the left.
How does the price of substitutes shift demand?
3. Prices of Substitutes •A substitute is a good that can be consumed instead of another good. •A decrease in the price of a substitute will decrease demand for the other good.
How does (4) Entry or Exit of Producers affect the supply curve?
4. Entry or Exit of Producers •The entry of new producers increases supply, shifting the curve down and to the right.
How does the price of compliments shift demand?
4. Prices of Complements •Complements are things that go well together. •A drop in the price of a complement increases demand for the complementary good.
How does (5) Changes in Opportunity Costs affect the supply curve?
5. Changes in Opportunity Costs •An increase in opportunity costs shifts the supply curve up and to the left. •If the price of wheat increases, the opportunity cost of growing soybeans increases. •Some farmers will shift away from producing soybeans and start producing wheat.
What happens if there is a decrease in demand?
A decrease in demand shifts the demand curve to the left. - At each price people are willing to buy LESS - At each quantity people are willing to pay LESS To remember: decrease (think less) and it shifts left. So, less = left. Both start with an L
Absolute Advantage vs. Comparative Advantage
Absolute Advantage - A person has an absolute advantage if that person is more productive than another. Being more productive means using fewer inputs or taking less time to produce a good or perform a production task. Being more productive also means being able to produce more with given inputs in a given amount of time. The specialized workers at McDonald's have an absolute advantage over the same number of workers each performing all the tasks needed to make a burger. - Person1 can have a comparative advantage over Person2 but if Person2 produces more of both things (at a higher cost) they have a absolute advantage Comparative Advantage - A person has a comparative advantage in an activity if that person can perform the activity at a lower opportunity cost than anyone else. Recall that the opportunity cost of something is what you must give up to get it.
Define Consumer surplus and total consumer surplus
Consumer Surplus: The consumer's gain from exchange; difference between the maximum price a consumer is willing to pay for a certain quantity and the market price Total consumer surplus: The area beneath the demand curve and above the price
Define "Free Lunch"
If production is currently at an inefficient point and it is moved to an efficient point, there is a free lunch. A free lunch is getting something for nothing. Resources were being used inefficiently & wasted but now by simply using what we already had we receive more of a good/service; thus, it is free as it costs nothing. Ex: Moving from point H to D creates a free lunch If production is already efficient (its on one of the points on the line) then there is no opportunity for a free lunch
A price elasticity of 1.27 means that demand is
Elastic Elasticity of Demand > 1 Elastic Elasticity of Demand < 1 Inelastic Elasticity of Demand = 1 Unit Elastic
Define Elastic & Inelastic
Elastic - very responsive to a price change Inelastic - Not very responsive to a price change. Ex: Medicine. If you have to have medicine it doesn't matter how much the price changes, you will still buy it Ex: If Starbucks rises the price on a latte but Dunkin' Donuts doesn't, you will buy more lattes at Dunkin', so the quantity sold by Starbucks changes - the demand for a starbucks latte is elastic. However, if both Starbucks & Dunkin' raises the price of a latte you will still continue to buy lattes (but maybe a little less lattes but not a whole lot fewer); thus, the demand for latte is inelastic. As the price increases, the quantity demanded decreases; and vice versa (as the price decreases the quantity demanded increases) - Elasticity is not the same as slope, but they are related. If two linear demand (or supply) curves run through a common point, then at any given quantity the curve that is flatter is more elastic.
The price before is $40 and the price after is $50. The quantity demanded before is 100 and the quantity demanded after is 20. Find the elasticity of demand
Elasticity of Demand = % change in quantity demanded / % change in price Where: • %ΔQuantity demanded = (Δquantity demanded) / (Average quantity) x100% • %Δ price = (Δ price) / (average price) x100% Δquantity demanded = New quantity - initial quantity average price = (New price - initial price) / 2 [(100-20) / (20 + 100 / 2)] / [(50-40) / (40 + 50 /2)] = 6
Elasticity of Demand Formula
Elasticity of Demand = % change in quantity demanded / % change in price Where: • %ΔQuantity demanded = (Δquantity demanded) / (Average quantity), • %Δ price = (Δ price) / (average price) Calculated in absolute value so if you get a negative answer make it positive Elasticity of Demand > 1 Elastic Elasticity of Demand < 1 Inelastic Elasticity of Demand = 1 Unit Elastic
Formula for elasticity of supply
Elasticity of supply = Percentage change in quantity supplied / percentage change in price Where: • Percentage change in quantity supplied = (Change in quantity supplied) / (Average quantity) x 100% • Percentage change in price = (Change in price) / (Average price) x 100%
What factors shift demand?
Factors That Shift Demand: 1.Income 2.Population 3.Price of substitutes 4.Price of complements 5.Expectations 6.Tastes
What are some factors that affect the supply curve?
Factors That Shift Supply: 1.Technological innovations and changes in the price of inputs 2.Taxes and subsidies 3.Expectations 4.Entry or exit of producers 5.Changes in opportunity costs
Ibn al-Haytham
Father of options and the scientific method. 6 methods to the scientific method, 1.) Observe and ask questions 2.) Research 3.) Create hypothesis 4.) Test hypothesis 5.) Conclude 6.) Share results Other guidelines for the scientific method: a.) No scientific theory can be proven to be 100% right b.) Correlation is NOT causation. c.) Avoid selecting windowing. Ex: provide all evidence. Ex: Colgate created an ad saying 80% of dentists recommended Colgate during a study. However, they left out the fact that dentists all chose many other brands - they selected a lot of different ones in addition to Colgate.
Proceed on
Flip cards back
If the demand curve is inelastic, then revenues ↑ when price ____ ? If the demand curve is elastic, then revenues ↓ when price ____ ?
If the demand curve is inelastic, then revenues ↑ when price ↑ If the demand curve is elastic, then revenues ↓ when price ↑
How do increases in supply affect the supply curve?
Increase in Supply—shifts the supply curve to the right. -At each price producers are willing to sell more. -At each quantity, producers are willing to accept a lower price
Define Market Equilibrium & Competitive Market Equilibrium
Market equilibrium A situation in which quantity demanded equals quantity supplied. •Equilibrium price and quantity are the only ones that are stable in a free market. •At any other point, economic forces push prices and quantities back toward equilibrium. Competitive market equilibrium A market equilibrium with many buyers and many sellers.
Elasticity of Demand
Measures how responsive the quantity demanded is to a change in price. More responsive = more elastic
Flip cards
Proceed
Producer Surplus and total producer surplus
Producer Surplus:The producer's gain from exchange, or the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity. Total Producer Surplus:The area above the supply curve and below the price. •An increase in demand means that buyers want a greater quantity at the same price or, equivalently, they are willing to pay a higher price for the same quantity. •An increase in supply means that sellers are willing to sell a greater quantity at the same price or, equivalently, they are willing to sell a given quantity at a lower price.
On a PPF, when is production efficient / inefficient?
Production is efficient when the economy is getting all that it can from its' resources. This is when it is not possible to produce more of one good/service without producing less of another - ALL available resources must be in use Something within the line where the max of neither good/service is produced is inefficient
Would the supply of roofing nails in Fargo, North Dakota, be relatively elastic or inelastic
Relatively elastic; it would be easy to increase production at constant unit cost; nails are a small share of the market for galvanized steel; and the local supply in Fargo is more elastic than the global supply
Revenue in regards to elasticity
Revenue = (Price per unit) (Quantity sold), or, R=PQ Elasticity measures how much Q changes when P changes
Define Quantity demand
The quantity that buyers a willing and able to buy at a particular price
Aggregate Variables
Things like gross domestic product, national income, aggregate demand, aggregate supply, general price level, rate of unemployment, public deficit, exchange rate, etc. It's all the little variables that can affect the economy as a whole.
Describe the process of "Thinking like an economist"
Thinking like an economist trains you to, - Think in terms of alternatives - Evaluate the cost of individual and social choices - Examine and understand how certain events and issues are related Thinking like an economist means - Using the scientific method - Thinking analytically and objectively
Identify the following sentence as either positive or normative: "Everyone should shop at Walmart"
This is a Normative statement. Notice the word should, so this is an opinion. This can't be proven true or false.
Identify the following sentence as either positive or normative: "People tend to shop at Walmart more when they get a pay raise."
This is a positive statement, whether the statement itself is factually correct or not is irrelevant. Notice it is in a "if...then" format. You can look at income and shopping data and determine if this statement is true or false If people earn more then they shop more at Walmart
How is Equilibrium maintained?
Too high of a price will result in a surplus. Because of low demand and in order to compete and sell more companies will lower their prices toward equilibrium Too low prices and there will be a shortage. Due to high demand companies will raise their price toward equilibrium Equilibrium is like a ball rolling around in a bowl. It will roll all around but eventually it always ends up back in the center (equilibrium)
The Circular Flow Diagram
a visual model of the economy, shows how dollars flow through markets among households and firms Firms - Produce and sell goods and services - Hire and use factors of production Households - Buy and consume goods and services - Own and sell factors of production Markets for goods and services - Firms sell - Households buy Markets for factors of production - Households sell - Firms buy
Determine if the following questions are microeconomic or macroeconomic questions a.) What determines the overall trade in goods, services and financial assets between Canada and the rest of the world? b.) What policies should be adopted to promote full employment and growth in the economy as a whole?
a.) Macro b.) Macro
Determine if the following questions are microeconomic or macroeconomic questions a.) Go to university or take a job? b.) What determines the overall salary levels paid to workers in a given year? c.) How many people are employed in the economy as a whole? d.) What determines the salary offered by Royal Bank to its new CEO?
a.) Micro b.) Macro c.) Macro d.) Micro
Determine if the following questions are microeconomic or macroeconomic questions a.) What determines the price of a cup of coffee at Lakehead? b.) What determines the overall level of prices in the economy as a whole? c.) What determines whether Ford produces its F-150 in Canada or Mexico?
a.) Micro b.) Macro c.) Micro
Identify the following 2 statements as either positive or normative a.) An increase in the minimum wage will cause a decrease in employment among the least-skilled. b.) Higher federal budget deficits will cause interest rates to increase. c.) The income gains from a higher minimum wage are worth more than any slight reductions in employment. d.) State governments should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor.
a.) Positive b.) Positive c.) Normative d.) Normative
If iPads are a normal good, when incomes increase, the demand curve for iPads will: a.Shift to the right. b.Shift to the left. Not change
a.) Shift to the right Higher incomes increase demand for a normal good, shifting the demand curve to the right
Identify the following 2 statements as either positive or normative a.) "Rich people need to pay more taxes" b.) "If families with incomes over $250,000 per year paid more taxes, overall tax revenues will increase."
a.) This is clearly an opinion and cannot be proven. No values or specifications are even given. Normative b.) Positive.
unexploited gains from trade
Unexploited gains exist when quantity is below the equilibrium point. Ex: outside of the eq. someone is selling for either too much or too little - someone is getting a good deal. This also lends credence to the theory of markets always correcting toward equilibrium. Ex: People will realize they overpaid for a product and pay less next time, correcting the price (and vice-versa)
Econ Micro (Week 3)
Week 3 Material for exam 1
What is the elasticity of demand if a price drop from $4 to $3 causes quantity to increase from 120 to 150?
[(120 - 150) / (120 + 150 /2)] / [(4-3) / (4+3/2)] = 0.7778 Absolute value; drop the minus.
If demand for iPhones is inelastic, an increased supply of iPhones would result in: ? (increased, decreased, or unchanged revenue)
b. Decreased revenues; the increase in quantity sold would be offset by a much larger decrease in price
Aggregate Economic Behavior
economic wide results of individual behavior
Elasticity Rule
if two linear demand (or supply) curves run through a common point, then at any given quantity the curve that is flatter is more elastic
Define Productivity
output per unit of input
_____, _____ and the idea of _____ explain how prices are determined. Changes in ____ and _____ can plunge an economy into a recession or set off a boom
supply, demand, equilibrium supply, demand
Things that affect elasticity of demand
- Ease in finding substitutes. The easier it is to find substitutes the greater the elasticity. Ex: If starbucks increases frappe costs you can simply stop buying starbucks and buy Dunkin' instead, thus, starbucks demand for frappes is dependent on their prices (elastic) - Time to adjust to price change. More time --> more substitutes --> greater elasticity. If prices are high for a long time people will adapt over time and find more substitutes. The more time, the more elastic. - The definition of the commodity. Narrow definition/specific brand --> more substitutes --> greater elasticity. The broader the classification, the less likely the consumers will be able to find a substitute (inelastic). Ex: If exon gas (a specific brand) raises prices you can find another gas station (elastic); however, if gas everywhere (broad) increases in price, you can't find a substitute (inelastic). - Necessities vs. Luxuries. Luxuries --> greater elasticity - Share of budget devoted to the good. Larger share ---> greater elasticity. If the purchase is small relative to the consumers income it won't make a difference; in fact, the consumer might not even notice the price increase. (Full list in image)
What are your incentives to learn economics?
- Gives lessons for investing in the stock market; however, economics is much more than that - it is the study of human action. How people make choices and how certain things (like scarcity) affect those choices. Ex: It helps you decide what jobs and degrees to pick, whether to pursue college at all or how much, etc.
What are the components of an Economic Model
- Variables are measures that can change over time - Assumptions regarding relationships among variables - Implications - Testable Hypothesis
How does income shift demand?
1. Income •When people get richer, they buy more stuff. •When an increase in income increases the demand for a good, it is a normal good. •Most goods are normal goods. •When an increase in income decreases the demand for a good, it is an inferior good.
How does (1) Technological innovations and changes in the price of inputs change the supply curve?
1. Technological Innovations •Improvements in technology can reduce costs, thus increasing supply. •A reduction in input prices also reduces costs and thus has a similar effect.
What happens if there is an increase in demand?
An increase in demand shifts the demand curve to the right. - This means that at each price people are willing to buy more, and, at each quantity people are willing to pay a higher price
(b) is correct 50
Answer this question
When there is a shortage in a competitive market: a.Price will increase. b.Price will decrease. c.Price will remain the same.
Answer: a. Excess demand will cause price to increase.
If orange juice and apple juice are substitutes, an increase in the price of orange juice will: a.Increase demand for apple juice. b.Decrease demand for apple juice. c.Not affect demand for apple juice.
Answer: a. Increase demand for apple juice. A higher price for orange juice will cause some people to substitute the now lower-priced apple juice. This increases the demand for apple juice.
A decrease in demand will: a.Decrease both price and quantity. b.Decrease price and increase quantity. c.Increase price and decrease quantity.
Answer: a. Lower demand causes a surplus, lowering prices and causing suppliers to supply less
Suppose a new technology reduces the time it takes to assemble a car. How would this affect the supply of cars? a.Shift supply to the right. b.Shift supply to the left. c.It would have no effect on supply.
Answer: a. Producers would be able to supply more cars at the current price, shifting the supply curve to the right.
When there is a surplus in a competitive market: a.Price will increase. b.Price will decrease. c.Price will remain the same.
Answer: b. Excess supply will cause suppliers to decrease price.
If the quantity traded is less than equilibrium quantity: a.Resources will be wasted. b.Suppliers will only supply goods at equilibrium price. Some gains from trade will be lost.
Answer: c. Some gains from trade will be lost.
Waste from trade
Anything above (above&right) the equilibrium point produces waste. At this point companies are producing more than people will buy. This is unsustainable so it self corrects toward equilibrium
On a PPF, what is attainable / unnattainable?
Anything inside of and on the line is attainable Anything outside of the line is unattainable
If the price elasticity of demand for wine is 1.2, and the price of wine increases, the total revenues of the wine industry would: ?
Decrease Demand is elastic, so a price increase would cause revenues to decrease
How do decreases in supply affect the supply curve?
Decrease in supply—shifts the supply curve to the left. -At each price sellers will offer less. At each quantity, sellers demand a higher price
Define Economic Growth
Economic growth is the sustained expansion of production possibilities. Economic growth shifts the PPF outward Economic growth requires technological advancements or accumulations of capital so that there are more resources to devote to production or it costs less to produce
Microeconomics vs. Macroeconomics
Microeconomics is the study of economics at an individual, group or company level. Macroeconomics, on the other hand, is the study of a national economy as a whole. Macro, - Analyzes entire economy and the issues that effect the entire economy and most of society - Studies aggregate economic behavior - Studies aggregate variables - Studies national income - Analyzes total employment numbers - Studies overall prices - Studies aggregate demand and aggregate supply - Primarily focused on INCOME ANALYSIS Micro - Analyzes individual components of the economy - Studies economic behavior of individual units (individual firm or individual family) on markets for particular goods and services. Basically, it looks at how individuals shop - Deals with the decision-making of a certain firm (producer) or a certain household (consumer) - Studies variables relating to the individual, such as the firms output, consumer income, prices of individual goods, etc. - Analyzes supply and demand of labour - Includes laws related to marginal analyses - Primarily focused on PRICE ANALYSIS
Would demand for BMW cars be more elastic or less elastic than demand for cars in general?
More elastic; specific brands are more elastic than general categories, and luxuries are more elastic than necessities
Formula for cross elasticity of demand
Percentage change in the quantity demanded of a good / Percentage change in the price of one of its substitutes or complements
Positive vs Normative Economics
Positive - Positive statements are statements that describe the world as it is. Economic data (numbers) can be used to test to see if the statement is true. However, a positive statement doesn't have to be true, it can be false - Usually in a "if ... then" form Normative - Normative statements are statements about how the world should be. They contain values, opinions, or judgements. Ex: do we think this is good or bad? It's a statement of opinion that can NOT be tested to be true or false - Usually uses phrases like "should," "think," etc..
Define positive economics
Positive economics is a subset of economics that analyzes the way the economy actually operates
Supply curve
Supply Curve: A supply curve shows how producers respond to higher prices by producing more, and to lower prices by producing less. It's a function that shows the quantity supplied at different prices. Quantity Supplied:The quantity that sellers are willing and able to sell at a particular price. A Supply Curve Can Be Read: •Horizontally: At a given price, how much are suppliers willing to sell? •Vertically: To produce a given quantity, what price must sellers be paid? As the price of oil rises, it becomes profitable to extract from more costly sources. Ex: At a certain point on the graph (going) as the the price increases oil shale becomes profitable (but only after the price reaches a certain point). Also, as the price rises, the quantity supplied increases.
What affects the elasticity of supplies?
Supply is more elastic when the industry can be expanded without causing a big increase in the demand for that industry's inputs - The local supply of a good is much more elastic than the global supply - Supply tends to be more elastic in the long run than in the short run
Define Surplus & Shortage
Surplus A situation in which the quantity supplied is greater than the quantity demanded. Shortage A situation in which the quantity demanded is greater than the quantity supplied.
Deductive vs. Inductive (only describe deductive)
The deductive method, 1.) Select a problem (like unemployment, inflation, poverty, etc.) 2.) Formulate an assumption. This is done through logical deduction where relationship (p) and (q) exist, which implies that the relationship (r) exists as well. - Assumptions are used to simplify things - The art in scientific thinking is deciding which assumptions to make - Economists use different assumptions to answer different questions 3.) Test and Verify the hypothesis. Using observation and experimentation determine if the evidence supports the hypothesis.
Elasticity of supply
The fundamental determinant is how quickly per-unit costs increase with an increase in production. For example, elastic goods can be produced at a constant opportunity cost. Ex: Silicon can be manufactured from sand at a constant opportunity cost (regardless of the volume the cost is the same); however, a Picasso painting is inelastic because no more of them can be painted. - If increased production requires much higher per-unit costs, then supply will be inelastic - If production can increase without increasing per-unit costs very much, then supply will be elastic
Define Opportunity Cost
The opportunity cost of something is what you must give up to get it.
The Production Possibilities Frontier
The production possibilities frontier is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology - The line on a production possibilities graph shows the maximum possible output
Define Economics
The study of how individuals and society choose to employ scarce resources to produce and distribute goods and services.
Incentives
an action or reward that motivates one to act a certain way The British had very high death rates on ships transporting criminals to Australia. An economist at the time created a solution; instead of paying the captains for each prisoner that boarded the ship, they paid the captains only for every prisoner that made it to Australia. This created incentive for the captains to treat the prisoners good and ensure that they make it there alive. This proves that economy beats sentiment and benevolence
If the PPF has a downward slope it means there is a _______
tradeoff
Define Demand curve
•A demand curve shows how customers respond to higher prices by buying less, and to lower prices by buying more. Demand curves can be read 2 different ways, based on horizontal values and based on vertical values. How to read a demand curve; - Horizontal says how much people are willing to buy at a given price - Vertical says what people are willing to pay for a given quantity - A demand curve is negatively sloped (slopes down) - The lower the price the greater the quantity demanded. Ex: Consumers will buy more oil at lower prices than at higher prices. On the other end, when the price is high, consumers will use it only in its most valuable uses.
