Econ Exam 1
The U.S. manufacturer of the EpiPen raised its price by nearly 25% per year for nearly a decade. For each 25% increase in the price, quantity demanded would _____ by _______ 25%
decrease; less than
congestion effect
-When a good becomes LESS VALUABLE because other people use it -If more people buy it, the demand for it will decrease
network effect
-When a good becomes MORE USEFUL because other people use it. -If more people buy it, the demand for it will increase
price taker
-a buyer or seller who is unable to affect the market price -someone who decides to change the prevailing price and whose actions do not affect the prevailing price
"holding other things constant"
A commonly used qualifier noting your conclusions may change if some factor that you haven't analyzed changes.
Someone else's shoes technique
By mentally trading places with someone so that you understand their objectives and constraints, you can forecast decisions they will make.
If an item has a negative income elasticity, it is...
an inferior good
Rising marginal costs imply
an upward sloping supply curve
Elasticity of Demand Formula
change in quantity demanded/change in price
diminishing marginal product
the marginal product of an input declines as you use more of that input
Substitute goods: You would expect the value of the cross-price elasticity to be large because....
the opportunity cost of getting information on price is low.
equilibrium price
the price at which the market is in equilibrium
Inferior good
A good for which higher income causes a decrease in demand
Individual supply curve
A graph plotting the quantity of an item that a business plans to sell at each price.
market supply curve
A graph plotting the total quantity of an item supplied by the entire market, at each price
If demand is elastic, a higher price yields...
less revenue
An increase in supply leads to a
lower price and larger quantity
A decrease in demand leads to a
lower price and smaller quantity
If demand is inelastic, a higher price yields...
more revenue
Higher prices lead to _____ total revenue if demand is inelastic, and lead to _____ total revenue if demand is elastic
more, less
The price elasticity of supply....
Explains how the suppliers of goods and services react to changes in price
Law of supply
The tendency for the quantity supplied to be higher when the price is higher
Cost-Benefit Principle
an individual should undertake an activity if and only if the additional benefit of doing so is greater than or equal to the additional cost of doing so.
When the price elasticity of supply is a positive number, changes in price lead to:
changes in quantity supplied stay in the direction
Inelastic
Describes demand that is not very sensitive to a change in price
A bakery hires a baker who can make 15 cakes per day. The bakery then decides to hire a second baker who will use the kitchen at the same time as the first baker. The bakery finds that the second baker can produce only an additional nine cakes per day. What concept does this scenario illustrate?
Diminishing marginal product
diminishing marginal benefit
Each additional item yields a smaller marginal benefit than the previous item
The four principles
Marginal (one more) Cost-benefit (benefit beat cost) Opportunity Cost (or what) Interdependence (what else)
perfect competition
Markets where: 1.) all firms in an industry sell an identical good 2.) there are many buyers and sellers, each of whom is small relative to the size of the market
If an item is a necessity rather than a luxury, its demand curve will be:
Relatively steep
Production possibility frontier
Shows the different sets of output that are attainable with your scarce resources.
The marginal principle
Suggests that you evaluate whether the extra benefit from one extra unit exceeds the extra cost of that unit.
individual demand curve
Summarizes your buying plans and how they vary with the price
marginal cost
The additional cost from one extra unit
Paper producers can manufacture both printing and drawing paper. What effect would rising prices for printing paper have on the market for drawing paper?
The supply of drawing paper will decrease.
Interdependence principle
Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors change, your best choice might change.
The price elasticity of _____ measures how responsive buyers are to _____.
demand; price changes
substitutes tend to...
fall or rise in price together
Jonathan Mendez is deciding whether to study for his economics exam at a café or go to a concert with friends tonight. The cost of dinner at the fancy restaurant on the way to the concert is ____ in the calculation of his opportunity cost and represents a _____ cost.
included; financial
When the percent change in price is _____ than the percent change in quantity demanded, demand is _____.
larger; inelastic
Europe has eight different companies selling devices similar to the EpiPen. If these devices were available for use in the U.S. market, you would expect price elasticity of demand to become________. This would also lead Mylan to charge a_________ price.
less inelastic; lower
marginal benefit
the extra benefit from one extra unit (of goods purchased, hours studied, etc)
marginal product
the increase in output that arises from an additional unit of input (like labor)
Ceteris Paribus
a Latin phrase that means "all other things held constant"
inelastic supply
a change in price has relatively little effect on quantity supplied; the percentage change in quantity supplied is less than the percentage change in price; the price elasticity of supply has a value less than 1.0
a movement up and to the left on a price and quantity graph represents...
a decrease in quantity demanded
Normal good
a good for which higher income causes an increase in demand
An Inferior Good
a good whose demand decreases when consumer income rises (or demand increases when consumer income decreases)
Substitutes examples:
-shoes and sandals -beef and chicken
Compliments examples
-wine and cheese -tables and chairs -shampoo and conditioner
5 factors that shift the market supply curve
1. input prices 2. productivity and technology 3. prices of related outcomes 4. expectations 5. the type and number of sellers
Increase in demand (regarding the curve)
A shift of the demand curve to the right
opportunity cost
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another
Variable costs
Costs (like labor and raw materials) that change with the quantity of output you produce
Rational rule
If something is worth doing, keep doing it until your marginal benefits equal marginal costs
Shifts vs movement along supply curve
If the only thing changing is the price, then you're thinking about a movement along the supply curve. But when other market conditions change, you need to think about shifts in the supply curve
willingness to pay
In order to convert nonfinancial costs or benefits into their monetary equivalent, as yourself "What is the most I am willing to pay to get this benefit"
The "or what" trick
In order to make a decision, you have to ask yourself this, comparing your choice to its next best alternative
Diamond-Water Paradox
The observation that things with the greatest value in use sometimes have little value in exchange and things with little value in use sometimes have the greatest value in exchange.
Fixed costs
Those costs that don't vary when you change the quantity of output you produce
framing effect
When a decision is affected by how a choice is described (or framed). You should avoid framing effects altering your own decision.
cross price elasticity
a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good
shift in the supply curve
a movement of the supply curve itself
If an item has a small income elasticity , it is...
a necesity
Rational Rule for Buyers
buy more of an item if its marginal benefit is greater than (or equal to) the price
Planned economy
centralized decisions are made about what is produced, how, by whom, and who gets what.
The sign of income elasticity tells you....
if the good is normal or inferior
The sign of cross elasticity tell you...
if the goods are compliments or substitutes
surpluses lead to....
prices falling
shortages lead to...
prices rising
equilibrium
the point at which there is no tendency for change. A market is in equilibrium when the quantity supplied equals the quantity demanded.
Scarcity
the problem that resources are limited
inelastic demand
the quantity purchased is not very responsive to price.
equilibrium quantity
the quantity supplied and demanded in equilibrium
Law of Demand
the tendency for quantity demanded to be higher when price is lower
economic surplus
the total benefits minus the total costs flowing from a decision. It measures how much a decision has improved your well-being
market demand curve
the total quantity of an item demanded by the entire market, at each price.
shortage
when the quantity demanded exceeds the quantity supplied
surplus
when the quantity demanded is less than the quantity supplied
Price Elasticity of supply formula
% change in quantity supplied / % change in price
Percent change in quantity equation
(Q2−Q1) / [(Q2+Q1)/2] × 100
complementary goods
- goods that GO TOGETHER. - demand for a good will decrease if the price of the other rises
movement along the demand curve
A PRICE CHANGE causes movement from one point on a fixed demand curve to another point on the same curve.
Market economy
Each individual makes their own production and consumption decisions, buying and selling in markets.
Suppose supply shifts out and demand shifts back. What happens to the equilibrium price and quantity?
Price falls. The effect on quantity is uncertain.
Rational Rule for sellers in competitive markets
Sell one more item if the price is greater than (or is equal to) the marginal cost
If an item has a large income elasticity, it is....
a normal good
movement along the supply curve
a price change causes movement from one point on a fixed supply curve to another point on the same curve
Market
a setting bringing together potential buyers and sellers
Decrease in demand (regarding the curve)
a shift of the demand curve to the left
decrease in supply (regarding the curve)
a shift of the supply curve to the left
increase in supply (regarding the curve)
a shift of the supply curve to the right
substitutes-in-production
alternative uses of your resources, your supply of a good will decrease if the price of a _______ rises
elastic
describes demand that is very sensitive to a change in price
A Normal Good
goods for which the demand rises as consumer income rises.
compliments-in-production
goods that are made together, your supply of a good will increase if the price of a ______ rises
An increase in demand leads to a...
higher price and larger quantity
A decrease in supply leads to a
higher price and smaller quantity
The price elasticity of demand for a good with a vertical demand curve is:
perfectly inelastic.
Supply shifts lead to
price and quantity moving in opposite directions
Demand shifts lead to
price and quantity moving in the same direction
Diminishing marginal product leads to...
rising marginal costs for a seller.
The supply curve is upward-sloping because
sellers can make more profit per unit if the market prices rise.
Supply is inelastic whenever the percent change in quantity supplied is:
smaller than the percent change in price.
You know that the price elasticity of demand for your leading generic drug is 1.5 and you sell it for three times what it costs. As the pricing manager, you should....
suggest decreasing the price on the leading generic drug to increase revenue.
change in quantity demanded (regarding the curve)
the change in quantity associated with movement along a fixed demand curve
substitute goods
- goods that REPLACE each other - demand for a good will increase if the price of the other rises
Six factors shifting demand
-Income -preferences -prices of related goods -expectations -congestion and network effects -the type and number of buyers
sunk cost
A cost that has already been incurred that cannot be changed by any decision made now or in the future. Good decisions ignore this.
change in the quantity supplied
the change in quantity associated with movement along a fixed supply curve