Econ Mid-Term

Substitution Effect

the change in the quantity consumed as the consumer substitutes other goods that are now relatively cheaper in place of the good that has become relatively more expensive

Law of Diminishing Returns

when a fixed input is held constant, beyond some point, increases in the variable input will yield smaller and smaller increases in output (short run) ((too many cooks in the kitchen --> less productive)

Inferior Goods

↓ consumption with higher income (ex. hamburger, canned food)

The Midpoint formula

➤% change in quantity= change in quantity/ (old quantity + new quantity)/2 ➤% change in price= change in price/ (old price + new price)/ 2

Cross Price Elasticity of Demand(subs & coms)

➤For subs, cross price elasticity of demand is positive ➤For complements, cross price elasticity of demand is neg

Effects of a Quota

➤decrease the quantity supplied ➤higher prices (if binding) ➤decrease the quantity demanded ➤no surplus results ➤allocation: efficient ➤lost economic surplus

Mandate

a *minimum* quantity that sellers are required to sell (low income housing mandates)

Price Ceiling

a maximum price that sellers can charge (ex. rent control on apartments, limits on Uber surge pricing)

Sunk Costs

costs that already incurred that cannot be reversed (O.C. says you should ignore sunk costs)

Taste

demand if fashionable → shift right, demand if unfashionable → shift left

Price and Quantity move in the same direction

demand shifted

Substitute Goods(replace each other)

demand ↑↑ when price of substitutes ↑↑, demand ↓↓ when price of substitutes ↓↓

Complementary Goods(go together)

demand ↓↓ when price of complementary good ↑↑, demand ↑↑ when price of complementary good ↓↓

Marginal Benefit

the "extra benefit" from one more unit

Marginal Cost

the "extra cost" from one more unit

Income Effect

the change in quantity of the good consumed that results from a change in overall purchasing power of the consumer due to a change in price of that good (you feel richer)

Extensive margin

the cheaper something is, the more customers you get

Intensive margin

the cheaper something is, the more each customer buys

Consumer Surplus

the difference between a consumer's willingness to pay and the price

Producer Surplus

the difference between the price and the producer's cost

Intensive Margin (supply)

the higher the price, the more each seller produces

Extensive Margin

the higher the price, the more sellers enter the market (and lower prices cause loss-making firms to exit the market)

Number and Type of Buyers

the individuals in the market are changing, doesn't shift the individual demand, does shift the market demand

Opportunity Cost Principle

the most valuable alternative that you have to give up to get it → ask yourself "or what?"

Number and Types of Sellers

the number of sellers in the market changes, doesn't shift individual supply, does shift market supply

Connectedness Principle

to fully understand the consequences of your decisions account for

Congestion Effects

when a good becomes less useful because other people use it, increased use by others will decrease demand (ex. traffic congestion)

Diseconomies of Scale

when increasing all of your inputs leads to a proportionally smaller increase in output (long run issue) ((many cooks in a larger kitchen, recipe gets changed))

Rising Cost of Time

you only have so many hours in the day, so the more time you devote to your business, the higher the opportunity cost

Economic Surplus

your benefit minus your cost, a measure of how much extra well-being your decision created

Normal Goods

↑ consumption with high income (ex. steak, wine, cars, shirts)

Effects of a Price Floor

➤higher prices (if binding) ➤increase the quantity supplied ➤decrease the quantity demanded ➤*surplus* results ➤disequilibrium leads to forces which lower "effective price"

Effects of Price Ceiling

➤lower prices (if binding) ➤decrease the quantity supplied ➤increase the quantity demanded ➤*shortages* result ➤disequilibrium forces increase "effective price", partly undoing price regulation

Equilibrium Price

price that equates quantity supplied with quantity demanded

Total Revenue

price x quantity

Economic Profit

profitability of a new business after subtracting the opportunity cost of entrepreneurship (foregone wages, foregone investment income)

Equilibrium Quantity

quantity at which supply equals demand

Income Elasticity of Demand

responsiveness of demand to changes in income ➤ can be used to distinguish normal from inferior goods ➤ normal goods: buy more as income rises, income elasticity is pos ➤ inferior goods: you "make do", but buy less when your income rises, income elasticity is neg ➤ for income-elastic goods, income elasticity is greater than 1 ➤ for income inelastic goods, income elasticity is positive but less than 1

Price of Inputs (Variable Costs)

rise in the price of variable inputs (labor, raw materials) causes a rise in marginal cost, yielding decrease in supply

Shutdown Condition

shutdown and produce nothing if your revenues do not exceed your recoverable (non-sunk) costs.......loss occurs when: costs > revenues.....shutdown when: (costs-sunk costs)>revenues

if production can be increased cheaply...

supply curve will be elastic

if increased production is expensive...

supply curve will be inelastic

Price and Quantity move in opposite directions

supply shifted

Unitary Elasticity

% change in Quantity= % Change in Price (Ed= 1)

Cross-Price elasticity of demand (eqn)

% change in quantity of this good/ % change in price of another good

Price Elasticity of Demand

% change in quantity ÷ % change in price

Income Elasticity of Demand

% change in quantity/ % change in come

Price Elasticity of Supply (EQN)

% change in quantity/ % change in price

Increasing Marginal Costs

At some point, producing each additional item comes at a higher marginal cost than the previous item

How Analysts Estimate Market Supply

1. Survey all possible suppliers 2. Add up the total quantity supplied 3. Scale the quantities supplied by the survey respondents, so that they represent the whole market 4. Plot the market supply curve

Four Steps to Estimate Market Demand

1. Survey your customers 2. Add up the total quantity demanded 3. Scale the quantities demanded by the survey respondents, so that they represent the whole market 4. Plot the market demand curve

Elasticity

A measure of responsiveness, the more responsive the more elastic

Demand for Normal Goods

Increase in income shifts demand right

Perfectly Inelastic

An increase in price leaves the quantity demanded unchanged (Ed< 1) (vertical line)

Expectations

Connectedness principle → buying tomorrow is a sub. for buying today

Fixed Costs

Costs that stay the same regardless of output (managers, buildings).....don't change when you produce another unit → irrelevant to the "or what?" question

Variable Costs

Costs that vary with the amount of output (wages, oil expenditures)

Cost Benefit Principle

Evaluation the full set of benefits and costs of any choice you face, and *only pursue that choice if its benefits are at least as large as the costs*

Short Run

Horizon over which some inputs can't be changed (➤can't change: inputs like size of refineries, plants, firms) (➤can change: inputs like labor, raw materials)

Demand for Inferior Goods

Increase in income shifts demand curve left

Surplus

Net Benefits

Long Run

Planning horizon over which all inputs can be changed (➤expand or shrink refinery, plant, firm ➤all costs are adjustable)

Shortage

Quantity demanded exceeds the quantity supplied occurs at any price lower than the equilibrium price

Perfectly Elastic

Quantity is infinitely responsive to even tiny price changes (horizontal line)

Elastic Demand

Quantity is quite responsive (Ed> 1)

Inelastic Demand

Quantity is quite unresponsive (Ed< 1)

Surplus

Quantity supplied exceeds the quantity demanded occurs at any price higher than the equilibrium price

Price Elasticity of Supply

Responsiveness of quantity supplied to the price ➤a more responsive quantity supplied is to a change in price, more elastic the supply curve

Rational Rule for Sellers

Sell more of an item if the marginal cost has not risen to be greater than (or equal to) the marginal benefit. Keep selling until PRICE=MARGINAL COST

Law of Demand

The quantity demanded is higher when prices are lower

Individual Supply

The quantity one person supplies, at each price

Law of Supply

The quantity supplied is higher when prices are higher

Market Supply

The total quantity supplied by the market at each price

Network Effects

When a good becomes more useful because other people use it, increase use by others will increase demand (ex. facebook)

Quota

a *maximum* quantity that sellers can sell (immigration laws, hunting season)

Economic Burden

Who bears the burden of the tax? ➤how much the buyers pay, how much less sellers receive

Statutory Burden

Who is responsible for paying the tax to the government

Price Floor

a minimum price that sellers can charge (ex. minimum wage, dairy price floor)

Subsidy

a payment made by the government to those who make a specific choice, neg tax ➤effects: increase the equilibrium quantity, increase the price

Substitutions in Production

alternative uses of your productive capacity ➤opportunity cost of producing gas is producing more diesel

When demand is elastic...

an increase in price causes a large reduction in quantity demanded ➤raising prices lowers revenue

When demand is inelastic...

an increase in price will cause only a slight reduction in quantity demanded ➤raising prices increases revenue

Marginal Principle

break "how many" choices into a series of smaller marginal choices, ask "one more?"

Rational Rule for Buyers

buy more of an item if its marginal benefit is greater than (or equal to) the price

Rising Input Prices

buying more and more of an input increases the opportunity cost of that output

Slope

change in price / change in quantity

Framing

how different alternatives are described

Perfect Competition

identical good, many buyers & sellers, each whom is a small share of market, implies analyzing price-takers

Expectations and Long Run Supply

if prices are expected to rise: invest in increasing production capacity, production today is a complement for production tomorrow ➤if the price is expected to rise, increase production capacity today

Equimarginal Rule

if something is worth doing, keep doing it until the marginal benefits equal your marginal costs

Complements in Production

joint produced (by products) ➤if I produce more beer, I can produce more Vegemite

Expectation and Short Run Supply

opportunity cost of selling today is selling tomorrow ➤if the price is expected to be high tomorrow keep production high today, decrease supply today, increase supply tomorrow

Equilibrium

point at which there is no tendency for change, where the curves cross ➤(quantity demanded= quantity supplied)