ECON2105 Test 1
Quantity demanded
The total number of units of a good or service consumers are willing to purchase at a given price
Quantity supplied
The total number of units of a good or service producers are willing to sell at a given price
Division of labor
The way in which different workers divide required tasks to produce a good or service
The basic difference between macroeconomics and microeconomics is:
microeconomics concentrates on the behaviour of individual consumers and firms while macroeconomics focuses on the performance of the entire economy.
What is any choice inside the PPF?
Any choice inside the PPF is productively inefficient because it is possible to produce more of one good, the other good, or some combination of both goods
Law of diminishing marginal utility
As a person receives more of a good, the additional (or marginal) utility from each additional unit of the good declines
Law of diminishing returns
As additional increments of resources to producing a good or service are added, the marginal benefit from those additional increments will decline
Ceteris paribus
As price rises, quantity demanded decreases; as price falls, quantity demanded increases during a given period of time, all other things remaining constant No relevant economic factors, other than the product's price, are changing. "all other things being equal"
Changes in the number of consumers
As the population of an economy changes, the number of buyers of a particular good also changes (thereby changing its demand).
Law of supply
Assuming all other variables that affect supply are held constant: If price goes up, then quantity supplied goes up. If price goes down, then quantity supplied goes down.
Supply Decision
Assuming that its objective is to maximize profits, a firm's decision to supply depends on: 1)The price of the good or service 2)The cost of producing the product, which in turn depends on: -The price of required inputs (labor, capital, and land) -The technologies that can be used to produce the product 3)The prices of related products 4)Number of competitors, other suppliers 5)Market expectations
Surplus or excess supply
At the existing price, quantity supplied exceeds the quantity demanded In between demand and supply curves above equilibrium
Shortage or excess demand
At the existing price, the quantity demanded exceeds the quantity supplied In between demand and supply curves below equilibrium
Which variable is the most important in any market?
Price
______________ are enacted when discontented sellers, feeling that prices are too low, appeal to legislators to keep prices from falling.
Price floors
Utility
Satisfaction, usefulness, or value one obtains from consuming goods and services
Private enterprise
System where private individuals or groups of private individuals own and operate the meals of production (resources and businesses)
Changes in tastes
Tastes and preferences are subjective and vary among consumers. Seasonal changes or fads have predictable effects on demand.
Consumer surplus
The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it = willingness to pay - price paid
Supply
The amount of some good or service a producer is willing to supply at each price
Demand
The amount of some good or service consumers are willing and able to purchase at each price
When __________________, a firm will supply a higher quantity at any given price for its output, and the supply curve will shift to the right.
costs of production fall
If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. This is known as ___________________.
excess demand
In a command economy, the __________ either makes most economic decisions itself or at least strongly influences how the decisions are made.
government
Scarcity implies that:
it is impossible to completely fulfill the unlimited human desire for goods and services with the limited resources available.
In the ____________, households work and receive payment from firms.
labor market
If a firm faces ________________________, while the prices for the output the firm produces remain unchanged, a firm's profits will increase.
lower costs of production
Most choices involve _________________, which involves comparing the benefits and costs of choosing a little more or a little less of a good.
marginal analysis
In a _______________________, most economic decisions about what to produce, how to produce it, and for whom to produce it are made by buyers and sellers.
market-oriented economy
Normal good
A product whose demand rises when income rises, and vice versa
Factors that decrease demand
-Taste shift to lesser popularity -Population likely to buy drops -Income drops (for a normal good) -Price of substitutes falls -Price of complements rises -Future expectations discourage buying
Marginal utility
With every additional consumption of the good, the utility of the good will decrease
Production possibilities frontier (PPF)
-A diagram that shows the productivity efficient combinations of two products that an economy can produce given the resources it has available -The slope of the production possibilities frontier shows the opportunity cost
Supply curve
-A graphic illustration of the relationship between price, shown on the vertical axis, and quantity, shown on the horizontal axis -The supply curve (S) is created by graphing the points from a supply schedule and then connecting them -The upward slope illustrates the law of supply
Demand curve
-A graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis -The downward slope illustrates the law of demand
Command economy
-An economy where economic decisions are passed down from government authority and where the government owns the resources -Government decides what goods and services will be produced and what prices it will charge for them
Effects of price controls on the equilibrium prices and quantities
-Changes in demand and supply reveal themselves through consumers' and producers' behavior -Price controls may deprive everyone in the economy of this critical information -Without this information it becomes difficult for buyers and sellers to react as changes occur throughout the economy
Fiscal policy
-Economic policies that involve government spending and taxes -Determined by a nation's legislative body (Congress & executive branch)
Factors that increase supply
-Favorable natural conditions for production -A fall in input prices -Improved technology -Lower product taxes/less costly regulations
The Cost of Production
-For a firm to make a profit, its revenue must exceed its costs -Cost of production depends on a number of factors, including the available technologies and the prices and quantities of the inputs needed by the firm (labor, land, capital, energy, etc.)
Adam Smith introduced the idea of dividing labor into discrete tasks in his book The Wealth of Nations
-Invisible hand -Self-interest -Division of labor
John Maynard Keynes
-Keynes thought that economics teaches you how to think, not what to think -An economist whose ideas have fundamentally affected the theory and practice of modern macroeconomics and informed the economic policies of governments
Monetary policy
-Policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing -Determined by a nation's central bank (Federal Reserve)
Factors that decrease supply
-Poor natural conditions for production -A rise in input prices -A decline in technology (not common) -Higher product taxes/more costly regulations
The economics approach...
-Portrays people as self-interested, but economics is not a form of moral instruction -Seeks to describe economic behavior as it actually exists -Uses positive statements, which describe the world as it is. These are factual. -Tries to avoid normative statements, which describe how the world should be. These statements are subjective questions of opinion. People's freedom to make their own economic choices has a moral value worth respecting.
Determinants of Supply
-Supply decision -The cost of production
Factors that increase demand
-Taste shift to greater popularity -Population likely to buy rises -Income rises (for a normal good) -Price of substitutes rises -Price of complements falls -Future expectations encourage buying
What is cost?
-The value of everything a seller must give up to produce a good -The obstacle or barrier to choice, that which must be got over before the choice is made -The displaced alternative, the rejected opportunity
Traditional economy
-Typically an agricultural economy where things are done the same as they have always been done -What you produce is what you consume -Little economic progress or development
How can economies grow?
1)An increase in factors of production: resources used to produce goods and services 2)Better technology: the technical means for producing goods and services
Important demand shifters
1)Changes in the prices of related goods or services 2)Changes in income 3)Changes in tastes 4)Changes in expectations 5)Changes in number of consumers
When the price of a good falls, two effects take place:
1)Consumers substitute toward the good whose price has fallen 2)Consumers have more purchasing power, which is like an increase in income
Objections in understanding the economic approach to decision-making.
1)People, firms, and society, do not act in a way that fits the economic way of thinking. However, it is reasonable to analyze them with the tools of economic analysis. 2)People, firms, and society should not act this way.
When nations desire a healthy macroeconomy, they typically focus on three goals:
1)low inflation 2)growth in the standard of living 3)low unemployment
What are the principles of individual choice?
1. Choices are necessary because resources are scarce 2. The true cost of something is its opportunity cost 3. "How much" is a decision at the margin -Trade-off 4. People usually respond to incentives, exploiting opportunities to make themselves better off
Substitute
A good or service that we can use in place of another good or service
Perfectly competitive market
A market with 1)many buyers and sellers, 2)all firms selling identical products, 3)no barriers to new firms entering the market
Price ceiling
A maximum price sellers are allowed to charge for a good or service (usually set below equilibrium)
Price floor
A minimum price buyers are required to pay for a good or service (usually set above equilibrium)
What is the model of the market that we use in this chapter?
A perfectly competitive market
Inferior good
A product whose demand falls when income rises, and vice versa
Theory
A simplified representation of how two or more variables interact with each other In this class, theory = model
Demand schedule
A table that shows a range of prices for a certain good or service and the quantity demanded at each price
Supply schedule
A table that shows the quantity supplied at a range of different prices
Economies of scale
A term referring to the fact that for many goods, as the level of production increases, the average cost of producing each individual unit declines
Opportunity set
All possible combinations of consumption that someone can afford given the prices of goods and the individual's income
Budget constraint
All possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set
Market economy
An economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand
Trade-off
Comparison of the costs and benefits of doing something
Sunk costs
Costs that were incurred in the past and cannot be recovered
Goods and services market
Firms sell and households buy
Marginal analysis
Examining the benefits and costs of choosing a little more or a little less of a good
Market
Interaction between potential buyers and sellers; a combination of demand and supply
Changes in Equilibrium Price & Quantity: The Four-Step Process
Four-step process to determine how an economic event affects equilibrium price and quantity 1)Draw a demand and supply model before the economic change took place. 2)Decide whether the economic change affects demand or supply. 3)Decide whether the effect causes a curve shift to the right or to the left, and sketch the new curve on the diagram. 4)Identify the new equilibrium and then compare to the original.
Product efficiency
Given the available inputs and technology, it is impossible to produce more of one good without decreasing the quantity that is produced of another good
If an increase in the price of Good X causes a decrease in the demand for Good Y, we can conclude that:
Goods X and Y are complement goods.
Complements
Goods or services that are often used together so that consumption of one good tends to enhance consumption of the other
Labor market
Households sell labor to business firms or other employees
Changes in expectations
If consumers have a choice about the timing of a purchase
Law of demand
Keeping all other variables that affect demand constant: If price goes up, then quantity demanded goes down. If price goes down, then quantity demanded goes up.
Which law is more specific: law of diminishing marginal utility or law of diminishing returns?
Law of diminishing marginal utility
Price controls
Legal restrictions on how high or low a market price may go 2 types: price ceiling & price floor
What can supply and demand curves be used to illustrate?
Market efficiency
Does a change in demand equal a change in quantity demanded?
NO
Rule of Law
No one is above the law
Circular flow diagram
Shows how households and firms interact in the goods and services market, and in the labor market
What does specialization allow business to do?
Specialization allows businesses to take advantage of economies of scale, which means that for many goods, as the level of production increases, the average cost of producing individual unit declines
Substitution effect
The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes
Income effect
The change in the quantity demanded of a good that results from the effect of a change in the good's price on a consumers' purchasing power
Equilibrium
The combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change quantity demanded = quantity supplied
What is the lesson of sunk costs?
The lesson of sunk costs is to ignore the past errors and make decisions based on what will happen in the future.
Changes in income- what does the effect of changes in income on demand depend on?
The nature of the good in question
Equilibrium price
The price where quantity demanded is equal to quantity supplied
Equilibrium quantity
The quantity at which quantity demanded and quantity supplied are equal for a certain price level
Microeconomics
The study of how households and firms make decisions and how they interact in markets; focuses on the actions of individual agents within the economy, like households, workers, and businesses
Economics
The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided
Macroeconomics
The study of the economy as a whole; the branch of economics that focuses on broad issues
What does dividing and subdividing the tasks involved with producing a good or service produce?
This produces a greater quantity of output
The law of increasing opportunity cost
To produce more of one good, a successively larger amount of the other good must be sacrificed As production of a good or service increases, the marginal opportunity cost of producing it increases as well
Price
What a buyer pays for a unit of the specific good or service
Opportunity cost
What you must give up in order to get something
Productive efficiency
When it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)
Allocative efficiency
When the mix of goods being produced represents the mix that society most desires (the good is produced up to the point when marginal benefit of producing a good = marginal cost of producing it)
Specialization
When workers or firms focus on particular tasks for which they are well-suited within the overall production process
Two good are complements if
a decrease in the price of one good leads to an increase in the demand for the other (or vice versa)
Two goods are substitutes if
a decrease in the price of one leads to a decrease in demand for the other (or vice versa)
After widespread press reports about the dangers of contracting "mad cow disease" by consuming beef from Canada, the likely economic effect on the U.S. demand curve for beef from Canada is:
a shift of the demand curve for beef to the left.
The slope of the _________________ is determined by the relative price of the two goods, which is calculated by taking the price of one good and dividing it by the price of the other good.
budget constraint
Philosophers draw a distinction between ___________________, which describe the world as it is, and normative statements, which describe how the world should be.
positive statements
A demand curve shows the relationship between price and _________________ on a graph.
quantity demanded
The lesson of __________ is to forget about the money that's irretrievably gone and instead to focus on the marginal costs and benefits of future options.
sunk costs
The opportunity cost of attending university is likely to include all except which of the following?
the cost of haircuts received during the school term
If new manufacturers enter the computer industry, then (ceteris paribus):
the supply curve shifts to the right.