Microeconomics Exam 2
List the 5 reasons for the inverse relationship?
1) Common sense 2) Diminishing marginal utility 3) Income effect 4) Substitution effect 5) Reservation price
How do each of those 5 factors effect the inverse relationship?
1) Common sense is the obvious factor that the price is an obstacle that deters consumers from buying, so the higher the obstacle, ,the less of a product will be bought. 2) Diminishing marginal utility says that in any specific period, each buyer of a product will receive less satisfaction from each successive unit of the unit consumers (I.e. consumers will only buy additional units if the price is reduced) 3) The income effect says that the lower the price allows the buyer to buy more, the higher price means they can buy less 4) The substitution effect says that at a lower price, buyers had the incentive to substitute a less expensive product for the similar products that are relatively more executive. Reflects the change in quantity demanded because buyers switch to or from substitutes when the price changes. 5) Reservation price is the cost-benefit principle that states that a person will only buy the good if the benefit received exceeds the cost. Demand curve is neg. because the reservation price (benefit) of the marginal buyer declines as the quantity of the good bought increases
What are 7 NONPRICE determinants that shift the demand curve?
1) Income 2) Tastes and preferences 3) Cultural factors 4) Future expectations 5) Price of related goods I.e. substitutes or complements 6) Population 7) Credit
What are some changes in choices that could occur (and alter the PPC) over time?
1) More resources (Investment in capital, population growth) 2) Improvements in technology (more specialization, start up and switching costs) [outward shift of the production possibilities curve]
What is a shift in demand?
A change in demand or shift in demand is movement of the entire demand curve caused by a nonprime determinant
What is a change in quantity demanded?
A change is quantity demanded is a movement ON THE DEMAND CURVE caused by a change in price
What is a market?
A market is an institution mechanism that consists of all buyers and sellers of a good/service and that facilitates the purchase and sale of goods/services/resources.
What is absolute advantage?
Absolute advantage describes the productivity of one person (firm, nation, etc.) compared to that of another.
What changes demand?
Another OTHER that price
What is comparative advantage?
Comparative advantage is who can produce the good at the lower opportunity cost
What does a production possibilities curve represent?
Current choices an economy has for production
As price increases/decreases, what happens to demand?
Demand is not affected by price so demand stays the same?
What is demand?
Demand is the curve that shows the different amounts of a product that consumers are willing to purchase at different prices during a specific period of time
Suppose there is a technological advance in the production of only 1 good, how does this affect production?
Even though the ability to produce one good is improved, you can produce more of each good.
What is the demand curve?
Graphic representation of the demand schedule
What is the income effect?
If the price increases and you purchase an item, you have less money so you buy less.
What is market equilibrium?
Market equilibrium occurs when all buyers and sellers are "satisfied" with their respective quantities at the market price
Is it possible for one person to have the comparative advantage in both goods?
No because comparative advantage reflects relative opportunity cost
Normal vs. inferior goods
Normal good are those that the demand increases when income increases and the demand falls when income falls Inferior good s are those who demand varies inversely with money income
Describe efficiency on the production possibilities curve
On the curve is equally efficient Inside the curve is inefficient Outside the curve is unattainable
What is the underlying economic principle for production possibilities?
Opportunity cost (trade off's because more of one thing=less of another)
How does price convey critical economic information?
Prince conveys critical economic information because when the price of a resource is high, companies have a greater incentive to economize on its use. When the pice of the good is thus high, the comparative has a greater incentive to produce more of that good and the consumers have an incentive to economize on its use. Thus, prices provide the economy with incentives the use scarce resources efficiently.
What does price measure?
Relative scarcity of a good
What is the buyers reservation price?
The buyers reservation price is the largest dollar amount that the buyer would be willing to pay for a good (I.e. the marginal benefit)
What is the demand schedule?
The demand schedule is a schedule of the quantities of a good that individuals will purchase at different relative prices with other things being equal
What is the substitution effect?
The idea that substitutes appear more or less appealing
What is individual demand?
The individual demand curve relates the quantity demanded of a good by one person at different prices
What is the law of demand?
The law of demand says that there is an inverse relationship between the relative price and quantity demanded for a product (I.e. as price decreases, quantity demanded increases)
What is the low hanging fruit principle? What else is the long hanging fruit principle known as?
The low hanging fruit principle relates to the production possibilities frontier for an economy. As you produce more of a good, the opportunity cost is increasing because some resources that may be good for the item you're producing may be better suited of a different item. The principle of increasing opportunity cost (I.e. start with the resources with the lowest opportunity cost, then move to the highest opportunity cost and still higher opportunity cost)
What is market demand?
The market demand is the demand of all consumers in the market for a good derived from summing at each price the quantity demanded by each individual
What is the market mechanism?
The market mechanism is the tendency in a free market for the price to change until the market clears.
What is a trade-off?
The only way to produce more of one good is to produce less of another good.
What is the opportunity cost of producing one good and how can you figure it out using the production possibilities frontier?
The opportunity cost of producing one good the opportunity lost of producing the other good. The opportunity cost is the slop of the production possibilities curve.
What are inefficient levels of production?
The points inside the production possibilities curve
What is price?
The price of a good is what must be given in exchange for the good or service
What is the principle of comparative advantage?
The principle of comparative advantage says that everyone does best when each person concentrates on the activity with the lowest opportunity cost
Who is said to have the absolute advantage?
The producer that requires a smaller quantity of inputs to produce a good
Who is said to have the comparative advantage?
The producer who has the smaller opportunity cost of producing a good
What is equilibrium price/equilibrium quantity?
The values of price and quantity for which quantity supplied and quantity demanded are equal (stable point without tendency to change)
What does a production possibilities frontier show?
The various mixtures of output than an economy can produce
How can trade expand the set of consumption opportunities?
Trade allowing points outside of the PPC to be attained.
WWhat are the efficient levels of product?
When the economy is getting all that it can from the scarce resources available (points on the production possibilities curve)
If an entity has an advantage in producing both goods, can they benefit from trad?
Yes
What does the production possibilities curve depict?
your options for production