Microeconomics Midterm 1
What does voluntary trade create?
1. Gains from specialization and division of labor 2. Gains from mass production methods ex.) creating in bulks or buying in bulks 3. Gains from innovation ex.) trading ideas to make products better 4. Creation of Wealth ex.) Process by which someone becoming rich will make everyone richer(Microsoft)
What are the characteristics of private property rights?
1. The right to exclusive use of the property 2. Legal protection against invasion from other individuals 3. The right to sell, transfer, exchange, or mortgage the property
What are the 4 incentives of property rights?
1. Use resources in ways that other people value 2. Care for and manage what you own 3. Conserve for the future 4. Make sure your property does not damage anybody else's property
What causes a change in demand
A change in anything that affects demand other than the price of the good.
What causes a change in quantity demand
A change in price of that good
A change in Quantity Demand
A movement along the demand curve
What is a middleman?
A person who buys and sells goods or services or arranges trades. A middleman reduces transaction costs. ex.) grocery store
A change in demand
A shift in the entire demand curve.
Resources
An input used to produce an economic good. There are 3 types Human resources(aka human capital), Physical goods(aka physical capital), and Natural resources.
Rachel, Phoebe, Monica, Chandler, Ross, and Joey all go out to dinner together and agree ahead of time to split the bill evenly. After finishing their main course, they are trying decide whether or not to get dessert. Joey has been eying the fudge-brownie sundae which costs $6, but is already fairly full from dinner. All else constant, if Joey is only focusing on his personal cost-benefit analysis, under what conditions should he purchase the fudge-brownie sundae?
Joey should only order the fudge-brownie sundae if he thinks he might receive more than $1 of benefits from it since the marginal cost of the dessert to him is only $1.
Property Rights and Development
Lack of property rights = lack of economic progress
Normative economic statement
Cannot be tested. It's a judgement about what ought to be. ex.) we should increase minimum wage.
1st Shifter of Demand
Change in consumer income A.) Normal goods- income increases so does demand B.) Inferior Goods- income increases the demand decreases
5th Shifter of Demand
Change in consumers taste and preferences A.) if taste and preference increases Demand increases
4th Shifter of Demand
Change in expectation A.) Future Price increases Demand increases B.) Future income increases Demand increases
2nd Shifter of Demand
Change in the number of consumers # of consumers increases the Demand increases
3rd Shifter of Demand
Change in the price of a related good A.) substitute(Beef and chicken) Price in substitute increases so does demand B.) Compliments(Milk and cereal) Price in complement increases the demand decreases
Marginal
Describes the effect of a change in the current situation
What is microeconomics?
Focuses on human behavior and how it affects the conduct of affairs within individually defined units such as households or firms(trees). Most out of life with decisions
What is capital?
Human-made resources used to produce other goods and services
3rd Guide Post to Economic Thinking
Incentives Matter: choices are influenced in a predictable way by changing incentives. ex) money challenge
2nd Guide Post to Economic Thinking
Individuals are rational: They try to get the most from their limited resources (but what is rational for one person, may not be rational for everyone)
4th Guide post to Economic Thinking
Individuals make decisions at the margin
5th Guide Post to Economic Thinking
Information helps us make better choices, but is costly: We gather more information for bigger decisions, but we make almost every decision without full information. ex) buying a new pencil vs buying a new car
If the current price of a product rises, what happens to the demand for that product?
It does not change.
What is a Production Possibilities Curve(PPC)?
It outlines all possible combinations of total output that could be produced assuming that: 1. fixed amount of productive resources 2. given amount of technical knowledge 3. full and efficient use of resources
1st Guide Post of Economic thinking
Resources are scarce, so decision makers must make tradeoffs. (No such thing as a free lunch)
Coercion
Someone will devote resources to make you worse off if you don't comply (with their request.
3rd Pitfall to Avoid in Economic Thinking
The belief that association is causation: Don't make the mistake of believing that just because two things happen together then one causes the other. ex.) Alarm clock doesn't make the sun rise
2nd Pitfall to Avoid in Economic Thinking
The belief that good intentions equal desirable outcomes: Don't make the mistake of believing that just because the intentions behind a policy or action are good, the outcomes will also be good. ex.) Endangered Species Act
Consumer Surplus
The difference between the maximum amount consumers would be willing to pay and the amount that they would actually pay. Area below the demand curve but above the price.
8th Guide Post to Economic Thinking
The test of a theory is its ability to predict: We know a theory is valid if real world empirical evidence confirms our theories.
Transaction Cost
The time, effort, and other resources needed to search out and complete an exchange. This then leaves a role for a middleman.
What is the Law of Comparative Advantage?
The total output of a group of individuals, an entire economy, or a group of nations will be greatest when the output of each good is produced by whoever has the lowest opportunity cost.
7th Guide Post of Economic Thinking
The value of a good or service is subjective: A good or service is worth different amounts to different people. This allows is to trade goods and services in such a way that both sides are better off.
The Supply Curve
There is a direct(positive) relationship between the price of a good or service and the amount that suppliers are willing to produce. Results in upward moving slope.
Law of Demand
There is an inverse(negative) relationship between the price of a good and the quantity that buyers are willing to purchase. Results in downward sloping curve
1st Pitfall to Avoid in Economic Thinking
Violation of the ceteris paribus principle: Don't make the mistake of failing to control for any outside factors that could influence your study. ex.) buying roses: if prices of roses increase, people will buy fewer roses with an exception of Valentine's day
What I coerced exchange?
When someone choose what item you can buy. Or someone that makes the decision for you (tyranny)
what is voluntary exchange?
When you choose to buy the item
Which of the following is least likely to increase the demand for new tires?
a decrease in the price of tires
Positive economic statement
a positive economic statement can be tested. ex.) scientific study
Natural Resources
comes directly to us from nature. Examples: oil, coal, natural gas
When economists say the demand for a product has increased, they mean the
demand curve has shifted to the right.
A decrease in the current price of a good would
increase the quantity demanded for the good.
Human Resources
intangible qualities about us as human beings that we can use to produce other things. Examples: speed, strength, creativity, etc.
Jax Teller enjoys the feeling of wind in his hair enough to ride his motorcycle without a helmet, even though he fully realizes the potential for injury it creates by not wearing one in the unlikely event he is in an accident. According to the economic way of thinking, Jax is
making a rational choice.
Physical Resources
man-made tools and machines. Examples: hammer, nails, paper, etc.
Cost-benefit analysis
one will undergo an action when the marginal benefits outweigh the marginal costs
What is scarcity?
scarcity necessitates rationing. Allocating scarce goods to those who want them. This leads to competitive behavior.
What is economics?
study of how individuals make choices under scarcity
You want to travel to Las Vegas next weekend and you are trying to figure out if you should drive or fly. A round trip airline ticket from Riverside to Las Vegas costs $460 and flying there and back takes about 4 hours. Driving roundtrip to Las Vegas costs about $60 in gas and takes about 8 hours. Other things constant, what is the minimum amount of money that you would have to expect to make by gambling in Las Vegas to induce you as a rational individual to fly rather than drive?You want to travel to Las Vegas next weekend and you are trying to figure out if you should drive or fly. A round trip airline ticket from Riverside to Las Vegas costs $460 and flying there and back takes about 4 hours. Driving roundtrip to Las Vegas costs about $60 in gas and takes about 8 hours. Other things constant, what is the minimum amount of money that you would have to expect to make by gambling in Las Vegas to induce you as a rational individual to fly rather than drive?
$100 per hour
In which statement(s) is "demand" used correctly? (I) "An increase in the price of hot dogs will reduce the demand for hot dogs." (II) "An increase in the price of hot dogs will reduce the demand for hot dog buns (a complement good)."
(II) "An increase in the price of hot dogs will reduce the demand for hot dog buns (a complement good)."
What are four factors that shift the PPC?
1. A change in the economy's resource base (the more an economy invests, rather than consumes, the more the curve will shift outward) 2. A change in technology 3. A change in the rules under which an economy functions 4. A change in work habits
6th Guide Post to Economic Thinking
Beware of secondary effects: economic actions generate both direct and indirect effects
Carla has gotten into some credit card trouble and has $7,000 of outstanding debt on her credit cards that she can't pay off. Every month she fails to make payments, the credit card company charges her $150 in late fees and interest. She is currently driving a 2012 Lexus hybrid that she can sell for $10,000 (the Kelley Blue Book value) and found out that a friend of hers is selling his 2008 Honda Civic, which has some maintenance issues, for $3,000. The cars get the same gas mileage and Carla isn't particularly attached to either one (though she does need a car for work), so she is considering selling her Lexus, buying the Honda Civic, and using the left over $7,000 to pay off her credit cards, but comes to you for advice. What should you tell her?
Only sell the Lexus and buy the Honda Civic to pay off her credit cards if she thinks the maintenance costs of the Honda Civic will be less than the $150 a month she is paying the credit card companies in late fees and interest.
4th Pitfall to Avoid in Economic Thinking
The fallacy of composition: Don't make the mistake of believing that if something is true for one, then it is true for all.
Opportunity cost
The highest valued alternative that must be sacrificed when choosing an option. ex) and hour of your time
It's late at night and after a full evening of partying, you and your friends pull up to the drive through at Taco Bell (with a sober designated driver of course). Upon looking out the car window at the menu you see that crunchy tacos cost $1.00, burrito supremes cost $3.00, double stacked tacos cost $1.50. and a medium drink costs $0.60 when purchased separately. You initially decide to get one crunchy taco, one burrito supreme, and one medium drink. However, as the car inches forward, you notice that a double stacked taco box extra value meal includes a double stacked taco, a crunchy taco, a burrito supreme, and a medium drink all for $5.00. Given these conditions, you should order the double stacked taco box extra value meal if and only if
that additional double stacked taco is worth at least $0.40 to you
Secondary effect
the indirect impact of an event or policy that may not be easily and immediately observable
