Microeconomics Test 1 (Chapters 1-3)

Capital Investment

Spending on infrastructure, production facilities, that will increase future production possibilities

Economics

Study how people allocate their limited resources to satisfy their unlimited desires

Models for a single variable

1. Bar Graph 2. Pie Chart 3. Time-Series graph

Determinants of Cross Price Elasticity

1. Compliments E<0 2. Substitutes E>0 3. Unrelated goods E=0

Mistakes made in graphing

1. Confusing Causation 2. Extrapolation- using your estimates from 1 graph and applying them to a different sample

What makes a Supply curve shift right

1. Cost of input decreases 2. Taxes decrease or subsidies increase 3. The number of sellers increase 4. The price of product is expected to fall in future 5. Technological expansion/more efficient

What makes a supply curve shift left

1. Cost of input increases 2. Business taxes increase or subsidies decrease 3. The number of sellers decrease 4. Belief that the price of a product will rise in future

Reasons why Demand Curve shifts right

1. Demand for normal good rises and inferior goods decreases (income rises) 2. the price of a substitute good rises 3. the price of a complimentary good falls 4. The good is in style 5. Belief price will rise in future 6. The number of buyers rises

Points on a graph

1. Efficient 2. Inefficient 3. Unattainable

Different types of Variables

1. Exogenous variables- out of our control 2. Endogenous Variables- The variables we choose and are interested in testing

How do Economists test hypothesis

1. Experiment 2. Historical Data 3. Wait

Determinants of Price Elasticity in Supply

1. Flexibility of Producers 2. Ability to relocate 3. Time

Scientific Method

1. Form hypothesis 2. Build a model for our hypothesis 3. Design a way to test our hypothesis 4. Evaluate your hypothesis

Examples of opportunity cost

1. Going to class makes you give up studying 2. Going to college instead of getting a job

What is the Big 5 of Economics?

1. Incentives 2. Trade-Offs 3. Oppurtunity Costs 4. Marginal Thinking 5. Gains from Trade

Measures of Magnitude of Elasticity

1. Inelastic 0>E>-1 2. Elastic E<-1 3. Perfectly Inelastic E=0 4. Perfectly Elastic E=0 5. Unitary: E=-1

What were the key factors that made the Wright brother's wind tunnel a useful tool for wing design?

1. It was able to model real world flight conditions 2. Allowed measurement of wing performance 3. Enabled independent control of each key variable

Types of Goods

1. Normal 2. Inferior 3. Luxury 4. Substitutes 5. Compliment

Reasons why Demand Curve shifts to left

1. Normal goods fall and inferior goods rises (income less) 2. Price of substitute good falls 3. Price of complimentary good rises 4. Good falls out of style 5. Belief that price will decline in the future 6. The number of buyers decreases

Types of Analysis

1. Normative (Facts) 2. Positive (opinions)

What kinds of Incentives

1. Positive: reward -Ex-Allowance 2. Negative: Punishment -Ex: detention 3. Direct: Obvious outcomes -Ex: paying more for winning a game encourages better performance 4. Indirect: hidden unintended consequences -Ex: Paying for winning a game, leads to people cheating

Determinants of Price Elasticity of Demand

1. Substitutes- when many substitutes, price is elastic 2.Share of Budget 3. Necessity vs Luxury good 4. Time

Firm Goals

1. When demand is elastic, firms decrease price to increase total revenue 2. When demand is inelastic, firms increase price to increase total revenue 3. The firm's goal is to operate where E=unitary

Determinants of Income Elasticity

1.Inferior goods E<0 2. Normal goods 0<E<1 3. Luxury Goods E>1

Types of Elasticities

1.Price Elasticity of Demand 2. Price Elasticity of Supply 3. Income Elasticity of Demand 4. Cross Price Elasticity of Demand

Compliments

2 goods that are used together -Example: hamburger and fries or Peanut butter and Jelly

Demand Curve

A graph of the relationship between the prices and the quantity demanded at those prices

Supply Curve

A graph that shows the relationship between the price and quantity supplied

Competitive Market

A market with similar goods with many buyers and sellers such that each has only a small impact on market price and output; -no individual makes a difference

Supply Schedule

A table that shows the relationship between price and quantity supplied

Demand Schedule

A table that shows the relationship between the prices and the quantity demanded at those prices

Law of Demand

All other things are equal; as the prices increase, the quantity demanded decreases. The demand curve should always slope downward.

Quantity Demanded

Amount of a good or service buyers are willing to purchase at a certain price - These are points on the demand Curve

Normal Goods

As income increases, the consumers buy more normal goods - Example: Nikes

Inferior Goods

As income rises, consumers buy less inferior goods -Example: Can of soup

Luxury Goods

As income rises, consumers not only buy more luxury goods, but they also increase their purchases by a higher percentage than the increase of income

Law of Supply

As the price of a good increases, the quantity supplied increases -Example: drug war

Time adjustment Period

As time progresses, demand becomes more elastic

Movement along curve

Because Price changed

Market

Bring Buyers and sellers together to exchange goods and services

Monopoly

Extreme example of an imperfect market- when there is only one company that supplies the entire market

Marginal thinking

For each unit of a good you're going to buy, you must evaluate the cost and benefit of the additional purchase

Trade Off

Forgone alternatives in any decision

Substitute Goods

Goods that are used in place of each other -Example: meat or chicken; Nike or adidas

Centeris Paribus

Latin for one or the other; Only changing 1 thing that we can study (isolating a variable)

Scarcity

Limited Nature of resources

Price Elasticity of Demand

Measure of the responsiveness of quantity demanded to a change in price -% change in Quantiy demanded/ % change in price *Answer should always be negative

Income Elasticity Of Demand

Measures how a change in income affects spending - % change in quantity demanded/% change in income

Elasticity

Measures the responsiveness of buyers and sellers to changes in price or income

Price Elasticity of Supply

Measures the responsiveness of quantity supplied to price change - % change in quantitied supplied/ % change in price *answer should always be positive

Cross- Price Elasticity of Demand

Measures the responsiveness of the quantity demanded of 1 good to a change in the price of another good -% change in quantity demanded for good A/ % change in price of good B

Production Possibilities Frontier

Model that illustrates the combination of outputs a society can produce if it uses all its resources - represents trade offs that society faces in production

What is another word for incentives?

Motivation

TINSTAFFL

No such thing as a free lunch (Trade Off)

Immediate run (Time)

No time to adjust behavior

Long Run (Time)

Period of time when consumers can fully adjust to market conditions

Short run (Time)

Period of time when consumers can partially adjust behavior

Inefficient points

Points inside the graph because the did not meet the expectations

Efficient Points

Points on the graph because we utilize all our resources

Unattainable

Points outside graph because they impossible

Equilibrium Price

Price at which quantity supplied equals quantity demanded

Equilibrium Quantity

Quantity at which quantity demand equals quantity supplied

Quantity Supplied

The amount of good or service producers are willing and able to sell at a certain price

Imperfect Market

The buyer or seller can influence market -Example: Musicians and Iphones

Equilibrium

The point at which the demand and supply curve interact -quantity supplied=quantity demanded

Market Demand

The sum of all individual quantities demanded by each buyer in the market at each price

Market Supply

The sum of quantities supplied by each seller at each price

Variable

The thing we're interested in plotting

Trade

The voluntary exchange of goods and services between 2 or more parties

Why do people respond to incentives?

Theory of Rational self: Individuals always try to better themselves

Oppurtunity cost

Whatever you give up to do what your doing

Comparitive Advantage

When someone can produce at a lower opportunity cost than a competitor

Absolute Advantage

When someone can produce more of a good than another country with the same resources

The effects of Elasticity of supply and demand

When the demand or supply becomes more elastic, the price changes become smaller while quantity changes became larger

Surplus

When the quantity supplied is greater than the quantity demanded - Inventory Depletion *Price must decrease to bring market into equilibrium

Shortage

When the quantity supplied is less than the quantity demanded. - Inventory Buildup * Price must increase to bring market to equilibrium

Market Economy

Where resources are allocated among household and firms with no government interference

What are incentives?

Why do we do the things we do

Total Revenue

amount that consumers pay seller

Law and Supply and Demand

market price of any good will adjust to bring the quantity supplied to equal quality demanded

Adam Smith's invisible hand

markets respond to supply and demand

Model for 2 variables

scatterplot

Example of Trade off

what could you have done instead of coming to class? -sleep -eat-study