ECON 100 Exam #1

Shortage

- "Excess Demand" - Occurs whenever the Quantity Supplied is LESS than the Quantity Demanded - Quantity Supplied < Quantity Demanded - Strategy: Increase price

Surplus

- "Excess Supply" - Occurs whenever the Quantity Supplied is GREATER than the Quantity Demanded - Quantity Supplied > Quantity Demanded - Strategy: Lower the price because product is oversupplied, sellers reduce output

Ceteris Parabus

- "Other things being equal" - All things EQUAL nothing else changed - Used to build economic models --> Allows economists to examine a change in ONE variable while holding everything else constant

Specialization

- *Focusing production on the good that you are most EFFICIENT in producing* - Leads to GREATER PRODUCTIVITY - Helps TRADE --> 2 people specialize in their best production and trade - Equilibrium = without specialization

A Shift in the Demand Curve

- *ONLY a Change in PRICE can cause movement ALONG a demand curve, but CAN'T shift the curve* - *Shift to the Left* = DECREASE in DEMAND - health warning causes buyers to demand fewer cantaloupes - *Shift to the Right* = a medical report shows that eating cantaloupe lowers cholesterol - buyers demand more cantaloupe - Ex: Govt. issues a nationwide safety warning that cautions against cantaloupe --> would cause consumers to buy fewer cantaloupes at any given price, and overall Demand would DECREASE

Product Market (Circ. Flow Model)

- Households = BUYERS - Firms = SELLEERS - Ex: When you go to the gas station or the mall, you're acting as a buyer, the store is the seller

Law of Increasing Relative Cost

- *States that the opportunity cost of producing a good RISES as society produces MORE of it* --> happens when factors of production are at maximum output/efficiency - Changes in relative cost means that a society faces a significant trade-off if it tries to produce and extremely large amount of a single good

Subsidy

- A PAYMENT made by the Government to encourage the Consumption or Production of a good or service --> used to ENCOURAGE PRODUCTION

Positive Analysis

- A claim that can be tested/validated as TRUE OR FALSE - "What IS" - Ex: On average, people save 15% on their car insurance when they switch to Geico

Production Possibilities Frontier (PPF)

- A combination of *OUTPUTS a society can produce* if all resources are being used efficiently

Supply Curve

- A graph of the relationship between the Prices in the Supply Schedule and the Quantity Supplied at those prices - "Supply" means the amounts that firms are willing and able to PRODUCE at particular prices - Produces and UPWARD SLOPE - the curve moves from the lower-left side to the upper-right side of the graph --> POSITIVE relationship between Price and Quantity offered for Sale - Sellers are more willing to supply the market when prices are high since high prices generate more profit

Demand Curve

- A graph of the relationship between the Prices in the demand schedule and the Quantity demanded at those prices - When economists talk about DEMAND, they mean amounts people are willing and able to buy at a particular price --> relationship between price and quantity demanded

Price Ceiling (Think: Shortage)

- A legally established MAXIMUM Price for a good or service because market prices became too high - Causes SHORTAGE because Quantity Demanded Increases due to price drops, and Quantity Supplied Decreases due to lower profits - *Binding Price Ceiling* = Prevents sellers from increasing the price and causes them to reduce the quantity they offer for sale - Consumer Surplus = RISES - Producer Surplus = FALLS - *Nonbinding Price Ceiling* = ABOVE equilibrium price and does NOT impact the market price

Price Floor (Think: Surplus)

- A legally established MINIMUM price for a good or service because Market Price is TOO LOW --> prices RAISE - *Binding Price Floor* = RAISES the PRICE above equilibrium --> causes Quantity Supplied to EXCEED the Quantity Demanded - Producer Surplus = RISES - Consumer Surplus = FALLS - *Nonbinding Price Floor* = set BELOW equilibrium, no effect - *Minimum Wage* = Functions as a Price Floor above equilibrium --> prevents the market from reaching the Equilibrium Point --> HIGHER Min. Wage lowers the Quantity of Labor Demanded = SURPLUS of Workers (Unemployment) - Create a SURPLUS --> consumers purchase less, but manufacturers produce more - Strategy for solving Surplus: By restricting the supply of the good OR by stimulating additional demand

Elasticity

- A measure of the Buyers' and Sellers' responsiveness to changes in Price or Income --> Important because it allows us to measure how much consumers/producers change their behavior when prices or income changes

The Price Elasticity of Demand

- A measure of the responsiveness of Quantity Demanded to a Change in Price - Four Determinants influencing Price Elasticity of Demand: 1) Existence/# of Substitutes (Most important) --> when there's a lot of substitutes, markets tilt in favor of Consumer 2) The share of the budget spent on a good 3) Whether the good is a Necessity OR Luxury good 4) Time available to Adjust to a Price Change - EQUATION: Price Elasticity of Demand (Ed) = % Change in the Quantity Demanded / % Change in Price - When the % change in Quantity Demanded is HIGHER than the % change in Price = Demand is ELASTIC

Circular Flow Model

- A model that shows how Resources and final goods and services FLOW through the economy - TWO Groups: Households and Firms - *Households* - people we usually think of as CONSUMERS --> want the goods/services produced BY the firms - *Firms* - BUSINESSES --> want resources owned BY households in order to make goods and provide services - Model shows how households get the things firms produce and how firms acquire the resources to produce those things --> both trades happen in a MARKET

Market

- A place or system that *brings Buyers and Sellers Together to Exchange Goods* - Take different forms such as grocery stores, a Walmart, or a garage sale - Amazon, eBay, iTunes = Internet Marketplaces - help deal with Scarcity

Supply Schedule

- A table that shows the relationship between the PRICE of a good and the Quantity Supplied

Demand Schedule

- A table that shows the relationship between the price of a good and the quantity demanded

Terms of Trade

- As long as terms of trade fall between the trading partners' opportunity costs, the trade BENEFITS BOTH SIDES - Trade Creates VALUE

Normative Analysis

- Based on OPINION, cannot be tested as true or false - "What SHOULD/OUGHT to Be" - Realm of policy makers, voters, and philosophers - Ex: Everyone should work at a bank to learn the true value of money

Normal Good

- Consumers buy more of a Normal Good as Income RISES, holding other things constant - As income rises, consumers buy less of an inferior good because they can afford something better - Ex: Meal at a restaurant

Inferior Good

- Consumers buy more of an Inferior Good as income FALLS, holding other things contstant - Ex: Used cars (opposed to new cars), rooms in boarding houses (opposed to one's own apt./house), and Ramen Noodels (opposed to any other kind of food) - Mainly Store brands of goods

Trade

- Creates VALUE because participants in markets are able to SPECIALIZE in the production of goods and services in which they have a comparative advantage. --> Think: Specialization!

Demand Decreases; Supply does NOT change

- Demand Curve = SHIFTS LEFT - As a result, the Equilibrium Price/Quantity DECREASE

Demand Increases; Supply does NOT change

- Demand Curve = SHIFTS RIGHT - As a result, the Equilibrium Price/Quantity INCREASE

Demand DECREASES; Supply INCREASES

- Demand Curve = Shifts LEFT - Supply Curve = Shifts RIGHT - Price = DECREASES - Quantity = could be higher OR lower

Demand INCREASES; Supply DECREASES

- Demand Curve = Shifts RIGHT - Supply Curve = Shifts LEFT - Price = INCREASES - Quantity = could be higher OR lower

Demand and Supply DECREASE

- Demand and Supply Curve = SHIFTS LEFT - Quantity = DECREASES - Act as countervailing forces along Price axis - Price = could be higher OR lower

Demand and Supply INCREASE

- Demand and Supply Curve = Shifts RIGHT - Quantity = INCREASES - Act as countervailing forces along Price axis - Price = could be higher OR lower

Inelastic

- Describes a DEMAND condition in which consumers are NOT responsive to a change in price - *When Demand is Inelastic and Price Rises* = consumers buy LESS, but not a lot because they don't react much to a change in price - Ex: Disneyland --> unique with NO close substitutes --> Football Tickets for a true fan --> Assigned textbooks

Elastic

- Describes a DEMAND condition in which consumers are responsive to a change in PRICE - *When Demand is Elastic and Price Rises* = Buyers purchase A LOT LESS - Ex: Less expensive gold courses are good substitutes for expensive ones --> Dominos Pizza --> car

Macroeconomics

- Economy as a WHOLE - Ex: Aggregate scale, Inflation, Unemployment, Monetary Policy - If a mass amount of workers are fired = Macro

Incentives

- Factors that motivate you to ACT or EXTORT effort - Can create unintended consequences - Matter because incentives help explain how decisions are made - *Direct* = CASH reward, get policies to help people - Ex: "Cut my grass and I'll pay you $30" - *Indirect* = to CHEAT - Positive/Negative Incentives

Circular Flow Model Steps

- Goods/Services move COUNTERCLOCKWISE from one part of the economy to another - Firms produce goods/services and SEND them to the *Product Market* --> Households barter with firms to acquire goods/services in the Product Market --> Households provide the inputs necessary to make goods/services --> Firms barter with households to acquire these resources and turn them into goods/services

Invisible Hand

- Guides resources to their highest-valued use - Sellers are guided by what seems to be an "Invisible Hand" to make things that consumers want --> if they don't, those sellers go out of business

Economic Models

- Help us explain BEHAVIORS used to make PREDICTIONS - Based on Assumptions - Form Hypothesis to test economic questions - Collect Data - A GOOD model should be: *Simple, Flexible, and Useful for making accurate predictions* - Help us predict the effects of changes in things like prices, production processes, and governmental policies on real-life BEHAVIOR

Resource Market (Circ. Flow Model)

- Household = SELLER - Firm = BUYER - The market for labor is a Resource Market - Ex: When you go on the job market, you are basically Selling Yourself --> Firms are looking for employees to help them produce goods/services (buying labor)

Microeconomics

- INDIVIDUAL levels - Ex: Household, Firms, Costs - If a single worker is fired = Micro

Black Markets

- Illegal markets that arise where either illegal goods are sold OR legal goods are sold at ILLEGAL PRICES

Circular Flow Model With Money

- Instead of bartering for goods/services, people use money to make the transactions much easier - Money acts as a *medium of exchange*, enabling the economy to avoid the Double-Coincidence-Of-Wants problem

Barter

- Involves Individuals trading a good they already have OR providing a service in exchange for something they want

Marginal Analysis

- Marginal = ADDITIONAL - *Marginal Cost* = The additional COST allocated with adding an additional unit - *Marginal Benefit* = The additional BENEFIT gained from an additional unit - *Incentives* = Direct/Indirect - Breaks down decisions into smaller parts between doing MORE OR LESS of something

Scarcity

- NOT enough stuff to go around

Equilibrium

- Occurs at the point where the demand curve and the supply curve intersect - At equilibrium, supply and demand are perfectly balanced - When market is in equilibrium, "The Market Clears" or that "The Price Clears the Market"

Double Coincidence of Wants

- Occurs when each party in an exchange transaction has what the OTHER party Desires - Unusual

Price Gauging Laws

- Place a temporary CEILING on the prices that sellers can charge during times of Emergency until markets function normally again - Laws are designed to prevent the victims of natural disasters from being exploited in a time of need - Demand Curve = Shifts RIGHT - Equilibrium Price = RISES above legal limit - Result = SHORTAGE

Equity

- Refers to the fairness of the distribution of the benefits within society

Market Economy

- Resources are allocated among households and firms with little or no government interference - Producers earn a living by selling the products that customers want - Consumers motivated by *Self Interest* - They must decide how to use their money to select the goods they need or want the most - Exchange of goods/services happens through prices that are established in markets --> these prices change according to the level of demand for a product and how much is supplied

Inputs

- Resources used in the Production Process - Ex: Workers, equipment, raw materials, and buildings

Law of Supply and Demand

- States that the Market Price of any good will adjust to bring the Quantity Supplied and the Quantity Demanded into Balance

Example: Price Ceiling on Gasoline

- Stations shut down early because they have no gasoline left to sell 1) You get LESS than what you paid for --> consumers will buy more since the price is lower, but producers manufacture less 2) High-octane gas will disappear --> producers use cheaper ingredients to make profits 3) LONGER Gas LINES --> Opportunity cost of finding gas RISES 4) Black Market has dealers will help reduce the shortage

Supply Decreases; Demand does NOT change

- Supply Curve = SHIFTS LEFT - Equilibrium Price = INCREASES - Equilibrium Quantity = DECREASES

Supply Increases; Demand does NOT change

- Supply Curve = SHIFTS RIGHT - Equilibrium Price = DECREASES - Equilibrium Quantity = INCREASES

Equilibrium Quantity

- The AMOUNT at which the Quantity Supplied is equal to the Quantity Demanded - When Price Changes, Quantity Demanded changes in the opposite direction

Producer Surplus

- The Difference between the WILLINGNESS TO SELL PRICE and the ACTUAL PRICE the seller Receives --> along the Supply Curve - Ex: Willing to sell toy for $20, the sale price is $50 - Producer Surplus = $30

Consumer Surplus

- The Difference between the price you're WILLING TO PAY (Reserve Price) and what price you ACTUALLY PAY for a good or service --> along the Demand Curve - Whenever the price is greater than the Willingness To Pay, a rational consumer will decide NOT to buy in order to avoid consumer loss --> LOWER PRICES create MORE Consumer Surplus - Ex: Going to Marshall's willing to spend $100, end up finding something for $20 - Consumer Surplus = $80

Price Controls

- The Government sets prices which are different from the Market Equilibrium Rate - Enacted by Govt. to ease perceived burdens on society - Can and do cause buyers and sellers to alter their behavior to avoid price control (illegal activities) - FEWER TRADES made - REDUCE MARKET EFFICIENCY

Opportunity Cost

- The Highest valued ALTERNATIVE that must be given up in order to do something else - ALL choices entail Opportunity Costs - Ex: What is the opportunity cost of coming to class? (Think: what would you be doing instead?)

Willingness to Pay

- The MAXIMUM price a consumer will spend on a good or service

Equilibrium Price

- The PRICE at which the Quantity Supplied equal the Quantity Demanded - Prices ABOVE Equilibrium price = SURPLUS - Prices BELOW Equilibrium price = SHORTAGE

Total Surplus

- The SUM of Consumer Surplus and Producer Surplus - Measures the BENEFIT of Market Transactions to society - An outcome demonstrates *Efficiency* when an allocation of resources Maximizes Total Surplus (Equilibrium)

Market Demand

- The SUM of all individual Quantities Demanded by each BUYER in the market at each price - Price and Quantity Demanded = NEGATIVE Relationship - Market demand is solved by adding all demands = a Combined Market Demand

Market Supply

- The SUM of the Quantities Supplied by each seller in the market at each price - Calculated by adding together the amount supplied by individual vendors (Combined Market Supply)

Absolute Advantage

- The ability of one producer to make MORE than another producer with the SAME QUANTITY of resources

Quantity Demanded

- The amount of a good or service that buyers are willing and able to purchase at the CURRENT price

Quantity Supplied

- The amount of a good or service that producers are willing and able to SELL at a current price

Price

- The market-determined opportunity cost of a good or service - The key determinant of how market economies allocate goods/services - Prices are set by the interaction of demand and supply

Economic Growth

- The process that enables a society to produce more of an output in the FUTURE - An INCREASE in Output or Real GDP --> per person

Economics

- The study of how people allocate their *limited resources* to satisfy their nearly *unlimited wants* - The study of how people make choices under conditions of society

Substitutes (affect related good)

- Two good that are used in place of each other - Price of Substitute Good RISES = Quantity Demanded FALLS and the demand for the related good goes UP - Ex: Butter and margarine - Ex: Looking at prices of an Xbox and PlayStation 4 - If the price of the PlayStation goes UP and the price of the Xbox remains the same, the demand for the Xbox will INCREASE while the quantity demanded of the PlayStation DECREASES --> if the price of the Xbox goes down, the Quantity Demanded would change, NOT the demand

Complements (affect related good)

- Two goods that are used together - Price of Complementary Good RISES = the Demand for the related good goes down - A reduction in the price of a complementary good causes an INCREASE in demand = SHIFTS RIGHT - Ex: color ink cartridges and printing paper

Law of Demand

- When Prices RISE = Quantity Demanded FALLS - When Prices FALL = Quantity Demanded RISES

Comparative Advantage

- Whoever has the *LOWEST Opportunity Cost of producing the good* --> Matters for TRADE Ex: To make 1 Steel Bar, Andy can make 1 bottle of ketchup and Henry can make 4 bottles. - Andy has the Comparative Advantage because his opportunity cost is lower, giving up only 1 bottle of ketchup

Willingness to Sell

- the MINIMUM Price a seller will accept to sell a good/service Two Factors to determine Willingness to Sell: 1) The direct costs of producing the good 2) The indirect costs (Opportunity Costs)

Law of Supply

-When the PRICE of a good RISES = Quantity Supplied RISES - When the PRICE of a good FALLS = Quantity Supplied FALLS

Thinking Like an Economist

1) All choices entail Opportunity Costs 2) Decisions are made at the Margin 3) Incentives Matter 4) Trade creates Value

Factors of Production

1) Land - Natural Resources 2) Labor - Human Power 3) Capital - Tools used to Produce (NOT MONEY!) 4) Entrepreneurial Ability - Human Thinking

Assumptions of PPF

1) Technology is fixed (NOT changing) 2) Resources are fixed (land, labor, inputs) 3) TWO goods - *Efficient* = point ON boundary - *Inefficient* = point BELOW boundary - *Attainable* = point ON/BELOW boundary - *Unattainable* = point ABOVE boundary - When society is producing ON the PPF --> the only way to get more of one good is to accept LESS of another - A SHIFT ABOVE = change in technology/more labor - Points ALONG PPF represent how much that can be PRODUCED, not sold - UNEMPLOYEMENT = a point INSIDE the PPF, because people who can help produce would not be working - POPULATION = greater population shifts PPF outward --> more people to work

Example: Price Floor on Milk

1) There will be a SURPLUS of milk --> consumers will purchase less since the price is higher (law of demand), producers manufacture more (law of supply) 2) Illegal discounts will help to reduce the milk surplus --> selling below price floor 3) There might be a lot of spoiled milk

Shifts in the Supply Curve

A shift in supply occurs when something other than price changes - PRICE Changes = Quantity Supplied changes ALONG the supply curve, NOT a shift in the curve - Ask yourself: "Would the change cause a business to produce more or less of the good?"

Shifts in the Supply Curve LEFT

Decrease Supply - The cost of an INPUT RISES - The business adopts inefficient production processes or technology - Business Taxes INCREASE or Subsidies DECREASE - The # of SELLERS DECREASE - The price of the product is anticipated to RISE in the Future --> sellers delay sales until the good is at a higher price

Factors that Shift the Demand Curve LEFT

Decrease in Demand - Income FALLS (demand for a Normal Good) - Income RISES (demand for an Inferior Good) - The Price of a Substitute good FALLS - The Price of a Complementary good RISES - The good falls OUT OF Style - There is a belief that the Future Price of the good will DECLINE - The # of Buyers in the market FALLS

Shifts in the Supply Curve RIGHT

Increase Supply - The cost of an INPUT FALLS - The business deploys more efficient technology - Business Taxes DECREASE or Subsidies INCREASE - The # of SELLERS INCREASE - The price of the product is expected to FALL in the future --> sellers offer more while prices are higher

Factors that Shift the Demand Curve RIGHT

Increase in Demand - Income RISES (demand for a Normal Good) - Income FALLS (demand for an Inferior Good) - The price of a Substitute RISES - The price of a Complementary good FALLS - The good is currently IN STYLE - There is a belief that the Future Price of the good will RISE - The # of Buyers in the market INCREASES