econ midterm
define income when relating to shifting demand curve
- a normal good is a good for which higher income causes an increase in demand - an inferior good is a good for which higher income causes a decrease in demand
how do you find who has the comparative advantage?
- determine how long each task takes each person (this measures the cost of producing each good in hours) -convert this into a measure of opportunity cost by calculating how much of the alternative good you could have produced in that time -whoever can produce each good at the lowest opp. cost has the CA
define expectations when relating to the shift of the demand curve
- expectations about the future - if you believe prices will rise, you buy the item today which increases todays demand
the opportunity cost principle
- price of next best alternative -cost of choice-cost of next best alternative= opportunity cost
define input prices when relating to the shift of the supply curve
- the price of stuff you use to produce something -if input price falls, there is an increase in supply because the inputs cost less so you can make more
rule of thumb for demand
- when price changes it's a movement - when anything else changes its a shift
interdependent principle
- your best choice depends on other choices you make, choices of others, and developments in markets
define preferences when relating to shifting the demand curve
-advertising/marketing -social pressures -trends
why is supply curve upward sloping?
-because of increasing marginal costs -as you increase the quantity you produce, the marginal cost of producing an extra unit rises
define prices of related goods relating to the shift of the demand curve
-changes in the price of related goos cause the graph to shift - complementary goods are goods that go together so if price pf buns increase, this will increase the demand for hot dogs - substitute goods are goods that can replace each other, if pepsi price increase, the demand for coke increases
define expectation when relating to the shift of the supply curve
-decisions are linked through time -if their is a higher price next year, you start production early to save money and sell it later
cost benefit principle
-evaluate full set of costs and benefits, make choice if the benefit is greater than the cost -incentive: reason to change behavior
if the market supply curve is upward sloping then...
-higher price leads businesses to supply a larger quantity -higher price means more businesses are supplying their goods/services -lower price means fewer businesses are supplying their goods/services
define productivity and tech when relating to the shift of the supply curve
-how good people use stuff -productivity growth: when businesses figure out how to produce more with fewer input, this cause a shift to the right because more efficient=more quantity
define congestion and network effects when relating to the shift of the demand curve
-how other people use goods can affect demand curves -network: effect that occurs when a good becomes more useful because other people use it -congestion: effect that occurs when a good becomes less valuable because other people use it
marginal principle
-if your marginal benefit is greater than or equal to the cost, then yes, buy one more - decisions made one by one
how to choose the best quantity to supply?
-produce one more unit if marginal benefit exceeds marginal cost -when determining marginal cost, compare cost of production to its next best alternative
what happen when international trade imports a good at a high price
-quantity demanded by buyers fall -quantity supplied by sellers rise -consumer surplus decrease and producer surplus increase -economic surplus increases
what happens when international trade imports a good at a low price
-quantity demanded by buyers increase -quantity supplied by sellers decreases -consumer surplus increase and producer surplus decreases -economic surplus increases
define prices of related outputs when relating to the shift of the supply curve
-substitutes in production: alternative uses of your production capacity -complements in production: goods that are made together An increase in the price of one complement good causes an increase in the supply of the other. A decrease in the price of one complement good causes a decrease in the supply of the other
what happens when buyers import goods
-the price declines to the world price -the lower price reduces the quantity supplied by domestic sellers and increase the imports to fill the gaps between supply and demand
import
-to buy goods/services from a foreign seller
What is market demand and the market demand curve
Market demand is what the market wants Market demand curve is the sum of quantity demanded by each person
define specialized skills relating to CA
a. develop a specialized skill b. unique skills, production methods play a source of CA
define abundant outputs relating to CA
a. take advantage of what you have to get what you want b. abundance can be due to climate, geography, natural resources, and strategic investment
define mass production relating to CA
a.production in large quantities result in a lower opportunity cost per unit b. lower opp. cost from mass production is a source of CA
what are the three sources that shape comparitive advantage
abundant inputs, specialized skills, and mass production
efficient allocation
allocating goods to create the largest economic surplus - requires that each good goes to the person who will receive the highest marginal benefit
changing supply vs quantity supplied
anytime you move along a supply curve that is a change in quantity supplied
why do american producer gain when they import a good
because they pay a lower price
what do economic surplus and deadweight loss have in common
both focus on marginal benefits and marginal cost
voluntary exchange
buyers and sellers exchange money for goods only if they both want to
what happens to the graph when there is a decrease in demand
causes graph to shift to the left leads to a new equilibrium and a decrease in price and quantity
what happens to the graph when there is an increase in demand?
causes graph to shift to the right this leads to a new equilibrium and an increase in price and quantity
what does economic surplus equal
consumer surplus and producer surplus
calculate deadweight loss
economic surplus at efficient quantity-actual economic surplus=
trade cost
extra costs added as a result of buying/selling something internationally rather than domestically -shipping/taxes
how has the power to limit market failure
government policies
deadweight loss def
how far economic surplus falls below the efficient outcome
define types and number of sellers when relating to the shift of the supply curve
if new businesses enter the market, supply increases
What shifts both an individual demand curve and the market demand curve
income, preferences, prices of related goods, expectations, and congestion and network effects
what causes the supply curve to shift?
input prices, productivity/technology, prices of related outputs, expectations, and the types and number of sellers
comparitive advantage is foundation of what
internation trade
what is a downward sloping demand curve?
it is the diminishing marginal benefit, each additional item yields a smaller marginal benefit than the previous item
perfectly competitive market
many buyers and many sellers each of whom is small relative to the size of the market
the demand curve is also the
marginal benefit curve - it illustrates the price at which you are willing to buy at each quantity
calculate economic surplus
marginal benefit-marginal cost
calculate consumer surplus
marginal benefit-price
the supply curve is also the _____ curve
marginal cost
predicition market
markets whos payoffs are linked to whether an uncertain event occurred
internal market
markets within a company to buy and sell scarce resources, help companies, non profits, and government agencies
efficent allocation __________ benefits
maximizes
efficient production has what effect on the cost
minimizes it
a decrease in supply on the supply curve causes the graph to move to
move to the left
an increase in supply on the supply curve cause the graph to
move to the right
information problems def
not enough info given out before selling
what does the individual supply curve plot
plots the quantity to sell at each price
how do markets organize and coordinate economic activites
price
what happen when you shift a demand curve?
price and quantity move in the same direction
equilibrium price
price at which market is in equilibrium
Movements of demand curve are caused by
price changes only
what is the individual demand curve plotting
price vs quantity (holds everything besides price constant)
calculate producer surplus
price-marginal cost
when maximizing profit (supply), you will continue selling until...
price=marginal cost
efficent production
producing a given quantity of output at the lowest possible cost -this requires allocating production so that each item is produced at the lowest marginal cost
what creates deadweight loss?
quantities not prices
what happens when price is below equilibrium
quantity demand exceeds quantity supplied and a shortage results
equilibrium quantity
quantity demanded and supplied at equilibrium
the rational rule for markets lead to efficient quantities, what is efficient quantity
quantity that produces the largest possible economic surplus
irrationality def
reasons why you're not following the rationale rule (for sellers in market)
diminishing marginal product leads to...
rising marginal cost - marginal product of an input declines as you use more of the output
what is the rational rule for sellers in competitive market
sell one more unit if the price is greater than or equal to the marginal cost
what is prices 3 roles and their meaning when relating to markets
signal: price is line of communication between buyers and sellers incentive: higher price is incentive for suppliers to produce more,, higher price is incentive for buyers to buy less information: process of buying and selling aggregates info
externalities def
something that occurs when you do something and if affects other people and you don't take into consideration of the effects
what is the law of supply
tendency for the quantity supplied to be higher when the price is higher
comparative advantage
the ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.
absolute advantage
the ability to produce a good using fewer inputs than another producer
marginal benefit
the additional benefit to a consumer from consuming one more unit of a good or service
gains from trade def
the benefits that come from relocating resources, goods and services to better uses
marginal cost
the cost of producing one more unit of a good
opportunity cost of doing a task
the output you could produce of an alternative task -calculate by: opportunity cost of task=hour the task takes divided by hours required to produce alternative output
world price
the price where a good/service is bought by the world market
what is the law of demand
the quantity demanded is higher when the pric eis lower
what happens when price is above equilibirum?
the quantity supplied exceeds quantity demanded and a surplus results
what happens (supply) when the price of something becomes higher in the market?
the seller has an incentive to make more
world supply
the total quantity by all sellers around the world -total quantity of the product supplied by all sellers around the world
export
to sell goods or services to a foreign buyer
world demand
total quantity demanded by all buyers around the world
what is the market supply curve plotting
total quantity of an item supplied by the entire market at each price
market power def.
when a market is not perfectly competitive
how does government failure occur
when government policies lead to worse outcomes
when does market failure occur
when the forces of supply and demand lead to an inefficient outcome -market power, externalities, info problems, irrationality and government reelations
equilibrium
where supply meets demand
do gains outweigh the cost
yes