Econ Textbook questions
equation
a mathematical statement that two expressions are equal
when deciding to take an action, sunk costs should
be ignored
should you walk downtown to save 10$ on a 25$ video game? cost of trip is 12$ not 9$, how much smaller would your economic surplus be if you bought the game downtown instead of campus store?
benefit is 10 but cost is 12 so 2$ smaller
constant (paramenter)
fixed value
how do differences in opportunity cost affect gains from specialization
lowest opportunity cost person should specialize. comparative advantage drives specialization
income effect of a price change
the change in the quantity demanded of a good due to the effect that the change in its price has on an individual's purchasing power or real income. if it becomes more expensive people cant buy it.
substitution effect
the change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes. pizza becomes too expensive so you buy chicken.
buyer's surplus
the difference between the buyer's reservation price and the price he or she actually pays
total surplus
the difference between the buyer's reservation price and the seller's reservation price
seller's surplus
the difference between the price received by the seller and his or her reservation price
demand for gas increase and price falls
the equilibrium price of gasoline increases but equilibrium quantity demanded could go up or down
suppose the demand for gasoline increases at the same time the supply falls, then we know that
the equilibrium price of gasoline will go up but the quantity could go up or down
suppose that peoples income rises at the same time that the cost of producing cell phones falls. if cell phones are a normal good we know
the equilibrium quantity of cell phones will go up, but the price could go up or down
buyer's reservation price
the largest dollar amount the buyer would be willing to pay for a good
market
the market for any good consists of all buyers and sellers of that good
average cost
the total cost of undertaking n units of an activity divided by n
factors that cause an increase (rightward upward shift) in demand
1. a decrease in price of complements to the good or service 2. an increase in the price of substitutes for that good or service 3. an increase in income for normal good 4. an increased preference by demanders for the good or service 5. increase in population of potential buyers 6. expectation of higher prices in the future
factors that cause an increase (rightward upward shift) in supply
1. a decrease in the cost of materials, labor, or other inputs used in the production of the good or service 2. an improvement in technology that reduces the cost of producing that good or service 3. improvement of weather (agriculture) 4. increase in number of suppliers 5. an expectation of lower prices in the future
you grow 24,000 bushels potatos a year and 8,000 bushels corn a year, opportunity cost of growing a bushel of potato is
1/3 corn
debating going to 8am economics class. if you do not go you can sleep an extra hour valued at 10$ or go to the gym valued at 7$ your opportunity cost of going to class is
10$
martin just bought a guitar for 110. his reservation price was 140 and jacksons reservation price was 100. the sellers surplus from the transaction was
110-100=10$, surplus is 40$
should you use your frequent flyer coupon to cancun for spring break? it expires in a week
1350-1000=350>0 so yes
Suppose the most you would be willing to pay for a plane ticket home is $250. If you buy one for $175, then your economic surplus is:
75
variable
A factor that can change in an experiment
incentive principle
A person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises. In short, incentives matter. positive economic
Cost-Benefit Principle
An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs. big picture is cost benefit analysis. benefit is largest dollar amount the person would be willing to pay to take the action
Efficiency Principle (no cash on the table)
Efficiency is an important social goal because when the economic pie grows larger, everyone can have a larger slice.
the principle of comparative advantage
Everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is lowest
equilibruim
a balanced or unchanging situation in which all forces at work within a system are canceled by others
efficiency (economic efficiency)
a condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels
inferior good
a good whose demand curve shifts leftward when the incomes of buyers increase and rightward when the incomes of buyers decrease
normal good
a good whose demand curve shifts rightward when the incomes of buyers increase and leftward when the incomes of buyers decrease
supply curve
a graph of the relationship between the price of a good and the quantity supplied. upward slope. consequence of low hanging fruit. can be vertical or horizontal. change of input prices and technology are too important factors that give rise. changes in the # of sellers can cause a shift
economically inefficient
a market in which the production of the good has significant costs to others (pollution) and the consumption of the good has cost (2nd hand smoke)
price ceiling
a maximum allowable price, specified by law. pizza only sold at 2$, people will get mad and wont get as much. a price ceiling below equilibrium results in excess demand
change in quantity demanded (change in the quantity that people wish to buy that occurs in response to a change in price)
a movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price
change in the quantity supplied
a movement along the supply curve that occurs in response to a change in price
demand curve
a schedule or graph showing the quantity of a good that buyers wish to buy at each price. downward sloping with respect to price. i will buy 5 slices of pizza at 2$ each but only 3 at 3$.
change in demand
a shift of the demand curve, which changes the quantity demanded at any given price
change in supply
a shift of the entire supply curve
Outsourcing
a term increasingly used to connote having services performed by low-wage workers overseas, example is transcription of medical records. get the job done for you cheaper in another country, offshore call centers, atm machine. face to face are safe
dependent variable
a variable in an equation whose value is determined by the value taken by another variable in the equation
cash on the table
an economic metaphor for unexploited gains from exchange
efficient point
any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other
inefficient point
any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other
attainable point
any combination of goods that can be produced using currently available resources
unattainable point
any combination of goods that cannot be produced using currently available resources
the reason why countrys trade with one another is that each country can benefit by specializing in the production of the goods and services at which they have a
comparative advantage
an increase in corn supply could be because a
decrease in price
the fact that people dont always conciously weigh costs and benefits when making decisions
doesnt mean that economic models arent useful for predicting behavior
you're deciding if you should go on a run, if you don't you will watch tv or do your homework. the opportunity cost of going on a run is
either the value you place on watching tv or the value you place on doing homework, whichever is largest
free street parking or garage for 10$?
garage if you will pay at least 10$ to avoid hastle
opportunity costs includes
implicit and explicit
suppose sean makes 10 tables a month, sell for 200 each. if the cost is 150, should he make more or fewer
impossible to tell, needs to base it off of marginal cost benefit. average isnt marginal
vertical intercept
in a straight line, the value taken by the dependent variable when the independent variable equals zero. an increase makes a vertical shift up of the line. increase in rate makes slope steeper
the principle of increasing opportunity cost (low hanging fruit principle)
in expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward return to resources with higher opportunity costs
bread and peanut butter are compliments, a decrease in peanut price leads to
inc price of bread inc amount of bread people buy
a decrease in the cost for butter will lead to a ________ for popcorn (compliments)
increase
Four rules governing the effects of supply and demand shifts
increase demand=increase equilibrium price&quantity decrease demand=decrease equilibrium price&quantity increase supply=decrease equilibrium price&increase quantity decrease supply=increase equilibrium price&decrease quantity
marginal benefit
increase in total benefit as a result from carrying out one additional unit of activity
a sunk cost
is beyond recovery at the time of a decison
jack has a comparative advantage in gathering fish and kate has a comparative advantage in gathering coconuts. they want a few fish (not as many) and a few coconuts. who should spend less time gathering fish and more time coconuts?
kate, since she has a comparative advantage her opportunity cost is lower. low hanging fruit principle.
the increase in total cost that results from carrying out one additional unit of activity is
marginal cost
one common decision pitfal
measure costs and benefits as proportions rather than absolute dollar amounts.
3 pitfalls
measuring costs/benefits proportionally, ignoring implicit costs, failure to think at the margin
should meg update her own webpage? 3/hr and 3 bike/hr vs pat 2 web/hr 1 bike/hr
meg has an absolute advantage in both, but pat has a comparative advantage she only gives up half a bicycle.
should a basketball player take all the teams shots
no
market equilibrium
occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price. not always ideal for all
comparative advantage
one person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person's opportunity cost. gains are when trading partners have comparative advantages in producing different goods/services
absolute advantage
one person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person
positive (descriptive) economic principle
one that predicts how people will behave
normative economic principle
one that says how people SHOULD behave -ex) Cost-benefit principle
economic growth and population growth, most important improvements in technology and knowledge
outward shift in PPC
incentive
pizza is now 3.95 instead of 4.00
a graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good
production possibilities curve
which is more valuable, saving 100 on 2,000 to tokyo or 90 on a 200 plane ticket to chicago
saving 100$ is bigger than 90$ even though the percentage is bigger
laws make prices lower, so sellers sell less and buyers want more. rent controls
sellers can do finder fees to get closer to their goal selling price under the law
increasing opportunity cost explains why ppcs have a
slope that becomes steeper as production of the good on the x axis increase
population increase
specialization increase
suppose susan can pick 2lb coffee/hr or 4lb nut/hr and tom can pick 1lb coffee/hr or 1lb nut/hr. whats susans opportunity cost of gathering a pound of nuts? whats toms? where does susans comparative advantage now lie?
susans OC of gathering a pound of nuts is now 1/2 pound coffee, but toms is only 1lb coffee. tom has comparative advantage in coffee and susan in nuts
excess demand (shortage)
the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price. you want more than they have to offer
excess supply (surplus)
the amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price. you have more than they offer to buy
specialization based on comparative advantage is
the basis for economic exchange
equilibrium price and quantity
the price and quantity at the intersection of the supply and demand curves for the good equilibrium price - price at which good will sell equilibrium quantity - quantity that will be sold find this by supply and demand curves
socially optimal quantity
the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good
seller's reservation price
the smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost
miroeconomics
the study of the choices that individuals and businesses make, the way these choices interact in markets, and the influence of governments
Macroeconomics
the study of the performance of national economies and the policies that governments use to try to improve that performance. tries to understand unemployment, price value, total value of national output
if undertaking an activity includes both explicit and implicit costs, then according to the textbook, the opportunity cost is
the sum of its explicit and implicit costs
when people ignore the implicit cost of activities
they tend to make the wrong choice
failure to achieve economic efficiency means
total economic surplus is not maximized, everyone in the economy could be made better off
a price ceiling will have no effect on the market if it is set above equilibrium
true
compliments
two goods for which an increase in the price of one leads to a decrease in the demand for the other. increase price left demand, decrease price right demand on other. better together like tennis balls and tennis courts
substitutes
two goods for which an increase in the price of one leads to an increase in the demand for the other
independent variable
variable that is manipulated. determines
