Exam 1: Chapters 1, 2, and 3
Shift to the right:
A new way to brew a richer coffee, at half the cost, causes sellers to produce more coffee.
What happen when the price changed?
A price change causes a movement along a given demand curve, but it cannot cause a shift of the demand curve.
Positive statement
A statement that can be tested and validated. Each statement can be thought of as a description of "what is." For instance, the statement "The unemployment rate is 7%" is a __________ statement because it can be tested by gathering data.
Normative statement
A statement that cannot be tested or validated; it is about "what ought to be." For instance, the statement "An unemployed worker should receive financial assistance to help make ends meet" is a matter of opinion.
Production Possibilities Frontier: on the PPF
Any combination of pizza and wings is efficient along, or inside, the line.
What is a possible problem with using faulty assumptions when building an economic model? A) The model could become too popular. B) It could lead to poor economic decisions. C) It means we never have to rebuild the model. D) It could cause too much wealth.
B) It could lead to poor economic decisions.
Demand vs Tax
Changes in excise taxes (which are taxes on a single product or service) and sales taxes (which are general taxes on most goods and services) affect demand as well. Higher taxes lower demand because consumers must now pay the higher tax in addition to the price they pay for the good. Lower taxes reduce the overall cost to consumers and therefore increase demand.
Example of subsidy
Consider a hypothetical example where the government wants to promote flu shots for high-risk groups like the young and the elderly. One approach would be to offer large subsidies to clinics and hospitals, thus offsetting those firms' costs of immunizing the targeted groups. The supply curve of immu- nizations greatly shifts to the right under the subsidy, so the price falls. As a result, vaccination rates increase over what they would be in a market without the subsidy.
If we move down and to the right along a PPF, the opportunity cost of this movement can be measured in terms of A) how much of the x-axis good we gain. B) how much of the y-axis good we gain. C) how much of the x-axis good we give up. D) how much of the y-axis good we give up.
D) how much of the y-axis good we give up.
With regard to the PPF, an efficient point is a point that is A) impossible to reach. B) inside the PPF. C) outside the PPF. D) on the PPF.
D) on the PPF.
Economists are concerned with ___________ analysis.
Economists are concerned with positive analysis.
Economists use _________ to understand the complex real-world economy.
Economists use models to understand the complex real-world economy.
On average, people save 15% on insurance when they switch to Geico.
Geico made this claim in one of its commercials. It is a positive statement because it is a testable claim. If you had the data from Geico, you could determine if the statement were correct or not.
Example of quantity supplied
Higher prices cause the quantity supplied to increase. Conversely, lower prices cause the quantity supplied to decrease. When price increases, producers often respond by offering more for sale. As price goes down, quantity supplied also goes down.
Example of market supply
However, to make our analysis simpler, let's assume that our market consists of just two sellers, City Fish and Pure Food Fish, each of which sells salmon. Figure 3.6 shows supply schedules for those two fish seller and the combined, total-market supply schedule and the corresponding graphs. Looking at the supply schedule (the table within the figure), you can see that at a price of $10.00 per pound, City Fish supplies 100 pounds of salmon, while Pure Food Fish supplies 400 pounds. To determine the total market supply, we add City Fish's 100 pounds to Pure Food Fish's 400 pounds for a total market supply of 500 pounds. (For a clear example on page 88).
In Chapter 1 review
In Chapter 1, we learned that economics is about the trade-offs individuals and societies face every day. For instance, you may frequently have to decide between spending more time studying or hanging out with your friends. The more time you study, the less time you have for your friends. Similarly, a society has to determine how to allocate its resources. The decision to build new roads will mean that there is less money available for new schools, and vice verse
Example of equilibrium
In Figure 3.9, we see that when the price of salmon fillets is $10 per pound, consumers demand 500 pounds and producers supply 500 pounds. This situation is represented graphically at point E. At this point, the two opposing forces of supply and demand are perfectly balanced.
Invisible hands example
In other words, producers earn a living by selling the products that consumers want. Consumers are also motivated by self-interest; they must decide how to use their money to select the goods that they need or want the most.
Which of the following is a positive statement?
Increases in the minimum wage cause unemployment.
Why do economists use models?
Models allow us to study a simplified version of a complex world.
To understand how competition works?
On any given day, dozens of vendors sell salmon at this market. If a single vendor is absent or runs out of salmon, the quantity supplied that day will not change significantly—the remaining sellers will have no trouble filling the void. The same is true for those buying salmon. Customers will have no trouble finding salmon at the remaining vendors. Whether a particu- lar salmon buyer decides to show up on a given day makes little difference when hundreds of buyers visit the market each day. No single buyer or seller has any appreciable influence on the price of salmon. As a result, the market for salmon at Pike Place Market is a competitive one.
2. A furniture store in an isolated small town?
Residents would have to travel a significant distance to find another furniture store. This situation allows the small-town store to charge more than other furniture stores. The furniture store has some monopoly power. This is not a competitive market.
A health warning causes buyers to demand fewer cantaloupes.
Shift to the left => less demand
A medical study reports that eating cantaloupe lowers cholesterol, which causes buyers to demand more cantaloupes.
Shift to the right => more demand
What happen when the demand curve shifts?
Shifts in demand can happen only when an outside event influences human behavior. Price remains the same.
Harvard University is the top educational institution in the country.
Some national rankings indicate that this statement is true, but others do not. Because different rankings are based on different assumptions, it is not possible to identify a definitive "top" school. This is a normative statement.
Example of substitutes
Substitute goods work the opposite way. When the price of a substitute good increases, the quantity demanded declines, and the demand for the alternative good increases. For example, if the price of the PlayStation 4 goes up and the price of Microsoft's Xbox remains unchanged, the demand for Xbox will increase while the quantity demanded of the PS4 will decline.
Starbucks
Supplies coffee from coast to coast and seems to be everywhere someone wants a cup of coffee.
Nordstorm
Supplies fashion apparel to meet a broad spectrum of individual demand, from the basics to designer collections.
Microsoft
Supplies software for customers all over the world. Demand products has made large fortunes for founder Bill Gates and other investors in the company.
What are the benefits and costs of a being here in college?
The biggest cost of college is the foregone income while in school. -Lower income means students can't buy as much. -Students must also postpone getting a house, new car, taking vacations, and so on. What are the benefits of going to college? Higher income in future -Better job in future -Less physical -Cleaner environment
What do buyers and sellers do to the demand and supply?
The buyers create the demand for the product, while the sellers produce the supply.
Demand decreases; supply does not change.
The demand curve shifts to the left. As a result, the equilibrium price and the equilibrium quantity decrease.
law of supply and demand
The law states that the market price of any good will adjust to bring the quantity supplied and the quantity demanded into balance.
law of demand
The law states that, all other things being equal, quantity demanded falls when the price rises, and rises when the price falls.
law of supply
The law states that, all other things being equal, the quantity supplied increases when the price rises, and the quantity supplied falls when the price falls.
B) the value of the next-best alternative you could have purchased.
The opportunity cost of buying a good is A) the sum of values of all the other goods you could have purchased. B) the value of the next-best alternative you could have purchased. C) irrelevant since you will purchase your highest-valued good. D) the average of values of all the other goods you could have purchased.
Suppose that a hurricane devastates the coffee crop in Colombia and reduces the world coffee supply by 10% for that year. There is no way to make up for the destroyed coffee crop, and for the rest of the year at least, the quantity of coffee supplied will be less than the previous year.
This decrease in supply shifts the supply curve the left
True or False: Black Friday rush at target means more demand.
True
Public buildings in the United States are required to be accessible to the disabled and, as a result, almost all have an elevator. What would be an example of a positive direct incentive for those who can use stairs?
Using the stairs will give them some exercise and make them healthier.
Which of the following is a normative statement?
We should strive to push the production possibilities frontier (PPF) outward
A) Scarcity forces us to make choices.
What can be said about scarcity? A) Scarcity forces us to make choices. B) Scarcity doesn't affect the super-wealthy. C) Scarcity only affects commodities such as oil. D) Scarcity generally doesn't affect our day-to-day living.
When we shift the curve
When we shift the curve, we assume that price is constant and that something else has changed.
Everyone should work at a bank to learn the true value of money
While working at a bank might give someone an appreciation for the value of money, the word "should" indicates an opinion. This is a normative statement.
University of Virginia graduates earn more than Duke University graduates.
You can look up the data and see which university's graduates earn more. This is a positive statement.
market
a collection of buyers and sellers of a particular product or service.
demand curve
a graph of the relationship between the prices in the demand schedule and the quantity demanded at those prices.
supply curve
a graph of the relationship between the prices in the supply schedule and the quantity supplied at those prices.
Production possibilities frontier
a model that illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently.
subsidy
a payment made by the government to encourage the consumption or production of a good or service.
invisible hands
a phrase coined by Adam Smith to refer to the unobservable market forces that guide resources to their highest- valued use.
The basic goal of economics is to
address the scarcity problem created because the population's desire for goods exceeds the ability to produce them.
The scientific method and the tools of economics are useful in examining
anything; economists will use their tools to study anything in the world around them
Inputs
are resources used in the production process. (workers, equipment, raw materials, buildings, and capital goods). Each of these resources is critical to the production process. When the cost of inputs change, so does the seller's profit. If the cost of inputs declines, profits improve. Improved profits make the firm more willing to supply the good.
market
bring the buyers and sellers together to exchange goods and services
Technology
encompasses knowledge that producers use to make their products.
positive incentives
encourage action by offering rewards or payments. For example, end of year bonuses motivate employees to work hard throughout the year, higher oil prices cause suppliers to extract more oil, and tax rebates encourage citizens to spend more money.
monopoly
exists when a single company supplies the entire market for a particular good or service.
competitive market
exists when there are so many buyers and sellers that each has only a small (negligible) impact on the market price and output.
Incentives
factors that motivate a person to act or exert effort.
Saudi Arabia has a comparative advantage in producing oil because it
has specialized in the production of oil given its natural resources.
five foundations of economics
incentives, opportunity costs, trade-offs, marginal thinking, and trade create value
economic thinking
involves a purposeful evaluation of the available opportunities to make the best decision possible
indirect incentives
kind of incentive that is difficult to recognize "Suppose you work in welfare programs. Almost everyone agrees that societies should provide a safety net for those without employment or whose income isn't enough to meet their basic needs."
Economists believe that optimal decisions are made up to the point where
marginal benefits are equal to marginal costs
A price change causes a movement along the supply curve
not a shift in the curve.
equilibrium
occurs at the point where the demand curve and the supply curve intersect.
double confidence of wants
occurs when each party in an exchange transaction has what the other party desires For example, when you are hungry and plan to get something to eat, you got a jab at subway restaurant. You use the money that you paid at work for a sandwich. When you get home, you get a call from your land-lord to pay him a rent. You offer him sandwiches every other day instead of paying him them money, he agrees. Unfortunately, the cable company bill you for your cable, you also offer food from subway, but it wants to be paid because its service trucks don't run on sandwiches. You need to find someone else to trade sandwiches for gasoline so you can pay your cable bill.
A parent that pays a child an allowance for doing chores is providing a(n) ________ incentive.
positive
inferior good
purchased out of necessity rather than choice.
price goes up
quantity demanded goes down
First step of scientific method
researchers observe a phenomenon that interests them.
circular flow
shows how resources and final goods and services flow through economy > households > resource market > firms > product market >
Economics is concerned with the trade-offs that emerge because of scarcity. The term "trade-offs" refers to
the alternatives given up when making choices
quantity demanded
the amount of a good or service that buyers are willing and able to purchase at the current price.
scarcity
the limited nature of society's resources, given society's unlimited wants and needs
Scarcity
the limited nature of society's resources.
equilibrium price
the price at which the quantity supplied is equal to the quantity demanded. It is also known as the market-clearing price.
Third step of scientific method
they construct a model to test the hypothesis.
trade-off
we will make more informed decisions about how to utilize our scare resources
Adam Smith, the founder of modern economics, described the dynamic best: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."
"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."
normal goods
Consumers buy more of a normal good as income rises, holding all other factors constant ( (assuming all other factors remain constant).
What is economics?
Economics is the study of how people allocate their limited resources to satisfy their nearly unlimited wants. Because of the limited nature of society's resources, even the most abundant resources are not always plentiful enough everywhere to meet the wants and needs of every person. So how do individuals and societies make decisions about how to use the scarce resources at their disposal? This is the basic question economists seek to answer.
Economists are concerned with ________ analysis.
Economists are concerned with positive analysis.
While something is popular
demand increases.
What determines demand?
✷ The law of demand states that, all other things being equal, quantity demanded falls when the price rises, and rises when the price falls. ✷ The demand curve is downward sloping. ✷ A price change causes a movement along the demand curve, not a shift of the curve. ✷ Changes in something other than price (including changes in income, the price of related goods, changes in tastes and preferences, price expectations, the number of buyers, and taxes) shift the demand curve.
What determines supply?
✷ The law of supply states that, all other things being equal, the quantity supplied of a good rises when the price of the good rises, and falls when the price of the good falls. ✷ The supply curve is upward sloping. ✷ A price change causes a movement along the supply curve, not a shift the curve. ✷ Changes in something other than price (the cost of inputs, changes in technology or the production process, taxes and subsidies, the number of firms in the industry, and price expectations) shift the original supply curve.
Normative statement
-An opinion that cannot be tested or validated -Describes "what ought to be" - how the economy should work
Positive statement
-Can be tested and validated -Describes "what is" - describes the way the economy actually works
Economics differs from other sciences in important ways:
-Economists don't have a controlled lab; economic behavior takes place in the world around us. -Economists cannot always run controlled experiments and may sometimes have to rely on historical data
Consider a rise in the unemployment rate:
-Economists try to understand why it occurred. -Economists do not determine who should receive unemployment benefits or other government assistance.
The scientific method consists of four steps:
-First, researchers observe a phenomenon that interests them. -Next, based on these observations, researchers develop a hypothesis, which is a proposed explanation for the phenomenon. -Then they construct a model to test the hypothesis. -Finally, they design experiments to test how well the model (which is based on the hypothesis) works. After collecting data from the experiments, they can verify, revise, or refute the hypothesis.
Ceteris paribus
-Latin: Means "other things being equal" or "all else equal." -Used to build economic models. -Allows economists to examine a change in one variable while holding everything else constant.
Economic Models
-Many economic topics, such as international trade, Social Security, job loss, and inflation, are complicated. To analyze these phenomena and to determine the effect of various government policy options related to them, economists use economic models, which are simplified versions of reality. -Helps economists to predict the effects of changes in prices, production processes, and government polities on real-life behavior. -Are considered good if they predict accurately.
Economists use the scientific method to explain economic phenomena:
-Observe a phenomena -Develop a hypothesis -Construct a model to test the theory -Design an experiment to test how well the model works and collect data -Revise or refute the theory based on evidence
Go through the scientific method with a specific question as an example:
-Phenomena: People are buying more hybrid automobiles. -Hypothesis: (1) The price of hybrids has fallen and (2) the price of gasoline is higher. -Model to test theory: Supply and demand analysis (explain to students that you will get to that model in the next chapter) -Experiment: Gather data on car prices, gasoline prices, hybrid sales, and other variables of importance. Run appropriate statistical tests. Draw conclusions
Chapter 2 Reviews
-Scarcity refers to the limited nature of society's resources. -The production possibilities frontier (PPF) is an illustration of the goods and services an economy is capable of producing. -Trade is mutually beneficial for both parties involved.
Not all resources are perfectly adaptable for producing both goods
-The opportunity cost of producing a good will rise as we produce more of it. -
Assumptions (ceteris paribus):
-To preserve ceteris paribus, we assume that the technology available for production. -The quantity of resources remain fixed, or constant. -Society produces only two goods: Pizza and wings as example
When building a model, you must decide:
-we need to make choices about which variables to include. Ideally, we would like to include all the important variables inside the model and exclude all the variables that should be ignored. -However, no matter what we include, using a model that contains faulty assumptions can lead to spectacular failures.
Conclusion
1) Economists ask, and answer, big questions about life. This is what makes the study of economics so fascinating. 2) Economics is the study of how people allocate their limited resources to satisfy nearly unlimited wants. 3) The five foundations of economics: -Incentives -Trade-offs -Opportunity cost -Marginal thinking -Trade creates value
Shift to the left:
A hurricane that destroys the Colombian coffee crop causes sellers to produce less coffee.
Price expectations of sellers
A seller who expects a higher price for a product in the future may wish to delay sales until a time when the product will bring a higher price. For instance, florists know that the demand for roses spikes on Valentine's Day and Mother's Day. Because of higher demand, they can charge higher prices. To be able to sell more flowers during the times of peak demand, many florists work longer hours and hire temporary employees. These actions allow them to make more deliveries, increasing their ability to supply flowers while the price is high.
Examples of fault assumptions
An excellent example is the financial crisis and Great Recession that began in December 2007. In the years leading up to the crisis, banks sold and repackaged mortgage-backed investments under the faulty assumption that real estate prices will always rise. This assumption seemed perfectly reason- able in a world where real estate prices were rising annually. Unfortu- nately, the assumption turned out to be false. From 2006 to 2008, real estate prices fell. Because of one faulty assumption, the entire financial market teetered on the edge of collapse.
Question: Which one of the following will decrease the supply of chocolate ice cream? a. A medical report finding that consuming chocolate prevents cancer b. A decrease in the price of chocolate ice cream c. An increase in the price of chocolate, an ingredient used to make chocolate ice cream d. An increase in the price of whipped cream, a complementary good
Answer: We know that b cannot be the correct answer because a change in the price of the good cannot change supply; it can only cause a movement along an existing curve. Choices a and d would both cause a change in demand without affecting the supply curve. That leaves choice c as the only possibility. Chocolate is a necessary ingredient in the production process. Whenever the price of an input rises, profits are squeezed. The result is a decrease in supply at the existing price.
3. A fresh produce stand at a farmers' market?
Because consumers can buy fresh produce in season from many stands at a farmers' market, individual vendors have very little market pricing power. They must charge the same price as other vendors in order to attract customers. This is a competitive market.
1. Gas stations at a busy interstate exit?
Because each gas station sells the same product and competes for the same customers, they often charge the same price. This is a competi- tive market. However, gas stations also differentiate themselves by offering conveniences such as fast food, clean restrooms, ATM machines, and so forth. The result is that individual stations have some market power.
Example of complements
Consider this pair of complements: color ink cartridges and photo paper. You need to print a photo in color. What happens when the price of one of the complements—say, color ink cartridges—rises? As you would expect, the quantity demanded of ink cartridges goes down. But demand for its comple- ment, photo paper, also goes down because people are not likely to use one without the other.
Example of market demand
During a typical day at Pike Place Market, over 100 individuals buy salmon. However, to make our analysis sim- pler, let's assume that our market consists of only two buyers, Melissa Rivers and Ryan Seacrest, each of whom enjoys eating salmon. Figure 3.2 shows individual demand schedules for the two people in this market, a combined market demand schedule, and the corresponding graphs. At a price of $10 per pound, Melissa buys 2 pounds a month, while Ryan buys 4 pounds. To determine the market demand curve, we add Melissa's 2 pounds to Ryan's 4 pounds for a total of 6 pounds. As you can see in the table within Figure 3.2, by adding Melissa's demand and Ryan's demand, we arrive at the total (that is, combined) market demand. (Look in the book for a clear example pg. 78).
Example of the relationship between the price and the quantity demanded.
Economists always place the independent variable, which is the price, on the y (vertical) axis and the dependent variable, which is the quantity demanded, on the x (horizontal) axis. The relationship between the price and the quantity demanded produces a downward-sloping curve. (Look in the book for a clear example pg. 77)
Example of inferior good
Examples include rooms in boarding houses, as opposed to one's own apartment or house, and hamburger and ramen noodles, as opposed to filet mignon. As income goes up, consumers buy less of an inferior good because they can afford something better.
Demand
Exists when an individual or group wants something badly enough to pay or trade for it. How much an individual or group actually buys depends on the price of the good or service.
Suppose that a local pizza place likes to run a late-night special. The owners have contacted you for some advice. One of the owners tells you, "We want to increase the demand for our pizza." 1. Reduce the price of large pizzas. 2. Reduce the price of a complementary good—for example, offer two half- priced bottles or cans of soda with every large pizza ordered.
First, consider why late-night specials exist in the first place. Because most people prefer to eat dinner early in the evening, the pizzeria has to encourage late-night patrons to buy pizzas by stimulating demand. "Specials" are used during periods of low demand, when regular prices would leave the establishment largely empty. Next, look at what the question asks. The owners want to know which option would "increase demand" more. The question is very specific; the owners are looking for something that will increase (or shift) demand. Consider the first option, a reduction in the price of pizzas. Let's look at this option graphically (see graph on previous page). A reduction in the price of a large pizza causes a movement along the demand curve, or a change in the quantity demanded. Now consider the second option, a reduction in the price of a complemen- tary good. Let's look at this option graphically (see graph below). A reduction in the price of a complementary good (for example, soda) causes the entire demand curve to shift. This is the correct answer, because the question asks which marketing idea would increase (or shift) demand more. Recall that a reduction in the price of a complementary good shifts the demand curve to the right. The other answer, cutting the price of pizzas, will cause an increase in the quantity demanded, or a movement along the exist- ing demand curve. If you move along a curve instead of shifting it, you will analyze the problem incorrectly.
An improvement in technology enables a producer to increase output with the same resources or to produce a given level of output with fewer resources.
For example, if a new espresso machine works twice as fast as the old machine, Starbucks could serve its customers more quickly, reduce long lines, and increase its sales. As a result, Starbucks would be willing to produce and sell more espressos at each price in its established menu. In other words, if the producers of a good discover a new and improved technol- ogy or a better production process, there will be an increase in supply. That is, the supply curve for the good will shift to the right.
This relationship, described by the law of demand, shows us that when price changes, consumers respond by altering the amount they purchase. But in addition to price, many other variables influence how much of a good or service is purchased.
For instance, news about the possible risks or benefits associated with the consumption of a good or service can change overall demand.
Example of supply curve shift
For instance, suppose that beverage scientists at Starbucks discover a new way to brew a richer coffee at half the cost. The new pro- cess would increase the company's profits because its costs of supplying a cup of coffee would go down. The increased profits as a result of lower costs moti- vate Starbucks to sell more coffee and open new stores. Therefore, overall supply increases.
Question: Which one of the following will increase the demand for ice cream? a. A decrease in the price of the butterfat used to make ice cream b. A decrease in the price of ice cream c. An increase in the price of the milk used to make ice cream d. An increase in the price of frozen yogurt, a substitute for ice cream
If you answered b, you made a common mistake. A change in the price of a good cannot change overall market demand; it can only cause a movement along an existing curve. So, as important as price changes are, they are not the right answer. Instead, you need to look for an event that shifts the entire curve. I scream, you scream, we all scream for ice cream. Choices a and c refer to the prices of butterfat and milk. Because these are the inputs of production for ice cream, a change in their prices will shift the supply curve, not the demand curve. That leaves choice d as the only possibility. Choice d is correct because the increase in the price of frozen yogurt will cause consumers to substitute away from frozen yogurt and toward ice cream. This shift in consumer behavior will result in an increase in the demand for ice cream even though its price remains the same.
Price expectations of sellers (example #2)
Likewise, the expectation of lower prices in the future will cause sellers to offer more while prices are still relatively high. This effect is particularly notice- able in the electronics sector, where newer—and much better—products are constantly being developed and released. Sellers know that their current offer- ings will soon be replaced by something better and that consumer demand for the existing technology will then plummet. This means that prices typi- cally fall when a product has been on the market for a time. Because produc- ers know that the price will fall, they supply as many of the current models as possible before the next wave of innovation cuts the price that they can charge.
Example of inputs
So, for example, if Starbucks is able to purchase coffee beans at a significantly reduced price, it will want to supply more coffee. Conversely, higher input costs reduce profits. For instance, at Starbucks, the salaries of Starbucks store employees (or baristas, as they are commonly called) are a large part of the Baristas' wages make up a large share of the cost of selling coffee. An increase in the minimum wage would require Starbucks to pay its workers more. This higher minimum wage would raise the cost of making coffee and make Starbucks less willing to supply the same amount of coffee at the same price.
Demand increases; supply does not change.
The demand curve shifts to the right. As a result, the equilibrium price and the equilibrium quantity increase.
equilibrium quantity
The equilibrium quantity is the amount at which the quantity supplied is equal to the quantity demanded.
Why Do the prices of new electronics Always Drop?
The first personal computers released in the 1980s cost as much as $10,000. Today, you can purchase a laptop computer for less than $500. When a new technology emerges, prices are initially very high and then tend to fall rap- idly. The first PCs profoundly changed the way people could work with infor- mation. Before the PC, complex programming could be done only on large mainframe computers that often took up an entire room. But at first only a few people could afford a PC. What makes emerging technology so expensive when it is first introduced and so inexpensive later in its life cycle? Supply and demand tell the story. In the case of PCs and other recent technologies, both demand and sup- ply increase through time. Demand increases as consumers find more uses for the new technology. An increase in demand, by itself, would ordinarily drive the price up. However, producers are eager to supply this new market and therefore ramp up production quickly. When the supply expands more rapidly than the demand, there is both an increase in the quantity sold and a lower price. Differences in expectations account for some of the difference between the increase in supply and the increase in demand. Both parties expect the price to fall, and they react accordingly. Suppliers try to get their new prod- ucts to market as quickly as possible—before the price starts to fall appre- ciably. Therefore, the willingness to supply the product expands quickly. Consumer demand is slower to pick up because consumers expect the price to fall. This expectation tempers consumers' desire to buy the new technol- ogy immediately. The longer they wait, the lower the price will be. Therefore, demand does not increase as fast as the supply.
A) trade-offs.
The governor decides to increase funding for education. However, this will mean decreasing funding for infrastructure. This situation illustrates A) trade-offs. B) comparative advantage. C) incentives. D) markets.
Winters in Arkansas are too cold.
The phrase "too cold" is a matter of opinion. This is a normative statement.
Production Possibilities Frontier: the point X
The point F and any other points located below the PPF are possible (feasible), but inefficient.
Production Possibilities Frontier: the point Y
The point Y is not possible (not feasible) with the current set of resources.
Supply decreases; demand does not change.
The supply curve shifts to the left. As a result, the equilibrium price increases and the equilibrium quantity decreases.
Supply increases; demand does not change.
The supply curve shifts to the right. As a result, the equilibrium price decreases and the equilibrium quantity increases.
The average January temperature in Fargo, North Dakota, is 56°F.
This is a positive statement, but the statement is wrong. North Dakota is much colder than that in January. The statement can be verified (in this case, proved wrong) by climate data.
The current exchange rate is 0.7 British pound per U.S. dollar.
This is a positive statement. You can look up the current exchange rate and verify if this statement is true or false.
Everyone ought to have a life insurance policy.
This sounds like a true statement, or at least a very sensible one. However, the word "ought" makes it an opinion. This is a normative statement.
The exchange of goods and services in a market economy happens through prices that are established in markets.
Those prices change according to the level of demand for a product and how much is supplied. For instance, hotel rates near Disney World are reduced in the fall when demand is low, and they peak in March when spring break occurs. If spring break takes you to a ski resort instead, you will find lots of company and high prices. But if you are looking for an outdoor adventure during the summer, ski resorts have plenty of lodging available at great rates.
C) Lee gives his children candy if they behave during dinner.
Which of the following situations illustrates an incentive? A) Dave snacks all afternoon and isn't hungry for dinner. B) Dirk's children misbehave during dinner. C) Lee gives his children candy if they behave during dinner. D) Jaime goes to a restaurant for dinner.
D) marginal benefits ≥ marginal costs.
With regards to marginal thinking, an individual will do an action if A) the probability of success is greater than 50 percent. B) the action has positive benefits. C) the costs of the action are small. D) marginal benefits ≥ marginal costs.
market power
a firm's ability to influence the price of a good or service by exercising control over its demand, supply, or both.
Example of normal goods
a meal at a restaurant. When income goes up, the demand for restaurant meals increases and the demand curve shifts to the right. Similarly, if income falls, the demand for restaurant meals goes down and the demand curve shifts to the left. While consumers with an increased income may purchase more of some things, the additional purchasing power will mean that they purchase fewer inferior goods.
demand schedule
a table that shows the relationship between the price of a good and the quantity demanded. For instance, when the price is $20.00 or more per pound, Ryan will not purchase any salmon. However, below $20.00, the amount that Ryan purchases is negatively related to the price. For instance, at a price of $10.00, Ryan's quantity demanded is 4 pounds per month. If the price rises to $12.50 per pound, he demands 3 pounds. Every time the price increases, Ryan buys less salmon. In contrast, every time the price falls, he buys more. If the price falls to zero, Ryan would demand 8 pounds. That is, even if the salmon is free, there is a limit to his demand because he would grow tired of eating the same thing.
supply schedule
a table that shows the relationship between the price of a good and the quantity supplied.
Second step of scientific method
based on these observations, researchers develop a hypothesis, which is a proposed explanation for the phenomenon.
The process of examining a change in one variable in a model while assuming that all the other variables remain constant is called
ceteris paribus.
When the price of a good increases?
consumers often respond by purchasing less of the good or buying something else. For instance, many consumers who would buy salmon at $5 per pound would likely buy something else if the price of salmon rose to $20 per pound. Therefore, as price goes up, quantity demanded goes down.
marginal thinking
decision-makers to evaluate whether the benefit of one more unit of something is greater than its cost. For example, have you ever wondered why people vacuum, dust, scrub the bathrooms, clean our their garages, and wash their windows, but leave the dust bunnies under the refrigerator? If you moving the refrigerator out from the wall to clean requires lots of effort for a small benefit. Most of us ignore the dust bunnies and just clean the visible areas of our homes. "the marginal cost of cleaning under the refrigerator is too high, and the added value of making the effort,or the marginal benefit is too low to justify the additional cleaning."
negative incentives
discourage action by providing undesirable consequences or punishments. For example, the fear of receiving a speeding ticket keeps motorists from driving too fast, higher oil prices might motivates more customers to use less oil, and the fear of a trip to the dentist motivates people to brush their teeth regularly.
Variables that are NOT accounted for in a model are called
exogenous factors
incentives
factors that motivate you to act or exert effort. Example, your choice to study for an exam you have tomorrow instead of spending the evening with your friend is based on your belief that doing well on the exam will provide a greater benefit.
Suppose that the government issues a nationwide safety warning that cautions against eating cantaloupe because of a recent discovery of Listeria bacteria in some melons. The government warning would cause consumers to buy ________ cantaloupes at any given price, and overall demand would _______.
fewer; decline
barter
involves individuals trading a good they already have or providing a service in exchange for something they want
direct incentives
kind of incentive that is easy to recognize "Cut my grass and I will pay you $30."
Why is the PPF downward-sloping?
must give up one good to increase production of another
surplus
occurs whenever the quantity supplied is greater than the quantity demanded. It is also called excess supply.
shortage
occurs whenever the quantity supplied is less than the quantity demanded. It is also called excess demand.
Unintended consequence
people who were supposed to use government assistance as a safety net until they can find a job use it instead as a permanent source of income.
price goes down
quantity demanded goes up.
market economy
resources are allocated among households and firms with little or no government interference.
Example of supply schedule
shows how many pounds of salmon Sol Amon, owner of Pure Food Fish, would sell each month at different prices. (Pure Food Fish is a fish stand that sells all kinds of freshly caught seafood.) When the market price is $20.00 per pound, Sol is willing to sell 800 pounds. At $12.50, Sol's quantity offered is 500 pounds. If the price falls to $10.00, he offers 400 pounds. Every time the price falls, Sol offers less salmon. This means he is constantly adjusting the amount he offers. As the price of salmon falls, so does Sol's profit from selling it. Because Sol's livelihood depends on selling seafood, he has to find a way to compensate for the lost income. So he might offer more cod instead. Sol and the other seafood vendors must respond to price changes by adjusting what they offer for sale in the market. This is why Sol offers more salmon when the price rises and less salmon when the price declines.
imperfect market example
the Empire State Building affords an iconic view of Manhattan. Not surprisingly, the cost of taking the elevator to the top of the building is not cheap. But many customers buy the tickets anyway because they have decided that the view is worth the price. The managers of the Empire State Building can set a high price for tickets because there is no other place in New York City with such a great view. From this example, we see that when sellers produce goods and services that are different from their competitors', they gain some control, or leverage, over the price that they charge. The more unusual the product being sold, the more control the seller has over the price. When a seller has some control over the price, we say that the market is imperfect. Specialized products, such as popular video games, front-row con- cert tickets, or dinner reservations at a trendy restaurant, give the seller substantial pricing power.
quantity supplied
the amount of a good or service that pro- ducers are willing and able to sell at the current price.
opportunity cost
the highest valued alternative that must be sacrificed to get something else For example, you get two invitations to the concert and hiking at the same time, but you have to choose one of these options, so if you prefer going to a concert (option that gives you the largest benefit), you should go because it has larger benefit than going to the hike. You have to give up the hiking because it has less value to you than the concert, so it has lower opportunity cost.
imperfect market
the one in which either the buyer or the seller can influence the market price. But even in imperfect markets, the forces of supply and demand significantly influence producer and consumer behavior.
what does not cause a shift of the demand curve?
the price For instance, the price remains at $5 per cantaloupe, demand has moved from 6 melons to 3, the price is still the same.
comparative advantage
the situation where an individual, business, or country can produce at a lower opportunity cost than a competitor can.
economics
the study of how individuals and societies allocate their limited resources to satisfy their nearly unlimited wants
Economics
the study of how people allocate their limited resources to satisfy their nearly unlimited wants.
microeconomics
the study of the individual units that make up the economy, such as households and businesses
macroeconomics
the study of the overall aspects and workings of an economy, such as inflation (an overall increase in prices), growth, employment, interest rates, and the productivity of the economy as a whole
market demand
the sum of all the individual quantities demanded by each buyer in a market at each price.
market supply
the sum of the quantities supplied by each seller in the market at each price.
Lower profits make the firm less willing to supply the product; thus,
the supply curve shifts to the left and the overall supply declines.
If the change would reduce the amount of a good or service a business is willing and able to supply at every given price
the supply curve shifts to the left.
If the change would increase the amount of a good or service a business is willing and able to supply at every given price
the supply curve shifts to the right.
A nation will engage in voluntary trade if
the terms are mutually beneficial for both parties.
purchasing power
the value of your income expressed in terms of how much you can afford.
Endogenous factors
the variables that can be controlled for in a model. For example, the wind tunnel enabled the Wright brothers to see how well each wing design—an important part of the model—performed under controlled conditions.
Exogenous factors
the variables that cannot be controlled for in a model. At that point the plane, known as the "Flyer," was no longer in a controlled environ- ment. It was subject to the gusting wind and other exogenous factors that made the first flight so challenging.
trade
the voluntary exchange of goods and services between two or more parties
Fourth step of scientific method
they design experiments to test how well the model (which is based on the hypothesis) works. After collecting data from the experiments, they can verify, revise, or refute the hypothesis.
Example of supply curve
this relationship produces an upward-sloping curve. Sellers are more willing to supply the market when prices are high, because this higher price generates more profits for the business. The upward-sloping curve means that the slope of the supply curve is positive, which illustrates a direct (positive) relationship between the price and the quantity offered for sale. For instance, when the price of salmon increases from $10.00 per pound to $12.50 per pound, Pure Food Fish will increase the quantity it supplies to the market from 400 pounds to 500 pounds.
substitutes
two goods that are used in place of each other. When the price of a substitute good rises, the quantity demanded of that good falls and the demand for the related good goes up.
complements
two goods that are used together. When the price of a complementary good rises, the demand for the related good goes down.
Recall that price is the variable that causes the supply curve to slope upward or downward?
upward
As soon as it falls out of favor
you can expect demand for it to decrease.
Factors That Shift Demand to the Left (Decrease 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 number of buyers in the market falls. • Excise or sales taxes increase.
Factors That Shift Demand to the Right (Increase Demand)
• Income rises (demand for a normal good). • Income falls (demand for an inferior good). • The price of a substitute good 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 number of buyers in the market increases. • Excise or sales taxes decrease.
Factors That Shift Supply to the Right (Increase Supply)
• The cost of an input falls. • Business taxes decrease or subsidies increase. • The number of sellers increases. • The price of the product is expected to fall in the future. • The business deploys more efficient technolo
Factors That Shift Supply to the Left (Decrease Supply)
• The cost of an input rises. • Business taxes increase or subsidies decrease. • The number of sellers decreases. • The price of the product is anticipated to rise in the future.
What are the fundamentals of markets?
✷ A market consists of a group of buyers and sellers for a particular prod- uct or service. ✷ A competitive market exists when there are so many buyers and sellers that each has only a small (negligible) impact on the market price and output. ✷ Not all markets are competitive. When firms have market power, mar- kets are imperfect.
How do supply and demand interact to create equilibrium?
✷ Supply and demand work together in a market-clearing process that leads to equilibrium, the balancing point between the two forces. The market-clearing price and output are determined at the equilibrium point. ✷ When the price is above the equilibrium point, a surplus exists and inventories build up. Suppliers lower their price in an effort to sell the unwanted goods. The process continues until the equilibrium price is reached. ✷ When the price is below the equilibrium point, a shortage exists and inventories are depleted. Suppliers raise the price until the equilibrium point is reached.
