Micro Unit 1
Elastic demand curves are relatively (flatter/steeper) than inelastic demand curves
flatter
(T/F) Tax incidence depends on the price elasticity of demand and supply
True
(T/F) The economic burden of subsidies is also balanced between buyers and sellers
True
(T/F) Both buyers and sellers benefit from voluntary exchange
True, should be viewed as cooperation rather than competition.
Framing Effect
When a decision is affected by how a choice is described, or framed. You should avoid letting framing effects alter your decision.
Congestion Effect
When a good becomes less valuable because more people use it. The more people use it, the more demand goes down.
Network Effect
When a good becomes more useful because more people use it (i.e. social media). The more people use it, the more demand goes up
Elastic
When the absolute value of the percent change in Qd is greater than the % change in price (AKA greater than 1)
Shift In the Demand Curve
When the demand curve itself moves, rather than a point moving along the demand curve. Right shift = increase in demand Left shift = decrease in demand
Shortage
When the quantity demanded exceeds the quantity supplied; causes price to rise
Surplus
When the quantity demanded is less than the quantity supplied; causes price to fall
Does an individual demand curve hold other things constant?
Yes
The Interdependence Principle
Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors change, your best choice might change. (What else?)
(T/F) Elasticity is equal to slope
False
Price ceilings lead to a (shortage/surplus)
Shortage
Midpoint Method for Price
% Change in P = (P2 - P1)/((P2 + P1)/2) x 100
Midpoint Method for Quantity
% Change in Qd = (Q2 - Q1)/((Q2 + Q1)/2) x 100
Give the equation for price elasticity of demand
% change in Qd/% change in P
Another Equation to Calculate Percent Change
(Ending Value - Beginning Value)/Beginning Value x 100
Price floors lead to a (shortage/surplus)
Surplus
Economic Burden
The burden created by the change in after-tax prices faced by buyers and sellers
List the 2 reasons a higher price leads to a larger quantity supplied to the market
1) A higher price leads individual businesses to supply a larger quantity 2) A higher price means that more businesses are supplying their goods and services; a lower price means fewer businesses are doing so.
List the 4 types of interdependencies to think about
1) Dependencies between each of your individual choices 2) Dependencies between people or businesses in the same market 3) Dependencies between markets 4) Dependencies through time
List the two key rules to follow when DIAGNOSING what's happening in the economy
1) If prices and quantities move in the same direction, then the DEMAND (and possibly supply) curve has shifted 2) If prices and quantities move in the opposite directions, the the SUPPLY (and possibly demand) curve has shifted
List the 5 factors shifting the supply curve
1) Input prices 2) Your business's productivity and technology 3) The prices of related outputs 4) Expectations 5) The type and number of sellers (ONLY affects the market curve)
List the 5 determinants of the price elasticity of supply
1) Inventories make supply more elastic (especially if it is easy to store) 2) Easily available variable inputs make supply more elastic 3) Extra capacity makes supply elastic 4)Easy entry and exit of new businesses make supply more elastic 5) Over time, supply becomes more elastic
When you're analyzing a new tax, what three questions should you ask?
1) Is the supply or demand curve shifting? 2) Is that shift an increase in taxes, shifting the curve left? Or a decrease, shifting the curve to the right? 3) How will prices and quantities change in the new equilibrium?
List the 3 helpful questions to ask when trying to predict real-world market outcomes
1) Is the supply or demand curve shifting? (or both?) 2) Is that shift an increase, shifting the curve to the right? Or is it a decrease, shifting the curve to the left? 3) How will prices and quantities change in the new equilibrium?
List the 5 factors determining elasticity
1) More competing products means more elasticity 2) Specific brands tend to have more elastic demand than categories of goods 3) Necessities have less elastic demand 4) Consumer search makes demand more elastic 5) Demand gets more elastic over time
List the 3 signs of disequilibrium
1) Queuing (driving in circles waiting for a spot to open 2) Bundling of Extras (buying din just for valet parking) 3) A secondary market (paying to park in someone's driveway)
List the 4 important lessons about opportunity cost
1) Some out-of-pocket costs are opportunity costs 2) Opportunity costs need not involve out-of-pocket financial costs 3)Not all out-of-pocket costs are real opportunity costs (if an expense is the same either way, it is not an opportunity cost) 4) Some non-financial costs are not opportunity costs
What are the two questions you should ask yourself if you want to evaluate opportunity cost correctly?
1) What happens if you pursue your choice? 2) What happens under your next best alternative?
List the 4 core principles of economics
1. Cost-Benefit Principle 2. Opportunity Cost Principle 3. Marginal Principle 4. Interdependence Principle
List the 6 factors that shift the demand curve
1. Income 2. Your preferences 3. Prices of related goods 4. Expectations 5. Congestion and Network Effects 6. Type and Number of Buyers "PEPTIC"
Statutory Burden
The burden of being assigned by the government to send a tax payment
Buyers typically take up about ________ of the tax burden because they don't want to change their behaviors
2/3
Sunk Costs
A cost that has been incurred and can't be reversed. It exists with whatever choice you make, and hence is not an opportunity cost.
Inferior Good
A good for which a higher income leads to a decrease in demand
Normal Good
A good for which a higher income leads to an increase in demand
Individual Supply Curve
A graph plotting the quantity of an item a business plans to sell at each price. Graphs your selling plans. Upward sloping; holds other things constant
Individual Demand Curve
A graph plotting the quantity of an item that someone plans to but, at each price.
Market Demand Curve
A graph plotting the total quantity of an item demanded by the entire market, at each price. It is the sum of the quantity demanded by each person and is downward-sloping
Market Supply Curve
A graph plotting the total quantity of an item supplied by the entire market, at each price. It is the sum of Q supplied by each seller; upward sloping
Quota
A limit on the maximum quantity of a good that can be sold
Define Price Elasticity of Demand
A measure of how responsive buyers are to price changes. It measures the percent change in Qd that follows from a 1% price change. Result is a negative number
Price Elasticity of Supply
A measure of how responsive sellers are to price changes. It measures the percent change in the quantity supplied at a 1% price change PES = % Change in Qs/% Change in Price Positive
Income Elasticity of Demand
A measure of how responsive the demand for a good is to changes in income IED = % Change in Qd/ % Change in Income Positive for normal goods, negative for inferior goods
Cross-Price Elasticity of Demand
A measure of how responsive the demand of one good is to the price changes of another CPED = % Change in Q Demanded/ % Change in Price
Quantity Regulation
A minimum or maximum quantity that can be sold
Subsidy
A payment made by the government to those who make a specific choice.
Binding Price Ceiling
A price ceiling that prevents the market from reaching the market equilibrium price, meaning that the highest price sellers can charge is set below the equilibrium price.
Binding Price Floors
A price floor that prevents the market from reaching its equilibrium price, meaning that the lowest price sellers can charge is above the equilibrium price
Mandate
A requirement to buy or sell a minimum amount of a good
(T/F) Elasticity depends on where you are on the demand curve
True
Substitutes-in-Production
Alternative uses of your resources. Your supply of a good will decrease if the price of a substitute-in-production rises
Market
Any setting that brings together potential buyers and sellers
The Rational Rule For Buyers
Buy more of an item if the marginal benefit of one more is greater than or equal to the price
Planned Economy
Centralized decisions are made about what is produced, how, by whom, and who gets what
Cost-Benefit Principle
Costs and benefits are the incentives that shape decisions. You should evaluate the full costs and benefits of any choice and only pursue those whose benefits are at least as large as their cost. (benefit beat cost?)
Fixed Costs
Costs that don't vary when you change the quantity of output you produce
The Marginal Principle
Decisions about quantities are best made incrementally. You should break 'how many?' questions into a series of smaller, or marginal decisions, weighing marginal benefits with marginal costs. (How many? One more?)
Demand curves are (upward/downward) sloping
Downward
Diminishing Marginal Benefit
Each additional item yields a smaller marginal benefit than the previous item. This explains why your demand curve is downward-sloping
Market Economy
Each individual makes their own production and consumption decisions. Buying and selling in markets
When quantity is very responsive, demand is (elastic/inelastic)
Elastic
(T/F) All markets are perfectly competitive
False
(T/F) The marginal cost principle is relevant in "either/or" questions.
False
Complementary Goods
Go together; demand lowers when the price of a complementary good rises
Complements-in-Production
Goods made together. Your supply of a good will increase if the price of a complement-in-production rises
Rational Rule
If something is worth doing, keep doing it until your marginal benefits equal your marginal costs.
Explain the difference between shifts in and movement along the demand curve
If the only thing changing is price, then you're thinking about a movement ALONG a demand curve. But when other market conditions change, then you need to think about SHIFTS in the demand curve.
Explain shifts vs movements along supply curves
If the only thing that's changing is price, then it's movement along the supply curve. If other market conditions change, then the supply curve itself shifts.
Willingness to Pay
In order to convert nonfinancial costs/benefits into monetary equivalent, ask yourself, "What is the most I am willing to pay to get this benefit (or avoid this cost)?
(T/F) Good decisions ignore sunk costs
True
If demand is elastic, higher prices lead to (more/less) revenue
Less
Perfect Competition
Markets in which 1) all firms in an industry sell an identical good and 2) there are many buyers and sellers, each of whom is small relative to the size of the market. Perfectly competitive markets are price-takers, following the market price.
If demand is inelastic, higher prices lead to (more/less) revenue
More
What is the Cross-Price Elasticity of Demand for independent goods?
Near zero
Inelastic
Opposite of elastic; when absolute value is less than 1.
What axes do price and quantity go?
Price on y-axis, quantity on x-axis
Demand Function
Qd = f(P)
Supply Function
Qs = f(P)
REMEMBER: "Price equals marginal benefit"
REMEMBER: "Price equals marginal benefit"
REMEMBER: It doesn't matter whether the buyer or seller is assigned by the government to send in the tax. The end result is exactly the same.
REMEMBER: It doesn't matter whether the buyer or seller is assigned by the government to send in the tax. The end result is exactly the same.
REMEMBER: Your supply curve is also your marginal cost curve
REMEMBER: Your supply curve is also your marginal cost curve
Substitute Goods
Replace each other; demand rises if the price of a substitute good rises
Rational Rule for Sellers in Competitive Markets
Sell one more item if the cost is greater than or equal to the marginal cost. Keep selling until you reach that point.
How do you solve for market equilibrium with equations?
Set Qd function equal to Qs function and solve for P
Production Possibility Frontier
Shows the different sets of outputs attainable with your scarce resources; moving along yours reveals opportunity costs
Price-Taker
Someone who decides to charge the prevailing price and whose actions don't affect the prevailing price.
Tax Incidence
The division of the economic burden of a tax between buyers and sellers
Marginal Benefit
The extra benefit from 1 extra unit (of goods bought, hours studied, etc.)
Marginal Cost
The extra cost from one extra unit (of goods bought, hours studied, etc.)
Marginal Product
The increase in output that arises from an additional unit of input, like labor
Diminishing Marginal Product
The marginal product of an input declines as you use more of that input
Price Ceiling
The maximum price that sellers can legally charge
Price Floor
The minimum price sellers can charge
Equilibrium
The point at which there is no tendency for change. A market is in equilibrium when quantity supplied = quantity demanded. Reflects both supply and demand
Equilibrium Price
The price at which the market is in equilibrium
Equilibrium Quantity
The quantity at which the market is in equilibrium
Law of Demand
The tendency for quantity demanded to be higher when price is lower.
Law of Supply
The tendency for the quantity supplied to be higher when the price is higher
Total Revenue
The total amount you receive from buyers; = Price x Quantity
Economic Surplus
The total benefits minus the total costs flowing from a decision. It measure how much a decision has improved your well-being.
Opportunity Cost Principle
The true cost of something is the next best alternative you have to give up to get it (trade-offs); the true cost of producing an additional unit of a good or service is the value of other goods or services that must be given up to obtain it (or what?)
Variable Costs
These costs - like labor and raw materials - that vary with the quantity of output you produce
(T/F) Both buyers and sellers bear the economic burden of the tax on sellers (or buyers).
True
A perfectly elastic demand curve is (horizonal/vertical)
horizontal
A right shift in the supply curve means a/an (increase/decrease) in supply and a left shift means a/an (increase/decrease) in supply
increase, decrease
A tax (increases/decreases) the price buyers pay and (increases/decreases) the price sellers receive
increases, decreases
A change in price leads to a (shift/movement along) the supply curve
movement along, yielding a change in the quantity supplied
Supply shifts lead price and quantity to move in the (same/opposite) direction
opposite
Quotas (raise/lower) prices
raise
Diminishing marginal product leads to (rising/falling) marginal costs
rising
Rising input costs lead to (rising/falling) marginal costs
rising
When demand is relatively elastic, buyers bear a (smaller/larger) share of the economic burden of a tax
smaller
When supply is relatively elastic, sellers bear a (smaller/larger) share of the economic burden of a tax
smaller
A tax on sellers shifts the (supply/demand) curve
supply
A perfectly inelastic demand curve is (horizontal/vertical)
vertical