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Positive Statements
as scientists, economists make positive statements in an attempt to describe the world as it is.
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Normative Statements
as policy advisors, economists make normative statements in an attempt to describe how the world should be.
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Efficiency
when society gets the most from its scarce resources
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Competitive Market
- a market in which there are many buyers and sellers
- each individual person's decision won't really affect the market as a whole
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Perfectly Competitive Market
- all the goods that are being sold are exactly the same.
- Because buyers and sellers in perfectly competitive markets must accept the price the market determines, they are said to be price takers.
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Demand Curve
- quantity on the x-axis
- price on the y-axis
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Law of Demand
The quantity demanded of a good falls when the price of that good rises.
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Substitutes
- 2 goods are substitutes if an increase in the price of one good leads to the increase in demand of the other good.
- ex: coke and pepsi
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Complements
- 2 goods are complements if an increase in the price of one causes a decrease in demand for the other.
- in essence, they go together.
- ex. bagels and cream cheese
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Normal Good
- A good for which an increase in income will lead to in increase in demand.
- ex: angus beef, or eating out more
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Inferior Good
- A good for which as income increases, demand decreases.
- ex: spam, McDonald's
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Law of Supply
- When the price of a good rises, the quantity supplied also rises.
- And then the price of a good falls, the quantity supplied also falls.
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Law of Supply & Demand
the price of any good adjusts to bring the quantity supplied and quantity demanded into balance.
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Jobs Day - when? what does it report?
- Every first Friday of the month
- reports number of jobs added to the economy and the unemployment rate.
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Price Elasticity of Demand
- A measure of how much the quantity demanded of a good responds to a change in price of that good.
- % change in quantity demanded / % change in price
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Inelastic Demand
- when demand is inelastic, it is not responsive to price changes.
- elasticity is between 0 and 1.
- ex: eggs, kidney donations, milk
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Elastic Demand
- An elastic good's demand is very sensitive to price changes.
- If the price of an elastic good goes up, consumers can simply switch to a cheaper alternative, or not buy the product at all.
- elasticity is greater than 1.
- ex: cars, yachts
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Expenditure
- price x quantity
- the total revenue received by the supplier
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Cross-Price Elasticity of Demand
- what is it in substitutes and complements?
- A measure of how much the quantity demanded of one good responds to a change in the price of another good.
- in substitutes its positive.
- in complements its negative.
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Income Elasticity of Demand
- what is it for normal and inferior goods?
- A measure of how much a good's demand changes when a person's income changes.
- for normal goods it's positive.
- for inferior goods it's negative.
- food and clothes have smaller income elasticities.
- diamonds and cars have larger income elasticities.
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