Card Set Information
the study of the efficient allocation of limited resources for unlimited wants
4 factors of production (resources)l
capital - man-made products used to produce something else more efficiently
entrepreneurial skills - creating and managing human and other resources to provide desired goods or services at a profit
a simplified description of reality -- should only include important factors, predict future events precisely and can be validated
when an increase in the independent variable also increases the dependent variable (or decrease/decrease) (if x↑, y↑) or (if x↓, y↓)
when an increase in the independent variable decreases the dependent variable (or decrease/increase) (if x↑, y↓) or (if x↓, y↑)
when a certain variable changes, "all other variables remain unchanged" ... "all things being equal"
a statement of fact; can be verified... statements with "is", "was", "will be". without opinions or value judgements
a statement of opinion or value judgements. "high" "low" "good" "bad" "better" "worse" etc
4 pitfalls in economic thinking
the fallacy of composition; what is good for one person is good for everyone
the post hoc fallacy; because event A precedes event B, event B must have been caused by event A. "after this, therefore because of this"
cause and cure; proposing a cure for a problem without proper testing. [supply will create its own demand]
predicting human behavior; inability to test in a lab
"let it be"
the "Invisible Hand"
the market system leads all individuals, in search of their own self-interests, to produce the greatest benefit for society as a whole. --Adam Smith
2 required conditions for the invisible hand to work:
clearly defined property rights [provides certainty about future]
economic freedom to produce or consume what people wish [benefit those around them; cooperation and communication by means of market prices]
opportunity cost (O.C.)
the cost of the
alternative foregone or sacrificed ... [when an economy produces one product, it has to proportionately limit or forego production of another product]
the production possibilities curve (PPC)
represents the maximum combination of any two goods a country can produce given today's limited resources.
the curve illustrates the boundary of production
region outside of PPC (production possibilities curve)
there are neither sufficient resources nor enough know-how to operate
region inside of PPC (production possibilities curve)
unemployment of resources exists
actions for government to take in a recession
raise gov't spending --> more jobs
lower taxes --> more disposable income
raise money supply --> interest rates drop
to determine the time it will take to double, triple, or quadruple an investment or standard of living based on an interest rate...
: 72/x; where x = % (not decimal)
allocation of resources is efficient only when one can make those involved in one activity better off without making those involved in another activity worse off.
the amount of a product or service that a person is willing or able to buy, at a particular price, over a specified period of time
as P goes up what happens to Qd?
P↑ ⇒ Qd↓ (or vice versa)
how the price of one product or service will effect the demand for another similar product [red OR green grapes, Starbucks OR Coffee Bean]
real income effect
consumers' purchasing power increases as prices for regularly bought goods decreases.
If you always buy x at $10 and its price is reduced to $3 you are effectively $7 richer. This is an increase in real income.
This will also raise the demand for x.
the law of diminishing marginal utility
the more of a product that is consumed, the less satisfaction (utility) the consumer will derive
Law of Demand
there is an inverse relationship between the price level of a good and its quantity demanded, ceteris paribus.
P↑ ⇒ Qd↓
P↓ ⇒ Qd↑
5 factors of shifting demand curve:
normal good--> positive relationship I↑ -->D↑
inferior good--> negative relationship I↓ --> D↑
expectation ↑, D↑, P↑... price fulfilling prophecy
prices of other (related) goods:
good.... good A OR good B [Pepsi P↑-->Qd↓-->Coke D↑]
good... good A AND good B [coffee P↑-->Qd↓-->half&half D↓]
When quantity supplied exceeds quantity demanded
When quantity demanded exceeds quantity supplied
When Qd = Qs
Opportunity cost formula
Δx/Δy = x sacrificed for one unit of y
* the OC of one unit that you seek goes in denominator
Factors that shift supply curve
Number of producers
cost of production
Prices of related goods substitute
: [rice to wheat; Pr↑-->Qr↑-->Sw↓] complementary: [chickens to organs; Pc↑-->Qc↑-->So↑]
Elasticity of demand, % and mid point formulas
Price elasticity of demand
Buyers' response to a change in price
Price elasticity of supply
Producers' response to a change in price
a 1% change in price will lead to a more than 1% change in quantity demanded.
: inverse relationship, a 1%
in price will lead to a more than 1%
if seller increases price by 1%, there will be exactly a 1% decrease in Qd, or vice versa
a 1% change in price will lead to a less than 1% change in Qd
* remember inverse relationship
Factors determining price elasticity of demand
number of substitutes
necessity or luxury?
level of income
price of product relative to income
length of period of adjustment
income elasticity of demand
measures the buyer's responsiveness to change in income as the demand curve shifts to the right or left
income elasticity: meaning of + and >1, +and <1, and -
+ = normal goods. *direct relationship b/t I and Qd
-=inferior goods. *indirect relationship b/t I and Qd
Cross elasticity of demand (
Measures the percentage change in demand of one good to the percentage change in price of another
If cross elasticity of demand is positive or negative or zero...
When positive (direct), the goods are
[gasoline and hybrid cars]
when negative (indirect), the goods are
[electricity and air conditioners]
is zero the goods are
[books and homes]