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State the law of Comparative advantage.
Differences in relative costs of production are the key to determining patterns of trade.
On the production possibilities curve, as production is moved from one point to another, more of a product is made while less of another is produced. What is this known as?
What is a graphical representation of how increased production of one product results in decreased production of another (Opportunity Cost)?
PPF Curve (Production Possibilities Frontier Curve)
An analytical tool used by economists that entails the impact of one or more variables upon an economic outcome.
What are the 3 primary purposes of economic systems?
- 1. Which goods and services to produce
- 2. How to produce goods & services
- 3. To whom to distribute goods & services
What are the 4 main economic systems?
- 1. Free Market - unregulated
- 2. Traditional - no change in methods
- 3. Command - state regulated
- 4. Mixed Market - blends free, traditional, command
In what economic system do consumers and producers operate in an unregulated environment?
In what economic system does society NOT change its methods of production or consumption?
In what economic system do government agencies regulate production and consumption?
Command (State Centrally Planned)
What law states that increasing inputs to produce an item can initially increase productivity, but increasing the inputs to much will decrease the rate at which the items are produced?
Law of Diminishing Marginal Returns
What are the determinants of supply?
price of raw materials, labor, capital, and entrepreneurship.
What are some determinants of demand?
- -Price & availability of substitute/complementary goods
- -# of buyers(population size)
- -Gov. regulation
In a free market system, income limits our ability to satisfy our desires. This is known as what?
Rationing power of prices
What law states that as a price rises, quantity demanded falls, and as a prices falls, quantity demanded rises?
Law of Demand
What law states that as more of an item is available, satisfaction from that item declines?
Law of Diminishing Marginal Utility
What is the point at which supply and demand intersect and product clears, but is still available?
Equilibrium Price (Market Equilibrium)
Term for how quantity demanded increases or decreases in response to a change in price.
Price Elasticity of Demand
What is the formula for Price Elasticity of Demand?
- %change in qty demanded
- %change in price
What are the benchmarks used to classify the nature of the price elasticity quotient?
- -If E>1, demand is elastic
- -If E<1, demand is inelastic
- -if E=1, demand is unitary elastic
Demand condition when consumers show greater sensitivity to price than to quantity of product demanded.
Demand Elasticity (Demand is Flexible)
Demand condition when consumers are more concerned with the product than with the price.
Demand Inelastic (Demand changes are less dramatic than price change)
Demand condition when consumer is equally concerned with price and quantity.
Demand is unitary elastic (Price & Demand change the same)
If consumers have an extreme reaction to price resulting in an elasticity quotient of near zero.
Perfectly inelastic (g/s is a life necessity) Horizontal to axis
If the qty/price quotient is significantly greater than 1.
- Perfectly elastic (meaning g/s is completely unnecessary to the consumer)
- Perpendicular to axis
Area of the demand curve when there is an inverse relationship between price and revenue. This means, if price decreases, qty demanded increases, which results in revenue increases.
Area of the demand curve when a price decrease causes a decline in total revenue even though sales increased.
What is used to determine whether two g/s are substitutes for each other, or if they are complementary to one another?
Cross elasticity of demand
What is the formula for cross elasticity of demand?
- %change in qty demanded of g/s A
- %change price of g/s B
What helps determine and classify the relationship between income and demand for a g/s?
Income elasticity of demand
What is the formula for income elasticity of demand?
- % change in qty demanded
- % change in income
If the quotient of a cross elasticity test is positive, what is the relationship of the g/s?
They are substitutes for each other.
If the quotient of a cross elasticity test are negative, how are the g/s related?
They are complementary
If the quotient of a cross elasticity test is near zero, the g/s are?
If the quotient of the Income elasticity test is positive...
An increase of income has resulted in an increase in demand.(High quality product)
If the quotient of an income elasticity test is negative....
A decrease in income has increased the purchase of the g/s (inferior product)
Producers use what, to determine if creating more of a g/s is going to achieve maximum profit?
Price elasticity of supply
What is the formula for price elasticity of supply? (Same as demand)
- %Change in qty demanded g/s
- %Change in price of g/s
(Same as demand)
1. If Price elasticity of supply >1
- 1. Supply is elastic
- 2. Supply is inelastic
- 3. Supply is unit elastic