Card Set Information

2011-01-18 08:24:45

Show Answers:

  1. Basic Economic concepts
  2. Scarcity
    people have unlimited wants and resources are limited, This is why economic decisicions must be made
  3. Production possibilities curve (PPF)
    Shows how much of 2 goods or services an economy can produce during a specific time and limited quantity of resources, or factors of production
  4. comparative advantage
    When one economy can make a product cheaper than another
  5. Economic systems
    • Market
    • mixed
    • planned (e.g. Socialism)
    • barter
  6. Marginal Analysis
    a way to study microeconomics where change specific variables and watch how effects others and whole system
  7. Supply and Demand:

    Market equilibrium
    • Where supply and demand are the same through perfect competition
    • Price of market balance:
    • P - priceQ - quantity of goodS - supplyD - demandP0 - price of market balanceA - surplus of demand - when P<P0B - surplus of supply - when P>P0
  8. determinants of supply and demand
    (four basic laws)
    • 1. Demand increases and supply unchanged = higher equilibrium price and quantity
    • 2. Demand decreases and supply unchanged = lower price and quantity
    • 3. Supply increases and demand unchanged = lower price and higher quantity
    • 4. Supply decreases and demand unchanged = higher price and lower quantity
  9. Change in Quantity Supplied and Quantity Demanded
    Change Quantity Supply; movement along supply curve as result of change in price

    Change Quantity Demanded; movement along demand curve as result of to a change in price
  10. Change in Supply and Change in Demand
    Change in Supply; shown by drawing a new supply curve

    Change in Demand; shown by drawing a new demand curve
  11. Price controls
    • price ceiling
    • price floor

    • -prevent price gouging and unsure income for producers of certain goods
    • -too low of a floor = shortages and queuing
    • -Too high and create a black market
  12. Price elasticity of demand (PED)
    • percentage change in quantity demanded in response to a one percent change in price
    • -hold all other determinants of demand constant
    • - demand for a good is INELASTIC when PED is less than one, ELASTIC when greater than one
    • -INELASTIC change in rpice has small effect on quantity
    • -ELASTIC change in price has a large effect on quantity
    • -= %change in quantity demanded / % change in price
    • -More substitutes something has it is likely to be more elastic
    • -perfectly inelastic when it = 1
  13. Price elasticity of supply (PES)
    • PES is % change in quantity supplied that would happen after a 1% change in price.
    • E.g.; 10% rise in price means 20% increase in quantity supplied; PES = 2; (20%/10%)

    • Determination;
    • -supply is usually more elastic in Long Run; allowed time to build more factories
  14. PES effect on Revenue
    %change in revenue = %change in quantity demanded + %change in price

    - Price inelastic to consumer means a rise in price, small demand loss would be accounted for by the extra revenue
  15. Cross price elasticity of demand
    • is how much a price change of one product effects quantity demanded of another product.
    • -If substitutes purchase more of one when price of other increases
    • -If complements price rise on one product cause demand for both to fall

    • -If CPEoD > 0 two goods are substitutes
    • -If CPEoD = 0 two goods have no relationship
    • -If CPEoD < 0 two goods are compliments

    CPEoD = (% Change in Quantity Demand for Good X)/(% Change in Price for Good Y)
  16. Income elasticity of demand (IEoD)
    IEoD = (% Change in Quantity Demanded)/(% Change in Income)

    • -is used to to see how sensitive demand for a good is to an income change
    • - Very higher income elasticity suggest that when a consumer's income goes up, consumers will buy a lot more of product
    • -Low price elasticity changes in income has little influence on demand
    • -IEoD > 1 then good is a luxury good and income elastic
    • -IEoD < 1 and IEoD > 0 then good is a normal good and income elastic
    • -IEoD < 0 then good is an inferior good and negative incom elastic
  17. Economic Surplus
  18. Consumer surplus
    most amount a consumer would pay for a good and the price actually paid
  19. Producer surplus
    Difference between lowest amount producer would be willing to sell and price producer actually sold it for
  20. Types of Goods
    Normal Good; demand increases when income increases and falls when income decreases; while price remains constant. Positive Income Elasticity of Demand

    Inferior Good; decreases in demand when consumer income rises
  21. Market Efficiency
    at any given time prices in a market reflect all available info about a particular product and no investor has an advantage because everyone has access to the same info
  22. Tax Incidence
    • Tax incidence falls on consumer when;
    • apples are price inelastic (meaning you raise the price, demand decrease but is made up for from an increase in revenue)

    • Tax incidence falls on producer when;
    • apples price elastic (price increase means demand lost would more than revenue gained)
    • File:Tax incidence (mixed).svgFile:Tax incidence (producer).svg
    • File:Tax incidence (consumer).svg
  23. Deadweight loss
    • measures inefficiency caused from a market distortion
    • -such as a tax levied on an item or a min price
    • = consumer surplus + producer surplus ;(that is caused by the policy)
    • Relates preferences to consumer demand curves
    • -Consumers face trade-offs in their purchase decisions, since income limited.
  25. Utility
    • measures the benefits (or drawbacks) from consuming a good or service or from working
    • -Usually the more a person consumes the larger their utility
    • -Usually increases as more of a good is consumed, but once you reach a certain threshold utility increases slower than the amount consumed

    • -can't be directly measured, but can be inferred from the decisions that people make
    • U(x) = 2x + 7, where U is utility and X is wealth
  26. Marginal Utility
    How much happier (in terms of utils) will an additional dollar make me? or what is the marginal utility of money

    How much less happy will working an additional hour make? or what is the marginal disutility of labor
  27. Utility Maximization
    Consumer says, "How Should I spend my money in order to maximize my utility?"

    "well I face a number of constraints; income and price, most importantly"

    • "this is my consumer problem"
    • when this problem is solved, decision made, you have consumer equilibrium
  28. Substitution effet
    as a price for one good increases consumers will replace this good with a less costly alternative
  29. Income effect
    • as a consumers income increases the negatively sloped budget constraint curve will shift to the right
    • link to shifting income of consumer and quantity of goods consumed as a resultAs income increases the amount of an inferior good purchased will decrease
  30. Individual Demand and Market Demand
    • -Individual consumer's demand for a particular good
    • however individual is only 1 of many market participants

    -Market demand is the demand curve of a product for entire market, every consumer's demand curve
  31. Production and Costs 10-15%
  32. Production Function
    • -describes quantities of inputs to quantities of an output
    • -specifies the output of a firm for all combinations of inputs
  33. Production Function in the short and long run
    short run; period of time in which quantity of at least one input is fixed and can not be changed

    Long run; period of time in which the quantities of all inputs can be varied
  34. Marginal Product
    change in a firm's total product that results from an increase in that factor by one unit (holding everything else constant)

    • So if you add one unit of labor and you get 3 more shirts, then 3 is the marginal product of labor
  35. Law of diminishing returns
    when you keep on adding a unit of a variable factor of production with fixed factors of production the gains begin to decline (instead of increas) after a certain point

    the marginal gain declines after you reach a certain point

    This is a short-run phenomenon, because in the long run none of the factors of production are fixed
  36. Short run and Long run costs
  37. Economies of scale & Dis-economies of scale
    At low levels of output a firm can usually increase its output at higher rate than the increase in inputs required

    eventually amount of output per input begins to decline
  38. Isoquant
    • is a line where all points on the line have the same quantity of output, while changing quantities of two or more inputs
    • -This idea is similar to utility maximization problem for consumers

  39. Firm Behavior and market structure 25-35%
    firm's goal when producing things is to maximize profits

    all about relationship between costs and profits
  40. Economic profit Vs. Accounting profit
    Economic profit factors in implicit costs; opportunity costs, e.g. cost of capital or money that could be made by renting out part of factory instead of using it for making goods

    explicit costs; money paid to the factors of production
  41. Normal profits
    This is when economic profits are zero; firm is covering explicit costs and all implicit costs
  42. Profit Maximization
    • firm will continue to increase number of goods produced until MR = MC
    • -After diminishing returns and and MR is declining when it equals MC you stop adding more units

    • -When MR is below MC firm is losing money
    • -When MR is more than MC firm can earn more profits by increasing output
  43. Perfect competition
    1. Must have many firms in market, where none have ability to influence price on their own, they are price takers; take the price given

    2. Firms should be able to enter and exit market easily

    3. Firms produce and sell non-differentiated, homogeneous products

    4. Everyone, firms and consumers, have complete information
  44. Perfect competition and Short Run Supply & Shut Down
    • When avg total costs (curve) are above marginal revnue *curve) at the profit maximizing level of output, firm losing money
    • But
    • It is still has sunk costs/ fixed costs, firm will continue to operate in short run if avg variable costs lower than marginal costs
  45. Conditions for Monopoly
    • 1. High barriers to entry
    • 2. There is only one firm in market
    • 3. There are no close substitutes

    • -can come from holding certain patents
    • -large start up costs
    • -limited acess to resources, e.g. Diamond market where one firm owns most diamond mines
  46. Monopoly Profit maximization
    monopolist faces a downward sloping demand curve, implies that price will not be constant as monopoly increases output.

    It will engage in price searching behavior looking for the price that maximizes profits

    Will discriminate on price between consumers
  47. Inefficiency of monopoly
    produces less out put and sells at higher price than perfectly competitive firmPoint C where MR = MC, but monopoly charging more avg total costs making a profit, because no competition to come in
  48. Marginal Revenue Product

    Marginal Physical Product
    MPP tells how many more chairs you can make

    MRP tell how much more revenue can make from the additonal chairs produced by the additional worker