Econ Test 1

  1. Economics
    How people decide of scarce resources to fulfill their unlimited wants
  2. Law of Demand
    • Price and quantity are inversely related
    • The higher the price the lower the quantity 
    • The lower the price the higher they quantity
  3. Substitution effect of price change
    A relative change in price of one good, that causes consumers to purchase more or less of another good
  4. Money income and real income
    Money income is the amount you make in a certain period while real income is the amount you make in terms of what you can buy
  5. Income effect of price change
    • When the price declines consumers will buy more, because the decline of price heightens their real income
    • Money income stays constant but real income varies as price changes
    • The larger the share of you income a product holds the bigger the income effect
  6. Quantity demanded v. Demand
    • Demand covers the entire relation ship between the price and quanitity of a product
    • Quanitity demanded is the specific price
    • Movement along the demand curve is change in quantity demanded
  7. Individual demand and Market demand
    Individual demand is the demand individual people like myself, market demand is that sum of individual demands
  8. Things that can shift the demand curve
    • Money income
    • Price of other goods
    • Consumer expectations
    • The number or composition of consumers in the market
    • Consumer tastes
  9. Supply Curve
    • Higher prices make producers want to supply more
    • Also more ability to cover higher costs to produce more
  10. Things that can shift the supply curve
    • State of the technology
    • Prices of resources used to make the good
    • Price of goods that can be produced with these goods
    • Supplier expectations (expected price increase = increase in supply)
    • Change in the number of producers
  11. Effects of an increase in demand during equilibrium
    Both price and quantity are higher
  12. Effects of an Increase in Supply during equilibrium
    quantity is greater price is lower
  13. Price rationing
    How the market rations goods and services when demand exceeds quantity supplied
  14. Shortages
    In the case of price ceilings when quantity demanded is greater than the quantity supplied
  15. Surpluses
    in the case of price floors when the quantity supplied is greater than the quantity demanded
  16. Circular flow of house holds and firms
    Households -> resource market -> resources -> product market -> households
  17. Scientific Method
    • Identify the question and define possible variables
    • Specify assumptions
    • Formulate a hypothesis
    • Test the hypothesis
    • -Reject the hypothesis and modify approach
    • -or Use the hypothesis until a better one comes along
  18. Association is causation
    Just because the two situations are related they caused each other
  19. Fallacy of composition
    • Ex. arriving early to buy tickets to a game does not work if many have the same idea
    • What is true for the individual is true for the whole
  20. Secondary Effects
    • Unintended consequences
    • Often more important than the primary effects
    • A good economists accounts for them, though they may be slow in developing
  21. Opportunity Cost
    The opportunity we are giving up in place of what we are choosing
  22. Absolute advantage
    To be absolutely positively better at something in comparison to a partner
  23. Comparative advantage
    • To be comparatively better at something
    • The person who has the lowest opportunity cost in doing one thing should specialize in it
  24. Specialization
    • You should do what you have comparative advantage in
    • -reduces the need to shift between different tasks
  25. PPF -Production Possibility Frontier
    • A graph showing all the combinations of goos and services that can be made if we use all the resources efficiently
    • Shows the trade off between Capital goods and consumer goods
    • If we want more of one thing we have to consume less of the other
  26. Capital goods
    goods that are used to make other goods
  27. Consumer goods
    goods bought by people in our society (outputs)
  28. Points inside the PPF
    • Inefficient
    • Result from mismanagement
    • Economic downturns or recessions
  29. Points outside of PPF
  30. Shifts in PPF
    • Techonology improves = outward shift
    • Decrease in available resources = inward shift
    • Improvement in rules of the game - institutions, economic growth (out and to the right)
  31. Marginal rate of transformation
    Slope of PPF
  32. Law of increasing opportunity cost
    When you make more of one output good you need to give up more and more of another output good
  33. The questions for economic systems
    • What gets produced
    • How is it produced
    • Who gets it
  34. Traditional economy
    Tradition determines economic structure
  35. Command economies
    Government centrally plans economy
  36. Laissez-Faire or market economies
    Companies regulate economy with no regulation, markets determine
  37. Elasticity
    • How much one variable responds when another variable changes
    • percentage change of A over percentage change of B
    • How much quantity demanded will change
  38. Elastic
    • More responsive 
    • Percentage change in quantity demanded is greater than the percentage change in price = price elastic
    • Price increase reduces total revenue
  39. Inelastic
    • Percentage change in quantity demanded is less than the percentage change in price
    • High price increases total revenue, lower price reduces
  40. Over time demand becomes
    More elastic as consumers are able to find cheaper alternatives
  41. Price Elasticity of Supply
    • Percentage change in quantity supplied over percentage change in price
    • How responsive producers are to change in price
  42. Over time supply becomes
    More elastic as producers adjust to changes in price
  43. Income elasticity of demand
    • percentage change in quantity demanded over percentage change in income
    • When income increases
    • -Demands for goods like used clothes shift left and are negative inferior goods
    • -Demands for most goods shifts rightward and are normal goods
  44. Total revenue
    • Price x Quantity demanded
    • Total revenue increases when elastic
    • Total revenue decreases when inelastic
    • Unit elastic nothing changes to total revenue
  45. Law of Deminishing Marginal Utility
    The more you consume of a product the smaller the utility you gain from consumption
  46. Utility Maximization
    • Utility is maximized when budget is exhausted 
    • MUa/Pa=MUb/Pb
  47. Budget constraints
  48. Consumer Surplus
    The difference between the maximum amount a consumer will pay and the actual price that they pay
  49. Cross price elasticity
    • A measure of how the quantity of one good changes when the price of another good is changed
    • If positive then goods are substitutes
    • If negative goods are compliments
    • Percentage change in quantity of X demanded over the percentage change in price of Y
Card Set
Econ Test 1