Week 1

Question 1

Four core ideas in economics

Answer 1

1. People face trade offs.
2. The opportunity cost of something is what you give up to get it.
3. Economic thinking is thinking at the margin.
4. People respond to incentives.

Question 2

Positive analysis

Answer 2

An attempt to describe or predict model outcomes. For example, minimum wage laws result in unemployment.

Question 3

Normative analysis

Answer 3

An attempt to prescribe what should be done. For example the government should raise the minimum wage.

Question 4

Types of variables

Answer 4

Exogenous - values that are given

Endogenous - values determined within the model

Question 5

Basic assumptions of economics

Answer 5

A1: Scarcity - resources are limited
A2: Choice - scarcity forces choice.
A3: Ind. Optimizing Behavior - we generally are rational and want to maximize a goal.
A4: Substitution - agents are willing to make the choice reqd by scarcity (can “price” things)

Question 6

What are attributes of a perfectly competitive market?

Answer 6

1. Everyone is a price taker
2. Easy exit and entry into the market
3. Firms sell identical products
4. Full information about price and quality
5. Costs of trading are low

Question 7

Demand

Answer 7

The quantity of a good consumers are willing to purchase at any given price.

F(pi, pj, I, theta, info, E, e)
Price of good, price of other good, income, tastes, information, expectations of the future, other factors

Question 8

Law of demand

Answer 8

When the price of any good increases, consumers will purchase less (or the same) amount of that good. SLOPE DOWN.

Question 9

Interpreting demand curve

Answer 9

If you tell me the price, I’ll tell you quantity I will consume.

If you tell me quantity, I’ll tell you my willingness to pay for the last unit - marginal value

Question 10

Marginal value

Answer 10

My willingness to pay for the last unit.

Question 11

Elasticity equation

Answer 11

EAB = (%deltaA)/(%deltaB) =
(deltaA)/(deltaB) * B/A

For linear demand,
EAB = -b(P/Q) where Q = a - bP

Question 12

Elasticity

Answer 12

Measure of sensitivity of one variable to another. Unitless. At an observed data point.

Question 13

Inelastic

Answer 13

At P = 0 or an extreme (vertical line demand)

Any price, same quantity. Consumers have no options.

Medications.

Question 14

Perfectly elastic

Answer 14

At Q = 0 or extreme case horizontal demand.

Any price increase, zero consumption.

Consumers have lots of other options.

Question 15

Is the demand for Tropicana OJ more or less elastic than the demand for OJ?

Answer 15

More - there are more options.

Question 16

Is the demand for gas more elastic today or in the future?

Answer 16

In the future. We believe there are other options in the future.

For consumption goods, the demand is more elastic in the long run. Because people need goods for daily life and buy them constantly, the short run demand is inelastic. Faced with high prices in the long run, they may change habits or find more substitutes.

Question 17

Is the demand for durable goods (cars) more elastic today or in the future?

Answer 17

Today. In the future, we will have fewer options because time will not be on our side.

For durable goods, the demand is more elastic in the short run. Consider cars. If price of of cars increase, in the short run people might use their current cars longer. In the long run, though, people have to replace their cars. That is, quantity demanded is more sensitive to price changes of such durable goods in short run and not so much in the long run.

Question 18

Supply

Answer 18

The quantity of a particular good that producers are willing to sell at any given price.

Pi, pk, T, E, n
Price of good, prices of production inputs, production technology, expectations about the future, number of sellers

Question 19

Interpreting supply curve

Answer 19

If you tell more the price I’ll tell you the quantity I would like to supply

If you tell me quantity, I’ll tell you the minimal price I’m willing to sell the last unit for - this is referred to as marginal cost

Question 20

Marginal cost

Answer 20

The minimal price I’m willing to sell the last unit for

Question 21

Market equilibrium

Answer 21

The situation in which there is no pressure for price or quantity to change.

Market self corrects.

Question 22

Condition for efficiency

Answer 22

Society’s resources are used efficiently when the marginal value of a unit is equal to its marginal cost : MV (Q) = MC(Q)