Definitions Flashcards
(41 cards)
Absolute Advantage
the ability to produce a
good using fewer inputs than another producer
Comparative Advantage
the ability to produce
a good at a lower opportunity cost than another
producer
Law of Demand
Quantity of demanded goods falls when the price rises, all things remaining equal.
Law of Supply
the claim that the quantity supplied of goods will rise when the price of goods rises, all things equal.
A change in price, does what on a demand curve?
Causes a movement along the curve
Demand curve shifters (5)
1 - # of buyers increase 2 - Income for normal goods 3 - Prices of related goods 4 - Tastes 5 - Expectations
Supply curve shifters (4)
1 - # of suppliers
2 - Input prices
3 - Technology
4 - Expectations
Price Elasticity of Demand
a measurement of how much Quantity demanded responds to a change in price
measurement of price sensitivity
What determines price elasticity?
- Products with substitutes have high elasticity because people can go to something else.
- Price elasticity is higher for narrowly defined products than broad categories
- Price elasticity is higher for luxuries than necessities
- Price elasticity is higher in the short run vs long run
What is price elasticity used for?
- forecasting
- strategic pricing
Efficiency - definition?
when society gets the most from its scarce resources
Equality - definition?
when prosperity is distributed uniformly among society’s members
Opportunity Cost
The cost of whatever is given up in order to obtain the good or service. It is the relevant cost for decision making
Marginal changes
incremental adjustments to an existing plan
Market Economy
allocates resources through the decentralized decisions of many households and firms as they act within the market
Market Failure
when a market fails to efficiently allocate society’s resources
Perfect Market
- all goods are exactly the same
- all sellers are ‘price takers’ - having no effect on price
Normal Goods
Goods which are positively demanded when income rises. (more money to spend on it results in more consumption)
Inferior Goods
Goods which decline when compared to an increase in income. (For example, Bus rides versus automobiles. )
Substitute
Two goods are substitutes if an increase in the price of one causes an increase in quantity demanded of the other. (Pizza and Hamburgers)
Compliments
Two goods are compliments if an increase in the price of one causes a fall in the quantity demanded of the other. (Hot dogs and buns)
What is the Numerator of a Price Elasticity Equation?
% Change in Quantity (supplied or demanded)
What is the Denominator of a Price Elasticity Equation?
% Change in Price
What are the Properties of a Perfectly INELASTIC curve?
Elasticity = 0
Curve: Vertical
Sensitivity: None
