Flashcards in Final Exam Deck (47):
The limited nature of society’s resources
Nothing is infinite in nature—not even air and water!
The highest-valued alternative that must be sacrificed in order to get something else
Multiple trade-offs, but only one opportunity cost
Not all alternatives, just the next best choice
The Law of Demand
All other things equal, there is an inverse relationship between price and quantity demanded
Inverse: two variables move in opposite directions
Income, diminishing marginal utility, and the substitution effect dictate the law of demand
as prices go up, income stays relatively steady so if the price goes above someone’s income, they are out of the market
Diminishing marginal utility
The satisfaction of doing something goes down every time that you use it
when something gets too expensive, we look for an alternative
Law of supply
All other things equal, there is a direct relationship between price and quantity supplied.
Direct: two variables move in the same direction
What is the different between a change in quantity demanded and a change in demand?
A change in quantity demanded is a movement along the curve and a change in demand is a shift of the curve
What changes demand? (5 Shifters of Demand)
Changes in income, changes in the price of related goods, changes in tastes and preferences, change in future expectations, change in the number of buyers
What changes supply? (5 Shifters of Supply)
The costs of inputs, changes in technology, taxes and subsidies, change in the number of sellers, and changes of price expectations
Quantity demanded changes a small amount as the result of the price change
Quantity demanded changes significantly as the result of the price change
Inelastic Demand Characteristics
Goods with few substitutes, goods that are cheaper, and goods that take less time to acquire
Elastic Demand Charactersitics
Goods with a lot of substitutes, goods that are very expensive, and goods that take a long time to acquire
Elasticity of Demand Equation
% change in quantity demanded / % change in price
Perfectly Inelastic Demand
Ed = 0
Relatively Inelastic Demand
Ed is between 0 and -1
Ed = -1
Relatively Elastic Demand
Ed is less than -1
Perfectly Elastic Demand
Ed = - infinity
Cross Price Elasticity of Demand
Measures the responsiveness of the quantity demanded of one good to a change in the price of another good
Substitute goods cross price elasticity
Complementary Goods Cross Price Elasticity
Cross Price Elasticity of Demand Formula
% change in Qd (A) / % change in price (B)
Responsiveness of the change in quantity purchased as a result of a change in income
Income Elasticity of a Normal good
Income Elasticity of an Inferior good
Buyer’s Maximum – Price
Price – Seller’s Minimum
Total Revenue (TR)
The amount a firm receives from the sale of goods and services
Total Cost (TC)
The amount a firm spends in order to produce those goods and services
Tangible expenses. Bills that the owner has to pay.
Wages, insurance, food ingredients
Opportunity costs of doing business
Opportunity cost of capital
----Bought a franchise for a large sum of money. How could the money have been invested otherwise?
Opportunity cost of owner’s time above salary paid
-----How much could the owner get paid elsewhere?
Does not take into account implicit costs of doing business
Considers “All Costs” = (Explicit Costs + Implicit Costs)
Economic Profit = Revenues – All Costs
Diminishing marginal product
Successive increases in an input eventually cause output to increase at a slower rate
The demand for resources is determined (derived) by the products they help produce.
What is Demand for Labor?
Demand is the different quantity of workers that businesses are willing and able to hire at different wages.
What is Supply for Labor?
Supply is the different quantity of individuals that are willing and able to sell their labor at different wages.
Marginal Revenue Product (MRP)-
Change in TR / change in inputs
Marginal Resource Cost (MRC)-
Change in TC / change in inputs
Shifters of Labor Demand
1.) Changes in the Demand for the Product
2.) Changes in Productivity
3.) Changes in Price of Other Resources
Shifters of Labor Supply
Number of qualified workers
Personal values regarding leisure time and societal roles.
Government efforts that attempt to prevent oligopolies from behaving like monopolies
Sherman Act of 1890
“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.”
Positive network externalities
Individual preferences for a good increase as the number of people buying the good increases
Internet, social networks, cell phones, fax machines, MMORPGs, video game consoles, fads, night clubs