midterm 1 Flashcards
(204 cards)
1
Q
opportunity costs
A
the true cost of something is the next best alternative you have to give up to get it
consequence of choice in relation to next best alternative
1
Q
scarcity
A
resources are limited and any resource spent on pursuing one activity leaves fewer resources for another
1
Q
economic surplus
A
total benefits-total cost
assesses how much a decision has improved well being
1
Q
cost benefit principle
A
costs and benefits are the incentives that shape decisions.
before making a decision you should evaluate all costs and benefits and pursue only if benefits are greater than costs
2
Q
willingness to pay
A
quantifies costs and benefits, “what is the most I am willing to pay for this”
3
Q
sunk cost
A
cost that has been incurred and cannot be reversed
good decisions ignore sunk costs. they occur with every choice
4
Q
ppf
A
illustrates alternative outputs
5
Q
marginal principle
A
decisions about quantities are best made incrementally.
6
Q
rational rule
A
if something is worth doing keep doing it until marginal benefits equal marginal cost. maximizes economic surplus
7
Q
interdependence principle
A
best choice depends on other choices, choices others make, developments in other markets, and future expectations. when these change the best choice may change
8
Q
4 types of interdependence
A
dependencies between individual choices
dependencies between people/business in the same market
between markets
through time
9
Q
gains from trade
A
extra output from rearranging according to comparative advantage
10
Q
absolute advantage
A
ability to do a task using fewer inputs
11
Q
who should do a task
A
person with lowest opportunity cost
12
Q
comparative advantage
A
ability to do a task at lower opportunity cost
13
Q
how to determine who has comparative advantage
A
determine how long the task would take each person
convert to opportunity cost (calculate how much of an alternative good you could produce
evaluate who can produce each good at lowest OC
14
Q
specialization
A
focusing on task that you have lowest opportunity cost in
15
Q
internal market
A
markets within a company to buy/sell scarce resources
16
Q
knowledge problem
A
knowledge needed to make a good decision is not available to decision maker
17
Q
individual demand curve
A
plots the quantity of an item that someone plans to buy at each price
18
Q
quantity demanded is higher when
A
price is lower
19
Q
market demand curve
A
total quantity of a good demanded by the market across all potential buyers at each price
20
Q
market demand
A
sum of quantity demanded by each person
21
Q
4 steps to finding market demand curve
A
1) survey customers asking the quantity they will buy at each price
2) for each price, add up total quantity demanded by each individual at that price
3) scale up that quantities demanded by survey respondents so that they represent the whole market
4) plot total quantity of goods demanded by market at each price
22
a change in price only causes
movement along the demand curve
23
the demand curve is also which curve
marginal benefit curve
24
right shift =
increase in demand
25
left shift =
decrease in demand
26
6 factors that shift the demand curve
1) income
2) preferences
3) prices of related goods
4) expectations
5) congestion, network events
6) the type and number of buyers
27
normal good
demand increases when income is higher
28
inferior good
demand decreases when income is higher
29
complementary goods
goods that go together
30
when the price of a complementary good rises, demand
decreases
31
substitute goods
goods that replace each other
32
what does demand for a good do if price of a substitute good rises
increases
33
network effect
when a good becomes more useful other people use it
34
congestion effect
good becomes less valuable because other people use it
35
individual supply curve
plots quantity of item business plans to sell at each price
36
law of supply
tendency for quantity supplied to be higher when price is higher
37
perfect competition
markets in which all firms in an industry sell an identical good
and
there are many buyers and sellers, each of whom is small relative to size of market
38
price taker
someone who charges prevailing price and whose actions do not affect prevailing price
39
variable cost
vary with amount of output produced
40
fixed costs
do not vary when output changes
41
rational rule for sellers
keep selling until price equals marginal cost
42
marginal product
increase in output that arises from additional unit of input
43
diminishing marginal product
marginal product declines as you use more of that input
44
raised input = raised marginal
cost
45
market supply curve
plots total quantity of an item supplied by entire market at each price. sum of quantity supplied by each seller
46
rise in price = what in quantity supplied
increase
47
supply curve is also
marginal cost curve
48
5 factors that cause supply curve to shift
1) input prices
2) productivity and tech
3) prices of related outputs
4) expectations
5) type and number of sellers
4 and 5 only shift market supply curve
49
substitutes in production
alternative use of resources
50
what does supply of good do if price of substitute in production rises
decreases
51
complements in production
produced together
52
what will supply do if price of substitutes in production falls OR price of complements in production rise
increase
53
always use what when graphing ppf
x and y intercept
54
numerator of OC
task that is neglected
55
planned economy
centralized decisions are made about what and how goods and services are produced and allocated
56
market economy
each individual makes their own production and consumption needs, buying and selling in markets
57
market
a setting that brings together potential buyers and sellers
58
equilibrium
point at which there is no tendency for change
a market is in equilibrium when quantity demanded = quantity supplied
59
equilibrium quantity
quantity demanded and supplied are at equilibrium
60
shortages cause price to
rise
61
shortage
quantity demanded exceeds quantity supplied
62
surplus causes price to
fall
63
surplus
quantity demanded is less than quantity supplied
64
price above equilibrium
causes a surplus
65
price below equilibrium
causes a shortage
66
3 symptoms of a market at a shortage
1) queuing
2) bundling extras
3) a secondary market
if there is a surplus the same things will occur in reverse
67
demand shifts cause price and quantity
to move in the same direction
68
shift in supply causes price and quantity to move in
opposite directions
69
price elasticity of demand
measures how responsive buyers are to price changes
70
p.e. of demand formula
percent change in quantity demanded/ percent change in price
use absolute value with final answer to determine elasticity, but remember this should always be negative numbers wise
71
elastic
absolute value of price elasticity is greater than 1
responsive
72
inelastic
absolute value of price elasticity is less than 1
buyers are unresponsive to price change
73
unit elastic
elasticity is exactly 1 or negative 1
74
elastic demand curves are ...... than inelastic demand curves
flatter
75
perfectly elastic
change in price leads to infinite change in quantity
horizontal demand line
76
perfectly inelastic
quantity does not respond to a change in price
vertical demand line
77
if you have good substitutes demand is more
elastic
78
elasticity reflects the availability of a
substitute
79
price elasticity of demand reflects availability of substitutes and is larger when
1) there are more competing products
2) for specific brands
3) for things that are not nessecities
4) when consumers search more
5) when there is more time to adjust
80
total revenue
price*quantity
81
if demand is elastic a higher price produces
less revenue
82
if demand is inelastic a higher price produces
more revenue
83
if demand is currently inelastic for your product, you should
raise prices
84
cross price elasticity of demand
measures how responsive prices quantity demanded of one good is to price changes of another
85
cross price elasticity of demand formula
percent change in quantity demanded/ percent change in price of other good
86
cross price elasticity is positive for
subsitutes
87
cross price elasticity is negative for
complements
88
cross price elasticity is zero for
independent goods
89
income elasticity of demand
change in quantity demanded in response to a change in income
90
income elasticity of normal goods is
positive
91
income elasticity of inferior goods is
negative
92
price elasticity of supply
responsiveness of sellers to price changes
will always be positive
93
quantity is unresponsive when supply is
inelastic
94
quantity is responsive when supply is
elastic
95
price elasticity of supply is increased when
1) firms store inventory
2) inputs are easily available
3) firms have extra capacity
4) when firms can enter or exit
5) more time to adjust
96
if supply and demand both shift there can be more than one possible outcome which means that either price or quantity will be
ambiguous
97
positive analysis
descibes what will happen
98
normative analysis
describes what should happen
99
the most effeciant outcome is the outcome that yields
the most surplus
100
economic surplus
total benefits - total cost
measures how much a decision improves your well being
101
equity
a measure of fairness
a more fair distribution of economic resources
102
consumer surplus
marginal benefit - price
triange closer to the top of the graph
surplus from buying
103
effecient production
producing a given quantity of output at the lowest possible costs
104
effecient quantity
quantity that produces largest amount of economic surplus
105
rational rule for markets
produce more of an item if the marginal benefit of the item is greater than or equal to its marginal cost
106
market failure
forces of supply and demand lead to an ineffecient outcome
107
5 market failures
1) market undermines competitive pressure
2) externalities create side effects
3) information problems undermine trust
4) irrationality leads to bad decisions
5) government can impede market forces
108
deadweight loss
how far economic surplus falls below effecient outcome
109
DWL=
surplus at effecient quantity - actual economic surplus
110
deadweight loss is always pointed at the
effecient quantity
111
3 critiques on effeciency
1) distribution matters. we should account for equity
2) willingness to pay affects ability to pay, not just. MB
3) the means matter, not just the ends
112
MC of the last unit produced will be the same for
all firms because each firm will produce up to the point where MC= price
113
if less than the effecient quantity is consumed
mutually beneficial exchanges will not occur
114
if more than the effecient quantity is consumed
some goods will go unsold
115
what is the market failure in the used car market
private information
116
more narrow market =
more elastic demand
117
a demand line shows the exact
marginal benefit
118
a demand line shows
max you would pay for each unit of a good
119
what does a tax on sellers cause
1) a shift in the supply curve
2) decline in quantity sold
3) increases price buyers pay
4) decreases price sellers recieve
120
who bears the incidence of a tax on sellers
both buyers and sellers
121
what does a tax on buyers cause
1) shift in the demand curve
2) decline in the quantity sold
3) increases what buyers pay
4) decreases what sellers recieve
122
who bears the incidence of a tax on sellers
both buyers and sellers
123
statutory burden
it doesnt matter if tax is on the seller or buyer, the result is the same
124
tax incidence
depends on price elasticity of demand and supply
refers to the distribution of the economic burden of a tax between buyers and sellers. It analyzes who ultimately bears the cost of a tax, regardless of who is legally responsible for paying it to the government.
125
sellers bear a smaller share of the tax incidence when
supply is relatively elastic
126
buyers bear a smaller share of the tax incidence when
demand is relatively elastic
127
the factor (supply/demand) that is more elastic will have a ....... share of economic burden
smaller
128
how to evaluate a tax or subsidy
1) determine which curve is shifting
2) consider if it is an increase or decrease in taxes
3) compare pre and post tax equilibrium
4) see if supply or demand is more elastic in order to assess who bears greater burden of the tax
129
subsidy
payment made by government to theose who make a specific choice
130
price celing
max price to be legally charged
131
price floor
min price that sellers can legally charge
132
binding price celing
price celing that prevents market from reaching market equilibirum price
133
price celings lower prices but they cause
shortages
134
binding price floor
prevents the market from reaching equilibrium price
135
quantity regulation
max or min quantity that can be sold
136
quota
limit on max quantity of a good that can be bought or sold
137
mandate
requirement to buy or sell a min amount of a good
138
what do quotas do to prices
raise them
139
when a competitive market is at equilibrium total surplus is
as large as it can be
140
statutory burden
burden of being assigned by government to pay tax
141
economic burden
actual burden created by changes in price due to a tax
142
tax incidence
division of burden between buyers and sellers
143
negative externality
effects harm bystanders
144
externality
side effect of an activity that affects bystanders whose interests are not taken into account
145
positive externalities
side effects benefit bystanders
146
price change is not a
externality
147
negative externalities create
external costs
148
marginal price cost
cost paid by the seller from one extra unit
149
marginal external cost
cost imposed on bystanders
150
marginal social cost
sum of marginal private costs and marginal external costs
151
marginal external benefit
extra benefit enjoyed by bystanders
152
marginal social benefit
sum of marginal benefit accruing to buyer and marginal external benefit accrued to bystanders
153
social optimal quantity
quantity thats the most effecient for society as a whole
occurs where marginal social benefit =marginal social cost
154
negative externalities lead to
overproduction
155
positive externalities lead to
underproduction
156
coase theorum
if bargaining is priceless and property rights are enforced, externality problems can be solved by private bargains
157
corrective taxes can solve
negative externalities
158
set corrective tax on negative externaility equal to
the marginal external cost
159
corrective subsidy can solve
positive externaities
160
you can cap a negative externality using
quantity regulation
161
cap and trade is like a
corrective tax
162
lawsuits, norms, social sanctions are like a
corrective tax
163
warm glow, social recognition are like a
corrective subsidy
164
laws rules and regulations can solve
externalities
165
non excludable goods
people cannot be easily excluded from using it
166
non rival goods
one persons use does not subtract from anothers
167
free rider problem
someone can enjoy benefits of a good without paying the costs
168
with nonrival goods, free rides enjoy a
positive externality
169
rival goods
use of good comes at the expense of someone else
170
public good
non rival good that is non excludable and therefore subject to free rider problem
171
markets ..........produce public goods
under
172
club good
excludable but nonrival in consumption
173
common resource
rival and non excludable
174
tradgedy of the commons
tendency to overconsume common resources
175
how to solve tradgedy of the commons
assign ownership rights
176
what type of goods create externality problems
non excludable
177
6 solutions to externality problems
1) private bargaining
2) fix the price through a tax or subsidy
3) fix the quantity through cap and trade
4) laws, rules, regulations
5) government provisions of public goods
6) assign ownership rights to common resources
178
what are the 3 consquences of a tax
1) tax raises revenue for governments
2) taxes reduce producer and consumer surplus
3) taxes create deadweight loss
179
subsidies are opposite of taxes in the way that whichever is less elastic gets to keep
more of the surplus
180
consequences of a price floor
1) choosy buyers because there is more demand
2) suppliers will try to sell on a black market
3) suppliers keep producing excess, government keeps having to step in to buy the surplus
181
4 unintended consequences of price celings
1) excess demand means that supplies do not need to worry about losing customers, makes quality decrease
2)suppliers find other ways to profit
3) black markets may emerge
4) suppliers will pivot into differeny industries
182
binding quota
quota is below equilibrium quantity
183
DWL triangle is located inbetween
what society is doing and what it should be doing
184
if the market is functioning properly social optimum is
the equilibrium point
185
supply curve slopes up to reflect increasing ....... demand curve slopes down to reflect decreasing ......
MC..... MB
186
what shift happens: negative externaility
supply shifts left
187
what shift happens: positive externality
demand shifts right
188
when the price of a good takes up a higher share of income, it is more
elastic
189
the more vertical a slope is
the less elastic it is
190
new tech causes production to be cheaper which in turn lowers ...... and therefore increases ......
MC, supply
191
more elastic (demand/supply) = ....... loss from tax
smaller
191
where are these located on the ppf: effecient, ineffecient, infeasible
effecient: on the ppf line
ineffecient: below the ppf line
infeasible: above ppf line
192
OC of y =
x/y x (units)
193
positive externalities shift the ...... to the ......
demand curve (social), right
194
negative externalities shift the ...... to the ........
supply curve (social), left
195
how does a tax levied on sellers affect supply and demand curves
supply shifts left, demand remains unchanged
196
how does a tax levied on buyers affect supply and demand curves
demand shifts left, supply is unchanged
197
when given a supply and demand function, where do you put the tax (on buyers) when you integrate the equations?
ex) S(p) = 2p
D(p) = 100-p
tax is $10
you would add the tax to the demand function
ex) S(p)= 2p
D(p) = 100-(p+10)
therefore D(p) (tax) =90-p
198
when given a supply and demand function, where do you put the tax (on sellers) when you integrate the equations?
ex) S(p) = 2p
D(p) = 100-p
tax is $10
you would subtract the tax from the supply function
ex) S(p) = 2 (p-10)
D(p) = 100-p
therefore S(p) = 2p-20
199
how do you factor a positive externality into supply and demand functions?
ex) s(p) =2p
d(p) = 10-p
positive externality of $2
adjust the demand function by adding externality
ex) d(p) (social) = 12-p
200
how do you factor a negative externality into supply and demand functions?
ex) s=2p
d=10-p
adjust the supply curve by adding the cost
s (social) = 2 (p+2), therefore
s (social) = 2p+4
