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Flashcards in Midterm 1 Deck (76):
1

Trade off

You give one thing up to get another

2

What are the two main trade offs

Equity vs. Effieciency

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Equity

Benefits of resources are distibuted equally

4

Efficiency

Society get the most out of their scarce resources

5

Opportunity cost

The thing u gave up to get what u have

6

How do people make decisions

Comparing marginal costs and benefits

7

Marginal changes

Small incremental adjustments to a plan.

8

Benefits of trade

Specialization (better value) cheaper costs

9

Market failure

Markets alone fail to allocate resources efficiently

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Causes of market failure

Externality- actions affecting a bystander (pollution)
Market power- when someone has a monopoly over the market

11

Circular flow diagram

Chart shows how money flows through markets and among households and firms

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Microeconomics

Study of how households and firms make decisions and how they interact with the market

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Macroeconomics

Study of the economy as a whole including governments and international factors

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Positive analysis

Analysis that explains how the world is

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Normative analysis

How the world should be

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Endogenous bariables

Factors that are influenced by other factors in the system

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Exogenous

Factors not affected by other factors in the system

18

Demand curve

Traces the effect of the price of a good compared to the quantity bought

19

Moving along the demand curve vs a shift in the demand curve

Along- change in price
Shift- change in other factors not on the graph

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Market demand curve

Summation of individual demand curves

21

Supply curve

Curve that shows how the price of a product affects how much producers are willing to sell

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Movement vs shift on supply curve

Movement- change in price
Shift- @ the same price a producer is willing to give more or less than previously

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Absolute advantage

When a producer requires less inputs to produce a good compared to another

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Comparative advantage

Which producer has a lower opportunity cost to produce a good

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Gains of trade

Buying a product at a lower opportunity cost than producing it yourself

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Terms of trade

Price of the trade has to between each party's opportunity cost

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How do u calculate opportunity cost

Time taken of 1 unit of what is produced/ time taken for 1 unit of what is not produced

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Normal good

As income increases demand increases

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Inferior good

As income increases demand decreases

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Engel curve

Curve that shows the relationship between income and quantity demanded

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Substitute

When price for one increases demand for another good increases

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Complements

As price for something decreases the demand for something else increases

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Factors thats shift the demand curve

Income, price of related goods, people's tastes, expectations of what will happen to price

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Factors thats shift the supply curve

Input prices, technology, expectations, taxes, subsides

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Law of supply and demand

Price of a good will afjust to reach equilibrium

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Change in quantity demanded vs. Change in demand

Quantitiy demanded- movement along the curve caused by price change
Change in demand- shift of a curve because @ the same price people are will to pay less or more than before

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Equilibrium Price

Quantity of goods buyers are willing to pay is equal to the price the sellers are willing to sell

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Excess surplus

When the quantity demanded is less than the quantity demanded

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Comparative statitics

Start from equilibrium, you make a change tonthe graph and compare the old equilibrium to the new one

40

Giffen good

Good that violates basic laws of supply and demand because as price goes up demand also goes up.

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Double shift

Both supply curve and demand curve both move at the same time and it is ambigious

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Double shift

Both supply curve and demand curve both move at the same time and it is ambigious

43

Elasticity

Measure of how consumers respond to changes in certain variables (price) of the product

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Price elasticity of demand

How much quantity demanded changes based on the price

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4 determinants of price elasticty

-substitutes
-neccesity vs. Luxury
-narrowerness of market more narrow=more elastic
-time period-more time=more elasic

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Total revenue

Amount paid by buyers and sellers for the good P ×Q

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Total revenue with inelastic demand

Total revenue increases as price increases

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Total revenue with elastic demand

Total revenue decreases as price increases

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Normal goods

Higher income raises quantity demanded

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Inferior good

Higher income decreases quantity demanded

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Cross price elasticity

How the quantity demanded of one good changes as the price of another changes

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Substitutes in cross price

Positive elasticity- increase in price of one goid means increased demand of another

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Complements and cross price elasticity

Negative elasticity. The increase in price of one good the decrease in demand for another.

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Price elasticity of supply

How much supply reacts to changes in price

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Determinants of price elasticity of supply

- flexibility of seller to change price
- time period

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Willingness to pay

The max a consumer is willing to pay for a product

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Consumer surplus

Amount buyer is willing to pay- amount paid

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Cost

The lowest price the producer is willing to sell their service/ producers opportunity cost

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Producer surplus

Amount seller is paid - production cost

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Total surplus

CS + PS

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Efficiency

Allocation of resources that maximizes total surplus

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Inefficient allocation of production

When the good is not being produced by the lowest producer and is produced by the highest. The consumer surplus will be smaller then

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Ineffecient allocation of the consumer

Product is not being consumed by the consumer who values it most so then producer surplus will ve small

64

Deadweight loss

Fall in total surplus when taxes are imposed/the amount of surplus consumers and producers cant get because of tax

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Perfect price inelasticity

0

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Perfect price elasticity

Infinity

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Price inelasticity

Less than 1

68

Price elasticity

Greater than 1

69

Inferior good

Less than 0

70

Normal good

Greater than 0

71

Necessity

Netween 0 and 1

72

Luxury

Greater than 1

73

Substitutes

Greater than 0

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Complements

Less than 0

75

Market demand curve

Horizontal summation of individual demand curves

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Market supply curve

Summation of the quantity supplied by individual producers