Unit 1 - Profits, Trade, Supply and Demand

Question 1

Opportunity Cost

Scarcity

Answer 1

Forgone benefit from directing resources towards one activity instead of the next best alternative resource use

Question 2

Marginal Analysis

Important in decision-making skills

Answer 2

To maximize profits, make incremental adjustments to a given control variable

Question 3

What is the additional benefit/cost of adjusting a control variable?

What is the Equi-Marginal Principal?

MR > MC
MR < MC

Answer 3

MR = MC (Maximizing Profit)
MR > MC (last unit of Q increased revenues more than it increased costs)
MR < MC (last unit of Q increased costs more than it increased revenues)

Question 4

Absolute Advantage

Answer 4

A producer who can produce more has the advantage in producing that good

Question 5

Comparative Advantage

Answer 5

A producer who has smaller opportunity cost of producing the good

Leads to specialization and trade for other goods

Question 6

Demand

Answer 6

Amount of the good or service that buyers are willing and able to purchase

Question 7

Demand Curve

Answer 7

Shows the amount of a good that will be purchased at alternative prices, holding other determinants of demand constant

Question 8

Law of Demand

(- sign in equation)

Answer 8

Demand curve is downward sloping
As the price of the good or service or resource rises, the quantity demanded will decrease and vice versa, all else held

Question 9

What are the 5 non-price determinants of demand?

Answer 9

1) Income effect
2) Substitution effect
3) Population and Demographics
4) Consumer Expectation
5) Quantity wanted in a down-stream market

Question 10

Price (-)

Demand

Answer 10

As price decreases, quantity demanded increases

Question 11

What is income effect and goods associated with it?

“Ability to pay”

Answer 11

Change of price on the purchasing power of income
As the price increases, purchasing power reduces. As price decreases, purchasing power increases
These goods are normal goods and inferior goods.

Question 12

What sign elasticity and relationship does normal goods have?

Answer 12

Positive elasticity (+)
Direct relationship
(increase income, increase demand_
(decrease income, decrease demand)

Question 13

What sign elasticity and relationship does inferior goods have?

Grad student + ramen
Graduates and gets a good job, stops buying low quality foods

Answer 13

Negative elasticity (-)
Indirect relationship
(increase income, decrease demand)
(decrease income, increase demand)

Question 14

What sign elasticity and relationship does substitutes have?

Chicken goes up, people start buying beef

Viewed as replacements for one another

Answer 14

Positive elasticity (+)
Direct relationship
(increase price, increase demand)
(decrease price, decrease demand)

Question 15

What sign elasticity and relationship does complementary goods have?

How people respond to prices

Goods that are used or consumed with one another: coffee and creamer

Answer 15

Negative elasticity (-)
Indirect relationship
(Good A price increases, complement good decreases)
(Good A price decreases, complement good increases)

Question 16

What sign elasticity and relationship does population, demographics have?

Medical Care or Population

Answer 16

Positive elasticity (+)
Direct relationship
(Population increases, increased services consumed right shift)
(65+ yr increases, medical care increases right shift)

Question 17

What relationship does consumer expectations have on demand?

Taste or Preference

Answer 17

Direct or Negative Relationship
ex: severe weather castatrophe - direct relationship
ex: Food - diminishing marginal utility - direct or negative

Question 18

What sign elasticity does quantity wanted in a down-stream market have?

Answer 18

Positive elasticity (+)
Direct relationship

Question 19

Shift in Demand

Answer 19

A change in the quantity of a good demanded at every price.
(Increase in demand, rightward shift of the curve)
(Decrease in demand, leftward shift of the curve)

Question 20

Supply

Answer 20

The amount of the good or service that sellers are willing and able to sell

Question 21

Supply Curve

Answer 21

Shows the amount of a good that will be produced at alternative prices, holding other determinants of supply constant.

Question 22

Law of Supply

Answer 22

Curve is upward sloping
As the price of a good rises, the quantity supplied will increase, and vice versa, all else held constant
Linked to opportunity cost

Question 23

Price (+)

Supply

Answer 23

As price increases, quantity supply increases

Question 24

What are the 5 non-price determinants of supply?

Answer 24

1) Subsidy and Taxes
2) Cost of inputs
3) Technology
4) Producer expectations
5) Quantity available in an up-stream market