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48 Cards in this Set

  • Front
  • Back
Resources are scarce
You can’t have everything you want
True for an individual
True for an economy
Resource scarcity necessitates choice
We must make tradeoffs
Production Possibility Frontier
Illustrates
Scarcity
Opportunity Cost
Depicts maximum attainable combinations of goods, given resources and knowledge
The Circular Flow
Model illustrates
Two kinds of flows: “real” things and money
Two kinds of markets: “factors of production” and goods
In factor markets
firms are buyers and households and other owners of inputs are sellers

Payments for factors provide income for buying goods, which provide revenue for buying factors…
Can be multiple stages, as some firms sell “intermediate goods
Money flows facilitate a system of trade that makes all of us immensely better off
Positive statements
about what is, how the world works
“An increase in the minimum wage reduces employment among low-wage workers”
“An increase in government spending increases GDP with a multiplier of 1.6”
“An increase in the minimum wage reduces employment among low-wage workers”
“An increase in government spending increases GDP with a multiplier of 1.6”
These statements are not necessarily true, and may be very hard to verify, but they are at least potentially “testable”
As scientists, economists aim to test hypotheses, and thereby improve understanding of the world
Normative statements
about what should be, involve value judgments
“We should increase the minimum wage to $10/hour”
“We should enact a tax-financed system of universal health coverage”
Situations where an association may not reflect causation
Omitted variables
Reverse causality
Market
Group of buyers and sellers exchanging a particular good or service
Market cont.
Broader than a particular geographic location
Often boundaries of a market (geographic and nature of product) are rather fuzzy
Demand
Relationship between quantity of a good that consumers are willing and able to buy and all of the factors that influence it
Demand is ?
the relationship, Quantity demanded is a number, Q(P)
Demand Schedule is ?
a table relating quantity demanded to price, other things held constant
Demand Curve is ?
a graphic representation of demand schedule
Q^D =
f(p, x, y, z,…)
Demand curve: shifts and movements along
If something changes other than price that affects demand, the demand curve shifts (“change in demand”)
If only price changes, move along the demand curve (“change in quantity demanded”)
Supply
Relationship between quantity of a good that sellers are willing and able to sell and all of the factors that influence it
Usually focus on response of quantity to price, other things equal (supply curve)
As with demand…
If something changes other than price that affects supply, the supply curve shifts (“change in supply”)
If only price changes, move along the supply curve (“change in quantity supplied”)
Market supply is horizontal sum of individual firm supplies
If firms enter market, market supply increases (shifts right)
If firms leave market, market supply decreases (shifts left)
Market equilibrium
At this price, buyers buying quantity they want, sellers selling quantity they want
No one could be better off by doing something different
No tendency for change
Why does price move toward equilibrium?
If higher, excess supply (surplus), sellers will reduce price
If lower, excess demand (shortage), sellers will increase price
Only at the equilibrium does Qd = Qs,no tendency for change
Demand and Supply are relationships between price and quantity (ceteris paribus)
Price and quantity demanded are negatively related (demand slopes down)
Price and quantity supplied are usually positively related (supply slopes up)
“Economic Surplus”
is a way of putting a number on gains from trading in markets, or inefficiencies from interference
Consumer Surplus
The difference between what you pay and your maximum “willingness to pay”
Producer Surplus
The difference between what you sell for and the minimum you were willing to sell for (your “cost”)
If individuals vary in “willingness to pay,” market demand looks like ?
stairsteps
If many buyers with different values, demand looks ?
smooth
CS at market price is ?
area under demand but above price
What happens to CS if the price rises?
Those who still buy lose amount of price increase
Those who no longer buy lose CS at the old price
If many sellers with different values, supply looks?
smooth
PS at market price is ?
area below price but above supply curve
What happens to PS if the price rises?
Those who still sell gain amount of price increase
Those who now sell gain some PS
Starting from market equilibrium, suppose we change how goods are allocated
Shift a unit from a buyer to a non-buyer
Shift a unit from a seller to a non-seller
Change the quantity exchanged
Claim: any of these changes would reduce total surplus
Two main forms of interfering with market?
Ceiling (maximum price)
Floor (minimum price)
Consequences of a price ceiling
If above equilibrium, nonbinding, no effect
If below, creates a shortage
Available supply must be “rationed” in some way
Inefficient, in several ways
Allocation among consumers
Wasted resources
Inefficiently low quality
Incentives to evade controls
Black market
Benefits (some) renters at the expense of landlords. Harms other potential renters who can’t find a place
Price floors
Minimum wage an important example
Also used in agriculture (price supports), usually coupled with other policies
Consequences of a price floor
If below equilibrium, nonbinding, no effect
If above, creates a surplus (excess supply)
Not all who want to sell will be able to (unless government buys surplus)
Inefficient
Beneficial trades are missed
Wasted resources
Consequences of a price floor
Benefits some low-skilled workers at the expense of others (and of consumers)
Quantity controls
Another way of interfering with the market is to control the quantity rather than the price
One way to do that is to require a license to do something, and limit the number of licenses
A common example in economics is taxicabs in NYC
Unless there is a good reason for the quantity restriction, it will create an inefficiency (deadweight loss)
If the “license” can be sold, market will determine its value
elasticity
The concept economists use to measure responsiveness
most common example of elasticity is ?
price elasticity of demand
Basic definition of elasticity
(%change in Q)/(% change in P)
Midpoint method
%change in X = 100 • (change in X)/(avg value of X)
So by midpoint method, elasticity = {(change in Q)/[(Q1 + Q2)/2]} / {(change in P)/[(P1 + P2)/2]}
In our example: (.4/1.8)  (1/3.5) = 0.78
Total revenue
P x Q
Revenue increases if ?
%change in Q smaller than % change in P --> elasticity < 1 (inelastic)
Revenue decreases if?
%change in Q larger than % change in P ---> elasticity > 1 (elastic)
revenue stays the same if?
elasticity = 1 (unit elastic)
Other Demand Elasticities
Generically: (% in Q)/(%  in X)
Income (% in Q)/(%  in Income)
Negative (inferior)
Positive (normal)
> 1 (luxury)
Cross-Price (% in QX)/(%  in PY)
Positive (substitutes)
Negative (complements)
Supply Elasticity
(% in Q)/(%  in P), along supply curve
Positive as long as supply slopes up
Flatter curve is more elastic (as with demand)
Relatively more elastic when…