Econ Midterm #1

Front 1

PPF

Back 1

Down-sloping line that shows the maximum amount of production for an economy with a given amount of resources.

Front 2

Points Outside of PPF

Back 2

Unattainable, Desirable

Front 3

Points Inside of PPF

Back 3

- Attainable, Inefficient
- Caused by idle and misallocation of resources

Front 4

Production Efficiency

Back 4

When we cannot produce more of one good without producing less of another

Front 5

Tradeoff

Back 5

- Makes PPF downsloping
- Give up something to get something else

Front 6

Opportunity Cost

Back 6

- What you give up to choose another action (2nd best choice)

Front 7

Law of Increasing Opportunity Cost

Back 7

- O.C. of a good increases as we produce more of it
- PPF: Concave

Front 8

Reason for Law of I.O.C.

Back 8

- Resources are not equally productive in all activities
- i.e. At first, we send our best engineers, so we only sacrifice some breadsticks, but later send farmers so many more b.s. are sacrificed

Front 9

Allocative Efficiency

Back 9

- Marginal Benefit = Marginal Cost
- When the society accumulates the highest total net benefit

Front 10

Marginal Cost

Back 10

- Marginal = Additional
- Opportunity cost of producing one more unit of a good --> M.C. = Change in Y/Change in X

Front 11

Marginal Benefit

Back 11

Additional benefit from consuming one more unit of a good.

Front 12

Demand

Back 12

- Relationship between quantity of a good people want to buy and the price of that good, ceteris paribus (all else equal)

Front 13

2 Interpretations of Demand

Back 13

1) How much of a good will be demanded at different prices (P-->Q)
2) What the max P that can be charged for different quantities of a good is (Q-->P)

Front 14

Law of Demand

Back 14

The higher the price of a good, the lower quantity demanded is.

Front 15

2 Reasons for Down-Sloping Demand

Back 15

1) Substitution Effect- P increases and Q of demand decreases because people substitute expensive good with cheaper substitutes
2) P increases so people feel poorer and consume less as a whole, including a particular good --> Q of demand decreases

Front 16

Movement Along the Demand Curve

Back 16

Due to price change, P increases and Qd decreases

Front 17

Shift in Demand

Back 17

Change resulting from all non-price factors

Front 18

Demand Shifters: 1) Prices of Related Goods

Back 18

- Substitute: Goods that can be used in place of other goods (Demand decreases)
- Complement: Goods that are consumed together (Q of another good increases so demand of this good also increases)

Front 19

2) Expected Future Prices

Back 19

Demand increases as consumers buy more now when they expect price to go up later

Front 20

3) Income

Back 20

- Normal Good: A good for which D increases as income increases
- Inferior Good: A good for which D increases as income decreases

Front 21

4) Preferences

Back 21

Example: because of swine flu, people want to use more hand sanitizer and D increases.

Front 22

5) Population

Back 22

Number of consumers increases so D increases.

Front 23

How to Add Demands

Back 23

Add quantities of two different demands at same price (Dtotal).

Front 24

Supply

Back 24

Relationship between quantity of the good supplied and the price of that good, ceteris paribus.

Front 25

2 Interpretations of Supply

Back 25

1) How much of a good will be supplied at different prices (P-->Qs)
2) Minimum price at which different quantities can be sold

Front 26

Law of Supply

Back 26

The higher the price of a good, the greater quantity supplied, ceteris paribus.

Front 27

Movement Along Supply

Back 27

- Due to price change
- P increases, Qs increases (supply stays the same)

Front 28

Shift in Supply

Back 28

- Due to all non-price factors

Front 29

Supply Shifters: 1)Technology

Back 29

Supply increases as technology does

Front 30

2) Productivity of Resources

Back 30

Supply increases as productivity of resources does

Front 31

3) Prices of Factors of Production

Back 31

As the prices of these factors increase, supply decreases

Front 32

4) Number of Suppliers

Back 32

As number of suppliers increases, so does supply

Front 33

5) Substitutes/Compliments in Production

Back 33

Substitutes cause decrease in supply; compliments cause increase

Front 34

How to Add Supplies

Back 34

Add quantities at same price

Front 35

Market Equilibrium

Back 35

Situation where there is no tendency for change

Front 36

Absolute Advantage

Back 36

When an entity (country, person, village, etc.) can produce more with a given amount of resources

Front 37

Comparative Advantage

Back 37

When an entity has a lower opportunity cost for producing a good than anyone else

Front 38

Connection b/w Slopes and Opportunity Cost

Back 38

They are the same because O.C. = change in Y/change in X and Slope PPF= O.C.

Front 39

Terms of Trade

Back 39

Relative price at which goods are traded

Front 40

Consumption Possibilities Frontier (CPF)

Back 40

Maximum amount of goods an entity (i.e. the villages) can consume

Front 41

Slope

Back 41

Rise over Run

Front 42

Elasticity

Back 42

- A measure of consumer responsiveness of the demand to price changes
- Not sensitive to units of measurement

Front 43

Price Elasticity of Demand (Mid-Point Formula)

Back 43

Ed= % Change in Qd/ % Change in P
% Change in Qd= (Q1-Q0)/(Q1+Q0)/2
% Change in P= "

Front 44

Why is Elasticity of demand a negative number?

Back 44

Because Qd decreases when P increases, as is always the case in realistic situations

Front 45

[Ed] > 1

Back 45

- Elastic Demand
- If price goes up by 1%, Qd decreases by more than 1%

Front 46

0 < [Ed] < 1

Back 46

- Inelastic Demand
- If price goes up by 1%, Qd decreases by less than 1%

Front 47

[Ed] = 1

Back 47

- Unit Elastic Demand
- If price goes up by 1%, Qd decreases by 1%

Front 48

Ed=0

Back 48

- Perfectly Inelastic Demand
- No matter the price change, Qd will stay the same

Front 49

[Ed] = Infinity

Back 49

- Perfectly Elastic Demand
- Tiny changes in price induce huge change in quantity demanded

Front 50

Total Revenue

Back 50

- Amount of money gained from sale (P x Q)

Front 51

Conclusion from Total Revenue Test

Back 51

Charge lower prices to those with elastic demand and higher to those with inelastic demand for greatest total revenue.

Front 52

Factors that Influence Elasticity of Demand

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1) # of Substitutes: The more there are, the higher the elasticity of demand
2) % of Income spent on good: The higher the %, the higher elasticity of demand
3) Time: The more time people have, the higher elasticity of demand
---> Example: In 1973-74 P of oil increased (OPEC cut prod.) but D did not decrease a lot because there was not enough time to react and there were no substitutes.

Front 53

Elasticity of Supply

Back 53

Measure of suppliers' responsiveness to price change

Front 54

Formula for Elasticity of Supply

Back 54

Es= % Change in Qs/ % Change in P

Front 55

Es > 1

Back 55

- Elastic Supply
- If P increases by 1%, Qs increases by more than 1%

Front 56

0 < Es < 1

Back 56

- Inelastic Supply
- If P increases by 1%, Qs increases by less than 1%

Front 57

Es = 0

Back 57

- Perfectly Inelastic Supply
- Regardless of price change, Qs will stay the same

Front 58

Es = Infinity

Back 58

- Perfectly Elastic Supply
- Any small change in price will cause huge change in Qs

Front 59

Factors that Influence Elasticity of Supply

Back 59

1) Time: the more there is, the more elastic supply is
2) Resource Substitution Possibilities: If there are substitutes for resources, then S is more elastic

Front 60

Inefficiency

Back 60

= Loss of Surplus

Front 61

MB = D & MC = S

Back 61

- Allocatively Efficient at Equilibrium
- Only in perfectly competitive markets

Front 62

Total Benefit

Back 62

- Sum of marginal benefits
- Value of the good, summed over quantities consumed

Front 63

Area Representing Total Benefit

Back 63

- Below Demand (MB), up to quantity consumed

Front 64

Consumer Surplus

Back 64

Benefit to the consumer, over and above the payment

Front 65

Area Representing Consumer Surplus

Back 65

Above price line, below demand

Front 66

Area Representing Total Revenue

Back 66

Under the price line, up to quantity supplied

Front 67

Producer Surplus

Back 67

Amount that producer receives over and above cost of production

Front 68

Area Representing Producer Surplus

Back 68

Above supply and below price, up to quantity supplied

Front 69

Total Surplus

Back 69

- Total Net Benefit
- TB - TC

Front 70

Is underproduction good for society?

Back 70

No, because we lose surplus (DWL)

Front 71

Is overproduction good for society?

Back 71

No, because there is less total net benefit (DWL)

Front 72

Rent Ceiling

Back 72

- Regulation that makes it illegal to charge a higher rent than a specified level
- To be effective, must be below equilibrium

Front 73

Price Ceiling

Back 73

Regulation that makes it illegal to charge a price above a specified level

Front 74

Minimum Wage

Back 74

Makes it illegal to pay less than a specified wage

Front 75

Price Floor

Back 75

- Makes it illegal to trade at a price below a specified level
- In order to be effective, must be above equilibrium

Front 76

What does incidence of taxation depend on?

Back 76

- Elasticity
- Steeper slope (i.e. Supply) = more inelastic
- Inelasticity penalized with greater tax burden

Front 77

Deadweight Loss

Back 77

- DWL
- Loss in Total Surplus

Front 78

If the sole purpose of taxation is to collect tax revenue, which goods should be taxed the most?

Back 78

Inelastic (for consumers). Also, with inelastic goods, there is no DWL (over or underproduction) because the quantity consumed does not change.