Microeconomics

Front 1

ten principles of economics

Back 1

people face trade-offs; the cost of something is what you give up to get it; rational people think at the margin; people respond to incentives;trade can make everyone better off; markets are usually a good way to organize economic activity; governments can sometimes improve market outcomes; a country's standard of living depends on its ability to produce goods and services; prices rise when the government prints too much money; society faces a short-run trade-off between inflation and unemployment

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competitive market

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a market in which there are many buyers and sellers so that each has a negligible impact on the market price

Front 3

quantity demanded

Back 3

the amount of a good buyers are willing and able to purchase

Front 4

law of demand

Back 4

ceteris parabis, when price rises, QD falls

Front 5

demand schedule

Back 5

a table that shows the relationship between the price of a good and QD

Front 6

demand curve

Back 6

graph of the relationship between the price of a good and quantity demanded

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normal good

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good for which, ceteris parabis, an increase in income leads to an increase in demand

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inferior good

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good for which, ceteris parabis, an increase in income leads to a decrease in demand

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substitutes

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two goods for which an increase in the price of one leads to an increase in demand of the other

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complements

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two goods for which an increase in ht eprice of one leads to a decrease in demand for the other

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what causes shifts in the demand curve?

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income; price of related goods; tastes; expectations; number of buyers

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quantity supplied

Back 12

amount of a good that sellers are willing and able to sell

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law of supply

Back 13

ceteris parabis, when price rises, quantity supplied rises

Front 14

supply schedule

Back 14

a table that shows the relationship between the price of a good and QS

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supply curve

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graph of the relationship between price ad QS

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what causes shifts in the supply curve?

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input prices; technology; expectations; number of sellers

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equilibrium

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situation in which market price has reached the level at which QS = QD

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equilibrium price

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price that balances QS and QD

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equilibrium quantity

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QS and QD at Pe

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surplus

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a situation in which QS > QD

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shortage

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situation in which QD > QS

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law of supply and demand

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claim that the price of any good adjusts to bring the QS and QD for that good into equilibrium

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elasticity

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measure of the responsiveness of QD or QS to one of its determinants

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price elasticity of demand

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measure of how much QD of a good responds to change in the price of that good, computed as the percentage change in QD divided by percentage change in price

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what determines elasticity?

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availability of close substitutes; necessities s luxuries; definition of the market; time horizon

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total revenue

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amount paid by buyers and received by sellers of a good, computed as price of good * quantity sold

Front 27

income elasticity of demand

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measure of how much QD responds to change in consumers' income, computed as percentage change in QD/percentage change in inome

Front 28

cross-price elasticity of demand

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measure of how much QD responds to a change in the price of another good, computed as the percentage change in QD/percentage change in price of the second good

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price elasticity of supply

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measure of how much QS responds to change in price of that good, computed as percentage change in QS/percentage change in price

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price ceiling

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legal maximum imposed on the price at which a good can be sold

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price floor

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legal minimum imposed on price at which a good can be sold

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examples of price ceiling/floor

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ceiling - gas prices in the 70s; floor - rent control, agricultural subsidies

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tax incidence

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manner in which tax burden is shared among participants in a market

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4 "lessons" learned from taxes

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1) burden of the tax doesn't always fall on the person writing the check; 2) tax incidence is the same regardless of who writes the check 3) inelastic actor bears tax burden 4) taxes on perfectly elastic or perfectly inelastic goods generate NO DWL - "ideal taxes"

Front 35

2 implications of taxes

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1) taxes discourage market activity; when a good is taxed, the quantity sold is smaller in the new equilibrium...2) buyers and sellers share the burden of taxes - in the new equilibrium, buyers pay more for the good and sellers receive less

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welfare economics

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study of how the allocation of resources affects economic well-being

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willingness to pay

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max amount buyer will pay for a good

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consumer surplus

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amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

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cost of production

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value of everything a seller must give up to produce a good

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producer surplus

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amount a sellers is paid for a good minus the seller's cost of providing it

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efficiency

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property of a resource allocation of maximizing the total surplus received by all members of society

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equality

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property of distributing economic prosperity uniformly among members of a society

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3 implications of free markets

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1) free markets allocate supply of goods to buyers who value them most highly, as measured by willingness to pay; 2) FM allocate demand for goods to sellers who can produce them at the least cost; 3) FM produce the quantity of goods that maximizes the sum of consumer and producer surplus

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deadweight loss

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fall in total surplus that results from a market distortion, such as a tax

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what determines deadweight loss?

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price elasticities of supply and demand