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43 Cards in this Set
- Front
- Back
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economic models |
organize and explain economic ideas |
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simple ideas + disciplined application= |
powerful insights about how the world works |
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Homo economicus= |
"rational man" -people are aware of their self interest -people respond to incentives |
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gary becker |
nobel prize in economics (1992) -Theory: is crime an economic choice? -(costs/benefits) ($$) |
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Opportunity cost |
the value of a forgone alternative (time)
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decide |
"to cut off" |
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Market efficiency |
opportunities for easy gain are quickly exploited then they disappear |
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Marginal analysis |
comparing small changes in costs and benefits to solve optimization problems |
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optimization problems |
trying to choose to best option among alternatives |
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marginal cost (MC) |
the cost of an additional unity of a good |
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marginal |
additional |
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marginal benefit (mb) |
the benefit of an additional unit of a good |
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cost-benefit principle |
an action should be taken if and only if the additional benefits equal or exceed the additional costs |
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diamond/water paradox |
water is necessary for life but cheap. diamonds are not necessary for life, but are expensive |
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what factors affect demand? |
my needs, cost, location, my preferences, income, popularity, brand/quality |
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factors affecting demand |
price, tastes & preferences, income, price of related goods, number of buyers |
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law of demand |
price and quantity demanded are inversely related |
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demand curve |
a graph of price/quantity demand combinations |
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factors affecting supply |
price, costs of production, supply shocks, number of sellers |
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law of supply |
price and quantity supplied are directly related |
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change in quantity supplied |
a movement along a supply curve caused by a change in price |
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change in supply |
a shift of the supply curve caused by a change in a non-rice factor affecting supply |
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costs of productions |
a. input prices: higher input prices decrease supply and vice versa b. technology: cost saving technology will increase supply |
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supply shocks |
a sudden decrease in supply |
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number of sellers |
more sellers increase supply and vice versa |
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market |
buyers and sellers together |
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fundamental points |
a. prices act as signals to buyers and sellers b. left alone, markets will reach an equilibrium |
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right amount= |
equilibrium |
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wrong amount= |
disequilibrium |
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fundamental points |
-prices act as signals to buyers and sellers -left alone, markets will reach an equilibrium |
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*rule1 |
when demand increases and supply stays the same, the equilibrium price and quantity will rise |
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*rule 2 |
when demand decreases and supply stays the same, the equilibrium price will fall and the equilibrium quantity will fall |
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*rule 3 |
when supply increases and demand stays the same, the equilibrium price will fall and the equilibrium quantity will rise |
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*rule 4 |
when supply decreases and demand stays the same, the equilibrium price will rise and the equilibrium quantity will fall |
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total revenue=price x quantity |
TR=PxQ |
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price elasticity of demand |
measures the responsiveness of quantity to a change in price |
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unresponsive |
inelastic |
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responsive |
elastic |
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when a business lowers the price of a good there will be good news and bad news. what are both? |
good: sell more bad: less money per unit |
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luxury vs necessity |
a. necessity --> inelastic b. luxury --> elastic |
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availability of substitutes |
a. few substitutes --> inelastic b. many substitutes --> elastic |
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time horizon |
a. short run --> inelastic b. long run --> elastic |
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price as a percentage of income |
a. price is a small % of income --> inelastic b. price is a large % of income --> elastic |
