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| Economics concerned with how people deal with _______ |
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| limited resources, unlimited wants |
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| Assumptions made my economists |
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1. People are rational
2. People are self-interested
3. Firms seek to maximize profits
4. More is preferred to less |
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| assuming that what is good for one person is good for all people |
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| believing that A causes B when this is untrue. seeing cause when actually it is only sequence (baseball game example) |
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| Saw A occur, saw B occur, correctly assumed that A caused B. A occurs again and we assume B will result, incorrectly |
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| ex/ price of movie tickets 1920 vs 2009. can't compare the two. |
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| using data selected in a way that biases the results (doing a drinking survey at a bar) |
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| 2 main branches of economics |
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1. Microeconomics/Price Theory
2. Macroeconomics |
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| Micro Economics/Price Theory |
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| role that prices play on individual decisions. Population includes individuals, or "the market" |
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| Society as a whole, national level businesses, "firms" |
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| What economic models need not necessarily be |
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| What economic models should be (3 things) |
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1.simple
2.general
3.useful |
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| goods you would like more of than you already have or than are currently available |
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| perception of what good a product or service has in a relative sense |
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| Principle of Diminishing Marginal Value |
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-as you consume additional units, each unit delivers less satisfaction
-first unit consumed gives most satisfaction |
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| the most a consumer would pay for a specific good/service (the value of that good/service) |
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| as price of good X RISES, number of units consumed will go DOWN |
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| map of marginal values decreasing according to principle of diminishing MV |
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| customers will buy units up to where the last unit purchased has a marginal value equal to the price, (e.g. consumers won't buy a product if it costs more than their MV) |
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| "holding other relevant factors constant"=prices of other goods, income of consumers, weather, tastes, etc. anything but price |
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| refers to change in factors DIFFERENT than price of a product (creates D') |
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| movement along demand curve |
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| change in PRICE or QUANTITY DESIRED only |
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| ex/ burgers and beer. increase in price of one leads to decrease in demand of the other, vice versa |
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| ex/pepsi vs. coke. consumer impartial to either choice, will substitute to pay less. |
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as income rises, quantity demanded goes down
as income lowers, quantity demanded goes up |
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| the most suppliers will pay to produce a single unit |
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price and supply are directly related (move in the same direction)
e.g. as price of good rises, suppliers willing to produce more of them |
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| The longer a price change persists, the greater the change in Quantity of Supply |
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| where quantities of supply and demand meet |
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| when do we become uncertain of the variables involved in a shift? |
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| when both price and quantity shift |
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| we are unsure of price in a shift when... |
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| P and Q shift in the SAME direction |
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| we are unsure of the quantity in a shift when |
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| P and Q shift in opposite directions |
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| voluntary transactions are beneficial to both buyer and seller |
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| marginal value (MV) - marginal costs(MC) = |
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| total value - total expenditures = |
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| consumer surplus (good for consumer) |
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| total revenues - total costs = |
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| producer surplus aka PROFIT |
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| as demand curve gets closer to horizontal, it becomes: |
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| the value of ED will always be... |
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| at the value -1, ED is called... |
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| if elasticity of demand is between -1 and infinity, it is called... |
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| if ED is between -1 and 0, it is called: |
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1.number and quality of substitutes
2.time to decide (time frame)
3. share of your budget purchase represents |
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| when ED = 0, it is called: |
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| ES will always be a _______ number |
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| demand curves will be more elastic in long term than in the short term / time period influences consumers' choices |
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deviations that alter the terms of trade outside equilibrium and keep equilibrium from returning - artificial.
ex/apartment rent |
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| requirements of a monopoly (3) |
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1. only 1 firm
2. unique product
3. significant barriers to entry into market |
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| requirements of perfect competition (3) |
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1. many identical choices of firms
2. product homogeneous, not unique
3. Few barriers into the market |
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| profit made from each additional unit produced |
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| firms with no influence on market price |
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| influence market price, can only sell additional units by lowering price |
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people who are unwilling to reveal
their willingness to pay for a public good |
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| public goods must be (2): |
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| non-rival and non-exclusive |
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the quantity available for other people does not fall when someone
consumes it |
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| cannot prevent a person who did not pay (free rider) from using it |
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| when many firms act as one large firm and coordinate their behavior in order to drive up prices |
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| non-binding price ceiling |
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| price ceiling set above equilibrium |
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| price ceiling set below equilibrium |
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| when price floor is set below P* |
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| when price floor is set above P* |
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| state fact, what is either true or false |
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| reflect value judgment. look for "should" or "ought" |
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| "what would I have done instead if I hadn’t done activity X?” |
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everything else of relevance
e.g. vodka causes/cures cancer, law makes something illegal that was previously legal |
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| The principle of rising marginal cost |
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the higher the rate of production, the higher the marginal cost of
producing an addition unit of output. |
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| firms choose to produce at a rate such that marginal cost is equal to marginal revenue |
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