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| unit of analysis is the individual or firm. Looking at one person's behavior, one firm's choice, do you have a price |
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| Considers economy wide aggregates. Looks at overall unemployment, level of output for economy, price levels |
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Desirable Characteristics of Economic Models |
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1. Simple-easy to understand
2. General-applies to a number of situtations
3. Useful-accurately predict observed behavior |
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| statements of facts, of what is, or what would occur if something else were to happen |
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| Expresses value judgments. They state what should be. "Should or Ought" |
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| This occurs when someone says what is true for one person must be true for everyone. |
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| This occurs when someone says that since event A occurred before event B, it must be the case that A caused B. |
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| This occurs when someone says that since two events occurred together in the past, will continue to occur together in the future |
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| Sometimes people make comparison in a way that does not relfect their true differences. Most of the time, this mistake occurs due to an omission of inflactionary adjustments in an arguement |
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| This occurs when people use data that is not typical, but instead is selected in a way that biases the results |
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| The highest valued forgone alternative |
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| How much it is worth to consume a certain quanity of goods. Total use value is always increasing, but at a decreasing rate |
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| The change in total value for ecah additional unit of consumption |
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Principal of Diminishing Marginal Value |
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| As the rate of consumption increases, the marginal use value falls |
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| People choose to consume at a rate such that the marginal use value is jsut equal to the market price |
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| Holding other relevant factors constant, the lower the price of a good, the greater will be the quanity demanded of that good |
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An increase in demand.... |
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Definition
| causes an increase in quanity demanded |
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| causes a decrease in quanity demanded |
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Goods X and Y are substitutes if when the price of good X changes, the demand for good Y changes in the same direction
Ex. If the price of Bud Light rises so does the demand for Miller Lite |
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Goods X and Y are called compliments if when the price of good X changes, the demand for good Y changes in the opposite direction
Ex. If the price of eggs rises, that means there will be a decrease in the demand for bacon |
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Good X is called normal good if when incomes change, the demand for good X changes in the same direction
If income rises, the demand for good X rises. If incomes falls the demand for good X falls |
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| Good X is inferior if when income changes, demand for good X changes in the opposite direction |
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Principle of Rising Marginal Costs |
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| The higher the rate of production, the higher cost of producing an additional of output |
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| The additional cost associated with producing one additional unit of output |
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| Holding other relevant constant, the higher the price of a good, the greater will be the quanity supplied |
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| there will be a higher quanity supplied |
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| there will be a lower quanity supplied |
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An increase in input prices... |
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causes an increase in marginal costs of producing each unit
And also causes a decrease in supply |
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A decrease in imputr prices... |
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Definition
| causes in decrease in MC and a increase in supply |
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| Process or location in which equilibrium is established and the otherwise inconsistent aspirations of demanders and suppliers are recommended |
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| An outcome or state that will tend to persist unless distrubed by a change in one or more of the ceteris paribus conditions. It is also the state in which the aspirations of suppliers are consistent with each other and state of the world |
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Definition
Total value-total expeditures
=What consumers are willing to pay-what they had to pay
=TV-P*Q
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Total Revenue-Total Cost
=What suppliers are paid-what they had to be paid to supply the goods
=P*Q-TC |
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Definition
This measures the response of quanity demanded to a change in a good's own price
Formula: %Change in Qd/%Change P |
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This measures the response of quanity supplied to a change this good's own price
Formula: % Change in Qs/% Chnage in P |
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Income Elasticity of Demand |
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| %Change Demand for good X/%Change Income of Consumers |
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| The longer a price change persists, the greater the change in quanity demanded. Demand curves are more elastic in the long run than the short run |
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| The longer a price change persists, the greater the change in quanity supplied. Or supply is more elastic in the long run than the short run |
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Definition
The maximum legal price. If price ceiling is above the equilibrium price, than it is non-binding and has no affect on market.
If the price ceiling is below the equilibrium then it will affect the market. |
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The minimum legal price. If the floor is set below the equilbrium price is non-binding, no affect on the market.
If the floor is above the equilbrium price it is binding and effects the market. |
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| Must take the market price as given. They face a perfectly competitive market |
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| Another name for monoply and they face a downward sloping demand curve |
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| Is seperate ownership of units of production whose owners collectively agree on a price and quanity for a group of member firms (price fixing agreement) |
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The costs to soceity created by an inefficiency in the market.
Deficiency due to an inefficient allocation of resources.
Lost in production due to inaccurate forecasting of labor. |
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| The attempt to redistribute the surplus without diminishing the gains from trade |
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1rst Degree of Discrimmination |
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Definition
| Charging what the market will bear. Haggling down price from the listed price. |
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2nd Degree of Discrimmination |
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| Quanity discounts or versioning. |
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3rd Degree of Discrimmination |
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| Seperate markets and costumers groups, such as age. |
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| Exists when people enjoy the benefits of governments provided goods independent of whether they pay for them. |
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