Economics Exam 1

means “extra” or “additional”

• The comparison of marginal benefits and marginal costs, usually for decision making

• Basically weighing the pros and cons

• For example: Should you buy a 1/2 carat diamond of a 1-carat diamond?

  • The marginal cost of the larger diamond is the added expense beyond the cost of the smaller diamond.

  • The marginal benefit is the perceived lifetime pleasure (utility) from the larger stone.

  • If the marginal benefit of the larger diamond exceeds its marginal cost (and you can afford it), buy the larger stone.

  • But if the marginal cost is more than the marginal benefit, you should buy the smaller diamond instead- even if you can afford the larger stone.

• The extra (additional) cost of producing 1 more unit of output

• Equal to the change in total cost divided by the change in output

• Impacts the producer

• It is always downward sloping

• A maximum amount a consumer is willing to pay for an additional good or service.

• It is also the additional satisfaction or utility that a consumer receives when the additional good or service is purchased.

• Tends to decrease as consumption of the good or service increases

When its marginal benefit exceeds its marginal cost

When the marginal cost exceeds the marginal benefit

When the marginal benefit and the marginal cost are equal to one another.

• The difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price

• The share of the total surplus that is received by a consumer or consumers in a market is called this

• On a graph: Triangular area below the demand curve and above the market price

• Calculate the area of a triangle: 1/2bh

• The difference between the actual price a producer receives (or producers receive) and the minimum price that a consumer would have to pay the producer to make a particular unit of output available.

• On a graph: the triangular area above supply curve and below the market price

Consumer and producer surpluses are calculated as the areas of the triangle below and above and below and above.

• Individuals: The need to make choices because economic wants exceed economic means

  • They must decide what to buy and what to forgo

• Society: Society has limited or scarce economic resources, meaning all natural, human, and manufactured resources that go into the production of goods and services.

• Simply means that when you make a choice, you will choose the thing you like best.

• As long as you’re doing what you want given your situation, you’re acting rationally

The tendency of competition to cause individuals and firms to unintentionally but quite effectively promote the interests of society even when each individual or firm is only attempting to pursue its own interests.

• The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).

• Happiness

• To obtain more of one thing, society sacrifices the opportunity of getting the next best thing that could have been created with those resources

• Sentence: If we got free donuts, it would not be free since we are sacrificing our time.

• An economic system in which individuals own most economic resources and in which markets and prices serve as the dominant coordinating mechanism used to allocate those resources; capitalism.

• Also known as a mixed economy

• Characterized by the private ownership of resources, including capital, and the freedom of individuals to engage in economic activities of their choice to advance their well-being.

• Self-interest is the driving force

• Specialization, the use of advanced technology, and the extensive use of capital goods are common features.

Illustrates the flows of resources and products from households to businesses and from businesses to households, along with the corresponding monetary flows.

• A particular set of institutional arrangements and a coordinating mechanism for solving the economizing problem

• A method of organizing an economy of which the market system and the command system are the two general types.

Economic systems differ as to (1) who owns the factors of production (2) the method used to motivate, coordinate, and direct economic activity.

Prices drive the market system

• What are we going to make

  • In a market economy - dollar votes will produce what we make

• How are we going to make it?

  • That is up to the business, going to try and make it as cheap as possible in order to increase their profit margin

• Who is going to make them?

• How will the system consider changes?

• Not equitable

• Because we are trying to maximize our individual utility or individual firm utility.

• Invisible hand

• Competing for your money

  • Maximizing their firm utility

  • We as individuals are trying to maximize our own utility

• Coincidence of wants

• You need to have the good that the person you are buying from wants.

• It means you have the freedom to start any business you want, even if its dumb as hell

• Free will

• The “votes” that consumers cast for the production of preferred products when they purchase those products rather than the alternatives that were also available

Any institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of a particular good or service

• The principle that, other things equal, an increase in a product’s price will reduce the quantity of it demanded, and conversely for a decrease in price

• Inverse Relationship

  • As price goes up, my quantity demanded goes down

• The principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease,

• Direct relationship

Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely).

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.

A legally established minimum price for a good, or service. Normally set at a price above the equilibrium price.

• Know market equilibrium on graph and price floor and ceiling

A legally established maximum price for a good, or service. Normally, set at a price below the equilibrium price.

Equilibrium quantity goes up, and equilibrium price goes down.

Equilibrium quantity goes up, and equilibrium price goes up

Equilibrium quantity goes up, equilibrium price could go up, down or stay the same.

A good or service whose consumption increases when income increases and falls when income decreases, price remaining constant.

• When income goes up, demand goes up for a normal good

A good or service whose consumption declines as income rises, prices held constant

• For an inferior good - income goes down, demand goes up

A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product’s price

• As your income goes OR purchasing power goes up (down) your demand goes up (down)

• A change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the good’s own price.

• The reduction in the quantity demanded of the second of a pair of substitute resources that occurs when the price of the first resource falls and causes firms that employ both resources to switch to using more of the first resource (whose price has fallen) and less of the second resource (whose price has remained the same)

The inability of a market to bring about the allocation of resources best satisfies the wants of society; in particular, the overallocation or under allocation of resources to the production of a particular good or service because of externalities or asymmetric information, or because markets fail to provide desired public goods

• Occurs when/Causes:

  • Externality

  • Public goods (if a selection of the population that consumes the goods fails to pay but continues using the good as actual payers)

  • Market control (when the buyer or seller possesses the power to determine the price of goods or services in a market)

  • Imperfect information in the market (lack of appropriate information among buyers and sellers)

A benefit obtained without compensation by third parties from the production or consumption of sellers or buyers.

Ex. A beekeeper benefits when a neighboring farmer plants cover. Also known as an external benefit or a spillover benefit

A cost imposed without compensation on third parties by the production or consumption of sellers or buyers.

Ex. A manufacturer dumps toxic chemicals into a river, killing fish prized by sports fishers. Also known as an external cost or spillover cost.

• You can tax it or subsidize it to shift the demand or supply curve

• positive externalities - subsidize it

• negative externalities - tax it

Marginal cost < Marginal benefit produce/consume more

Marginal cost > Marginal benefit produce/consume less

• Under/Over

• Positive externality examples - public schools

• Negative externality examples - pollution

A good or service that is characterized by nonrivalry and non-excludability.

• These characteristics typically imply that no private firm can break even when attempting to provide such products. As a result, they are often provided by governments, who pay for them using general tax revenues

A good or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude nonpayers from receiving the benefits

When there is adverse selection for a good or service. People that buy insurance are the ones that need it, so they drive worse.

Any political outcome in which a small group (“special interest”) gains substantially at the expense of a much larger number of persons who each individually suffers a small loss

• When you lobby to your own special interests

• S0 is original, S1 is shifted

• moving from 0 to 1, is a decrease because it shifted left, input cost go up from s0 to s1 or taxes went up

  • two main reasons market systems differ: government involvement and who gets to consume it

dead weight: B and D (lost economic activity) Q3 deadweight loss E & F because of overproduction

• Benefit/Cost

• surplus

• supply/demand

• A favorable change in consumer tastes

• An increase in the number of buyers

• Rising income if the product is a normal good

• Falling income if the product is an inferior good

• An increase in the price of a substitute good

• A decrease in the price of complementary good

• A new consumer expectation that either prices or income will be higher in the future