Exam 2 Microeconomics Macy Finck

curve that graphs all possible combinations of two given goods that an economy can produce

1. A single economy produces only two goods
2. The quantity of resources is fixed
3. Technology is fixed
4. Resources are identical ( Applies to example #1 only)

As production of a good increases, the opportunity cost of producing an additional unit rises.

number of units of the other good given up

an outward shift of the PPF

1. An increase in available resources
2. A technological improvement
3. A change in regulation

Quantity of Y at N-1 - Quantity of Y at n

the ability to produce more in a given time frame

the ability to produce at a lower marginal opportunity cost; where international trade arises from primarily

quantity of Y / quantity of X

assume the the economies completely specialize according to their comparative advantage

Production - consumption (y-axis)

Consumption- production (x-axis)

exports / imports

no-trade equilibrium

domestic production

domestic consumption

when the market opens to free trade, international consumers are added to demand; two lines for demand (Dd & Dw) and one line for supply (Sd); Price on x-axis (Pw & Pn) Pw is above Pn; quantity on y-axis (Qd, Qn & Qs) Qd is first.

Qs-Qd

PwACPn

PwBCPn

ABC (triangle in graph)

when the market opens to free trade, international producers are added to supply; two lines for supply (Sd & Sw) and one line for demand (Dd); Price on x-axis (Pw & Pn) Pw is below Pn; quantity on y-axis (Qs, Qn, & Qd) Qs is first.

Qd-Qs

PnACPw

PnABPw

Tariff & import quota

a tax levied on goods imported into a country

a specific limit or maximum quantity of a good permitted to be imported into a country during a given period

Qd-Qs

Qd1-Qs1

1. Import quotas have a similar impact, except area B goes to foreign producers rather than the US Gov.
2. With tariffs, foreign producers with the lowest costs will import the most.
3. With quotas, only foreign producers with permission may import, regardless of costs.

a measure of the relative responsiveness of one variable to a change in another

the ratio of the percent change in the quantity demanded to the percent change in the price

Ed= % change Qd/ % change P

change Qd/ original Qd

change P/ original P

Ed= (change Qd/ ave Qd) / (change P/ave P) OR
Ed= [(Q2-Q1) / (Q1+Q2) / 2] / [(P1-P2) / (P1+P2) / 2]

a tiny change in P causes an infinite change in Qd

% change Qd > % change P (Ed > 1); flat ; on graph there is a BIG space between Qd1 and Qd

% change Qd = % change P (Ed=1)

% change Qd < % change P (Ed < 1); steep; on graph there is a TINY space between Qd1 and Qd.

a huge change in P causes no change in Qd

D1 VS. D2;
1. Steep of flat
2. Inelastic or Elastic
3. Little change in Qd or Big change in Qd
4. Little Ed or Big Ed

1. Number of substitutes- # of subs and elasticity move together
2. Time in which to make the purchase- time and elasticity move together
3. Proportion of income- proportion and elasticity move together
4. Luxuries vs. Necessities- needs and elasticity move together

money earned from selling goods and services; NOT the same as profit, which includes costs

TR= P * Q

Ed > 1: price and TR move opposite
Ed < 1: price and TR move together
Ed = 1: a price change has no effect on TR

elasticity decreases as quantity increases

Es= % change Qs / % change P

Steep

Flat

Ei= % change Qd/ % change Income

Normal goods

inferior goods

Exy= % change Qd of X/ % change P of Y

substitutes

complements