Microeconomics – C718 WGU

the study of how people, individually and through institutions, make decisions about producing and consuming goods and services, and how they face the problem of scarcity. Focuses on opportunity costs, the assumption of maximization in terms of ones own self interest, and the analysis of choices at the margin. Uses models to test theories.

The inability to satisfy everyone's wants - due to limited _______________. economics seeks to solve the problem of scarcity

_________ describes the interactions of producers and consumers in individual markets, such as the market for cars. Focuses on the actions of individual agents within the economy ex households, workers and businesses. how household spends its budget, what combo of good/svc will buy, decide to work full/part time, how much will save for future or borrow to spend beyond their current means. Firm-how much product to produce and sell, prices, how many workers will be hired, expand/downsize/close, consumer behavior. focuses on individuals, firms, and industries.

The study of the economy as a whole is called __________. Focuses on areas of broad growth of production, number of unemployed people, the inflationary increases in prices, government deficits, and levels of exports and imports. Monetary (bank, lenders, interest rate)and fiscal policies (taxes, legislative body). _________ is concerned with the aggregate or total effect, determined by adding across many markets. _______________ studies the behavior of variables that describe the whole economy, such as the value of the total output that the economy produces in a given time period (which is called gross domestic product, or GDP).

The full value of the best alternative that is given up, or forgone (value of the next best alternative) EX given the option of two activities person chooses soccer game over going to a concert what you sacrifice / what you gain- core of economic thinking. As the set of available alternatives changes, you expect that the choices individuals make will change. A rainy day could change the opportunity cost of reading a good book; you might expect more reading to get done in bad weather than in good. A high income can be costly to take a day off; you might expect highly paid individuals to work more hours than those who are not paid as well. If individuals are maximizing their level of satisfaction and firms are maximizing profits, then a change in the set of alternatives they face may affect their choices in a predictable way.
The emphasis on opportunity costs is an emphasis on the examination of alternatives. One benefit of the economic way of thinking is that it pushes you to think about the value of alternatives in each problem involving choice.It can be money, time or a resource

When we are talking about the basic economic model of production, the assumption is we only have ___ items to produce: ___ goods or services, such as pizza and cola.

the amount by which an additional unit of an activity increases its total cost. You will pay more to supersize your McDonald's order; the firm's labor costs will rise when it hires another worker.

the amt by which an addtl unit of activity increases its total benefit. the amount by which the extra french fries increase your satisfaction, or the extra revenue the firm expects to bring in by hiring another worker.

Where marginal benefit is equal to marginal cost

Factors of production - resources used to produce goods and services (4)

_______ consists of tools, instruments, machines, buildings, and other items that businesses use to produce goods and services.

Human resources that organize or put labor, land and capital together to produce final goods and services

Rent, wages, interest and profit (net revenue-net costs)

The largest source of income in any economy.

Two economic agents in the economy (the circular flow)

Two markets in the circular flow

Own and sell factors of production
Buy and consume goods and services.

Hire and use factors of production.
Produce and sell good s and services.

Production Possibilities Curve is equivalent to Production Possibilities Frontier The shape of the PPF is typically curved outward, rather than straight. Choices outside the PPF are unattainable and choices inside the PPF are wasteful. Over time, a growing economy will tend to shift the PPF outwards. The shape of the PPF is typically curved outward, rather than straight. • All choices along a production possibilities frontier display productive efficiency; that is, it is impossible to use society's resources to produce more of one good without decreasing production of the other good. • The specific choice along a production possibilities frontier that reflects the mix of goods society prefers is the choice with allocative efficiency. The curvature of the PPF is likely to differ by country, which results in different countries having comparative advantage in different goods.

Giving up one thing to get something else caused by scarce resources

Shows you combinations of two goods production given resources. Production efficiency exists on the ___

A situation in which we cannot produce more of one good or service without producing less of something else. (Trade Off)

Inside the PPF (More of either good can be produced without forgoing the other good)

Utilizing all of the resources in the economy that are available to you

_____ _____ Results from better or more technology, labor and capital quality. It shifts the PPF outward.

The two types of product any company can product are _______ goods and _________ goods.

Any country that produces a lot in _______ goods will grow much faster than any country that produces a lot in ___________ goods.

Infrastructure, Roads, Buildings, Freeways, Streets and so on

When one person (or nation) is more productive than another - TAKES LESS TIME or resources to produce a good or perform an activity - we say that person (or nation) has an ________ ______. Look at how many of the item each country produces.

The ability of a person (or nation) to produce a good or perform an activity at a LOWER OPPORTUNITY COST than another person (or nation). (see graph on page 14) Would contrast how their opportunity costs differ. comparative advantage and absolute advantage shows how a party can benefit from trade as long as there is a comparative advantage, and that an absolute advantage may not be necessary. Comparative advantage refers either to when a country can produce a good at a lower cost in terms of other goods or when a country has a lower opportunity cost of production. The driving force of trade.

People and nations can gain from specializing in the production of goods in which they have a comparative advantage and then trading.

The points on PPF indicate full employment of _______. inputs used to create outputs (goods and services).

the quantity buyers are willing and able to buy at a particular price during a particular period all other things unchanged (ceteris paribus) price related moves on curve does not shift

The _____ schedule and _______ curve show the relationship between the PRICE of a product and the QUANTITY DEMANDED demand shifts the curve. Is both the demand schedules and demand curves. includes consumer preferences, prices of related goods, and services, income, demographic characteristics (population size and buyer expectations) Demand curves slope downward

Other things equal, as price falls the quantity demanded rises. As price rises the quantity demanded falls. This relationship is a _____ or ______ relationship cause downward sloping curve

Price and Quantity demanded move in opposite directions.

Demand will change if their is a change in the _______ of demand (influences on buying plans), other things equal.

As a result of a change in determinants, that causes demand to increase, the demand curve will shift to the ____

As a result of a change in determinants, that causes demand to decrease, the demand curve will shift to the ____

There are ___ factors of demand (or determinants) Price of the Given Commodity: It is the most important factor affecting demand for the given commodity,Price of Related Goods,Income of the Consumer,Tastes and Preferences, Expectation of Change in the Price in Future:

This determinant of demand

The first type of determinant. With two types of goods. ______ Goods and ______ Goods

When your income increases you buy more of this kind of good. The demand curve for this good will shift to the right as income increases.

When your income increases you buy less of this kind of good. The demand curve for this good will shift left as income increases. (Ramen Noodles, Spam, Expired Products, Cheap Meat)

The second type of determinant of demands. With two types of goods. ________ Goods and ______ Goods

An increase in the price of one product increases the demand for another product. (An increase in the price of Coke increases the demand for Pepsi.)

An increase in the price of one product decreases the demand for another good. (If the price of hot dogs increases, people will buy fewer hot dog buns.)

The third determinant of demands. Consider how this determinant effects demand today, and demand in the future. A rise in the expected FUTURE price of a good increases the CURRENT demand for that good.

The fourth determinant of demand.

The fifth determinant of demand. An increase in the number of buyers will shift the demand curve to the right.

The amount a seller is willing and able to sell at a given price during a particular period all other things unchanged.

The supply schedule (shows relationship between price and quantities supplied at different prices during a particular period all other things unchanged) and supply curve ( graph) show the relationships between the price of a product and the quantity supplied. The both show the same thing.

As price increases the quantity supplied increase, other things equal. As price decreases the quantity supplied decreases. Price and quantity supplied move in the same direction.

An increase in supply will shift the supply curve to the _______. A decrease will shift the supply curve to the ______.

The first determinant of supply. Higher input prices imply higher costs and lower supply. (An increase in the price of cream that causes the ice cream to cost more to produce. As the price of cream goes up, the supply of cream will go down. If the price of cream goes down, the supply of ice cream will go up.)

Price is one factor; ceteris paribus, a higher price is likely to induce sellers to offer a greater quantity of a good or service. Production cost is another determinant of supply. Variables that affect production cost include the prices of factors used to produce the good or service, returns from alternative activities, technology, the expectations of sellers, and natural events such as weather changes. Still another factor affecting the quantity of a good that will be offered for sale is the number of sellers—the greater the number of sellers of a particular good or service, the greater will be the quantity offered at any price per time period.

The second determinant of supply. Substitution in production. As a producer of footballs and basketballs, if the price of footballs goes down, you will want to produce fewer footballs, and therefore more basketballs.

The third determinant of supply If you expect that in the future the price of your product will go up, you will want to sell your product in the future. This will cause the supply of your product today to go down and the supply of your product in the future to go up. (If you think your stock will be of more value tomorrow, you will wait until tomorrow to sell it.)

The fourth determinant of supply. __________ always improves productivity and increases supply.

An increase in the _________ will increase supply.

The cross between the supply curve and the demand curve.

The initial effect of an increase in demand is a _____. is the amount by which the quantity demanded exceeds the quantity supplied at the current price. Exists if the quantity of a good/service demanded exceeds the quantity supplied at the current price.

is the amount by which quantity supplied exceeds quantity demanded at the current price. The initial effect of a decrease in demand is a ______. Only occurs if the current price exceeds the equilibrium price NOT at the equilibrium price

The amount a buyer is willing to pay for a good - the amount the buyer actually pays for it. The area on the graph that is under the demand curve, and above the price.

Consumer Surplus increases if the price goes _____

The amount a seller is paid for a good - the seller's cost of providing it. The area on the graph that is below the price and above the supply curve.

Producer Surplus increases if the price goes _____

The sum of consumer and producer surplus - the area between the supply and demand curves up to the equilibrium quantity. (see graph consumer surplus)

Surplus of labor (caused by minimum wage)

When a price floor or price ceiling has an effect on the market it is _______.
When it doesn't it is ______ ________.

Rent controls or a price ceiling on gasoline will cause a shortage in the market if the government sets the price ______ the ________ price.

Minimum wage or a price floor on wheat will cause a surplus in the market if the governments set the price ______ the _________ price.

A cost or benefit of producing a product is passed onto someone else or spills over to a third party outside the exchange. Because externalities that occur in market transactions affect other parties beyond those involved, they are sometimes called spillovers

Supply side market failure
External Costs
A third party
Example : Pollution, having music you hate drifting in your window
The firm does not pay the full cost of producing its output.

Society's Cost - Firm's Cost =

Firm's cost + externality cost =

There are __ types of government interventions for negative externalities

Laws to limit an activity or set emission standards. The government allows company's to ______ for externality rights.

Second type of government intervention. When the government taxes an organization if they must commit the action that they set direct controls to prevent.

Any government intervention on negative externalities is to ensure that the total benefit is = _____ _______ ____ OR the marginal benefit = _____ _____ _____

It is not possible for Tom to make the people who get the spill-over benefit from his education pay him. This is an example of ______ _______.

Ways to correct ___________ _________ :
Private bargaining : A company offers to help pay for education to offset cost in order to improve your value as an employee.
Government intervention that includes subsidy to consumers, subsidy to producers and government provision (free product such as vaccination). having music you love played outside that you love coming in windows (mostly tech) can be a flu shot

A person can consume a product if (s)he is willing and able to pay for the product.

When a person buys and consumes a product, the product will not be available for others.

Exludability
Rivalry
These are characteristics of _____ ______
Example : Shoes

No one can be prevented from using what is available.

Non-Excludable
Rivalry
These are characteristics of _____ ______
Example : Fish, Air

A firm that confronts economies of scale over the entire range of outputs demanded in its industry
Excludable
Non-Rivalry
These are characteristics of _____ ______ ______
Example : Cable Television, Internet, electricity, water, natural gas

When a person buys and consumes a product, the product will still be available for others.

Non-Excludable Non-Rivalry
These are characteristics of _____ ______
Example: Freeways and Roads Provided by the government for free.
Examples : National Defense, Public Fireworks, Lighthouses

Demand & consumers' willingness to pay are in line. No under production or overproduction

This analysis helps the government to make decisions by weighing whether or not the benefit of having more public goods is worth the loss of the private goods. If so, the government will pursue that course. MB (marginal benefit) > MC (Marginal cost)

Could be provided by the private sector through the market system. Exclusion is possible. Positive Externalities.
Libraries, Museums, Parks, Post Offices

The government collects taxes and spends that money on the production of public goods and quasi-public goods. This is an example of what process?

Satisfaction or pleasure - consuming a product. A subjective term that is difficult to quantify.

the total satisfaction a consumer derives from consumption; it could refer to either the total utility of consuming a particular good or the total utility from all consumption

Extra satisfaction from an additional unit all other things unchanged

The more you have the less you'll want. Each additional unit of a good provides less utility. This law explains the downward sloping of the demand curve. holds as addtl increments of resources are are to a certain purpose, the marginal benefit from those adtl increments will decline.

We obtain marginal utility from additional units of a good, so we will buy more only if that good is ______

description of how consumers allocate incomes among different goods and services to maximize their well-being

Water is vital for life but it is in great supply. That is why its marginal utility and price are low. Diamonds are rare. As a result, their marginal utility and price are high. The marginal utility of diamonds is greater than that of water.

A ______ ______ _____ shows the combination of two goods that a person can purchase given her income and the prices of the goods. The trade-off between two goods. a restriction that total spending on the two goods cannot exceed the budget available

The amount of two products you can purchase with a set amount of money.

The consumer's preferences are represented by the consumer's ________ ___________. The marginal rate of substitution

when total outlays equal the budget available and when the ratios of marginal utilities to price are equal for all goods and services. This rule states that the consumer will allocate income is such a way that MU (marginal utility) of product A/price of A = MU of product B/price of B

Explicit costs + Implicit costs =

Monetary Payments (material costs, wages and interest)Explicit costs are out-of-pocket costs, that is, payments made to factors of production such as labor and capital

The income you would have earned.
The value of the next best use. (Time, depreciation, forgone interest)represent the opportunity cost of using resources already owned by the firm. Often for small businesses, they are resources contributed by the owners; for example, working in the business while not getting a formal salary, or using the ground floor of a home as a retail store. Implicit costs also allow for the depreciation of goods, materials, and equipment that are necessary for a company to operate.

The difference between total revenue (PxQ) and explicit cost. (TR- Explicit costs)is a cash concept. It means total revenue minus explicit costs—the difference between dollars brought in and dollars paid out. The difference is important because even though a business pays income taxes based on its accounting profit, whether or not it is economically successful depends on its economic profit.
Example: Calculating Implicit Costs

The difference between total revenue and economic cost. (TR- Economic costs) AND (TR-Opportunity costs) AND (TR-Explicit costs - Implicit costs)Economic profit is total revenue minus total cost, including both explicit and implicit costs. EP per unit is difference between price and average total cost.

If you add a variable resource to a fixed resource your output will increase by smaller and smaller amount. Output will increase at a diminishing rate. (Increasing number of waiters without increasing the number of tables)

The analysis of production and cost begins with a period economists call the short run. Fixed plant size, land and machinery and fixed number of plants. Firms can vary their output by changing resources used for a small period of time.

Adjustable plant size and adjustable number of plants. Firms can enter and exit the market anytime. The planning period over which a firm can consider all factors of production as variable

Materials and most labor costs for raw materials, salaries of production workers, and utilities

Fixed costs + variable costs (TFC+TVC=)

Economies of Sales
Diseconomies of Scale
Constant Returns to Scale

Labor Specialization & Managerial specialization - workers are more efficient if they work on one task
Efficient capital - might be too expensive for small firms - This causes the ATC to fall

Large firms often have problems with communication and cooperation, which can cause the ATC to rise

When firms produces more and their long-run average total cost remains the same

Another word for pure competition or competitive markets

There are ___ market structures
Perfect Competition
Monopolistic Competition
Oligopoly Competition
Pure Monopoly/monopoly

Types of ______ _______
Monopolistic Competition
Oligopoly Competition
Pure Monopoly/monopoly

Many buyers and sellers, number of firms are large, types of goods are homogeneous, entry barriers are free entry and exit, there is no nonprice competition, EXP : Agriculture

Type of market that has only one firm NO rivals, no close substitute product, entry barriers are blocked( economies of scale, advantage of location, high sunk costs, a dominant position in ownership, govt restrictions), public relations advertising is used as nonprice competition, price maker EXP (Utilities) determines its own price. It selects from its demand curve the price that corresponds to the quantity the firm has chosen to produce in order to earn the maximum profit possible. The entry of new firms, which eliminates profit in the long run in a competitive market, cannot occur in the monopoly model. Could be only dentist, theater, doctor for miles (location)

Many firms, types of goods are differentiated, there is some price control, free entry and exit barriers, use of advertising and brand names as nonprice competition (EXP : Retail Trade)

Few number of firms, homogenous or differentiated products, mutual interdependence over price, SIGNIFICANT BARRIERS, advertising and brand names as nonprice competition
EXP : Appliances, automobiles

Both ______ and _______ have strong price competition.

In competitive markets, price will equal ______ ______. The increase in total revenue from a 1-unit increase in quantity is marginal revenue. Thus marginal revenue (MR) equals the slope of the total revenue curve.In perfect competition, a firm's marginal revenue curve is a horizontal line at the market price.

When the demand curve is a horizontal line

Total Revenue (TR) minus Total Cost (TC)

Percentage change in quantity demanded / percentage change in price

If the absolute value of the price elasticity of demand is great than 1, then demand for the product is ________.

If the absolute value of the price elasticity of demand is less than 1, then demand for the product is ________.

If the absolute value of the price elasticity of demand is equal to 1, then demand for the product is ________. numbers equal to each other

labor, tool, land, raw material, time needed to produce goods and services people want

current level of activity

decision to do a little more or little less of something. EXAssessing choices at the margin can lead to extremely useful insights. example, the problem of curtailing water consumption when the amount of water available falls short of the amount people now use. Economists argue that one way to induce people to conserve water is to raise its price. A common response to this recommendation is that a higher price would have no effect on water consumption, because water is a necessity. Many people assert that prices do not affect water consumption because people "need" water.
But choices in water consumption, like virtually all choices, are made at the margin. Individuals do not make choices about whether they should or should not consume water. Rather, they decide whether to consume a little more or a little less water. Think of that starting point as the edge from which a choice at the margin in water consumption is made. Could a higher price cause you to use less water take shorter showers, or water your lawn less? Could a higher price cause people to reduce their use, say, to 104 gallons per person per day? To 103? When you examine the choice to consume water at the margin, the notion that a higher price would reduce consumption seems much more plausible. Prices affect the consumption of water because choices in water consumption, like other choices, are made at the margin.

An economy in which production is based on customs and traditions and economic roles are typically passed down from one generation to the next. ex occupations stay in the family agricultural economy where things are done the sames as they have always been done. Neg- little economic progress or development.

An economic system in which the government controls a country's economy. centeralized structure= lord over the land

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services based on private enterprise ( means of production resources and businesses re owned and operated by private individuals or individual groups. businesses supply goods and services based on demand. Brings buyers and sellers of goods or services together.

given the available inputs and tech it is impossible to produce more of one good without increasing the quantity that is produced of another good. it is impossible to produce more of one good without decreasing the quantity that is produced of another good. (see page 13 graph)

the particular mix of goods and services most highly valued by society (most desires)

the institution that brings together buyers an sellers

a table that shows the quantities of a good or service demanded at different prices during a particular period all other things unchanged.

a graph of the relationship between the price (vertical axis) of a good and the quantity demanded (horizontal axis) during a particular period all other things unchanged. represents the demand schedule. Negative slope of the demand curve suggest a key behavioral relationships of economics all other things unchanged.

movement along the demand curve showing that a different quantity is purchased in response to a change in price. Price alone does not determine quantity. 2 variables. a change in quantity demanded is not a change or shift in the demand curve: it is a movement along the demand curve.

shift of the demand curve (see page 18)

a variable that can change the quantity of a good or service demanded at each price. this affects the all other conditions and it no longer applies shifters include consumer preferences, prices of related goods an services, income, demographic characteristics, and buyer expectations.

effect demand, starbucks increased demand for coffee, cigarettes demand decrease bad for health. A change in preferences that makes one good/service more popular will shift the demand curve right a change that makes it less popular will shift the demand curve left.

price of doughnuts falls people who drink coffee enjoy dunking doughnuts in their coffee; the lower price of doughnuts might therefore increase the demand for coffee, shifting the demand curve for coffee to the right. A lower price for tea, however, would be likely to reduce coffee demand, shifting the demand curve for coffee to the left.
In general, if a reduction in the price of one good increases the demand for another, the two goods are called complements used with each other donuts and coffee. If a reduction in the price of one good reduces the demand for another, the two goods are called substitutes ex tea for coffee. Changes relationship with demand shifting the curve left or right with all constant

income rise consumption rise income falls consumption falls ex cars, jewelry. income rise more fresh fruit less canned . Normal good a good for which demand increases when income increases shift to right. Inferior good good which demand increases when income increases cause demand curve to go to the left want better goods opposite of a normal good. Causes shift on demand curve NOT movement along the curve

physical and observable characteristics of individuals, including gender, ethnicity, and age. in general the greater the population greater demand. ex age 65 inc= demand medical services, cruises, motor homes increase. increase in birth rates after 1975 raise demand for infant supplies, teachers, soccer coaches, college education. demand can shift as a result of changes in both the number and characteristics of buyers

expect gas to go up tomorrow buy gas today, expected new tech of tv,computer can slow down sales, goods that can be easily stored or consumption can be postponed are strongly affected by buyer expectations. Shift the entire demand curve to the right if buy today for future exp. Shift the entire demand curve to right if demand decrease hold off on purchase like tv.

1. What should be produced? Using the economy's scarce resources to produce one thing requires giving up another. Producing better education, for example, may require cutting back on other services, such as healthcare. A decision to preserve a wilderness area requires giving up other uses of the land. Every society must decide what it will produce with its scarce resources.
2. How should goods and services be produced? There are all sorts of choices to be made in determining how goods and services should be produced. Should a firm employ a few skilled workers or a lot of unskilled workers? Should it produce in its own country or should it use foreign plants? Should manufacturing firms use new or recycled raw materials to make their products?
3. For whom should goods and services be produced? If a good or service is produced, a decision must be made about who will get it. A decision to have one person or group receive a good or service usually means it will not be available to someone else. For example, representatives of the poorest nations on earth often complain that energy consumption per person in the United States is 17 times greater than energy consumption per person in the world's 62 poorest countries. Critics argue that the world's energy should be more evenly allocated. Should it? That is a "for whom" question.

1. Economists give special emphasis to the role of opportunity costs in their analysis of choices.
2. Economists assume that individuals make choices that seek to maximize the value of some objective and that they define their objectives in terms of their own self-interest.
3. Individuals maximize by deciding whether to do a little more or a little less of something. Economists argue that individuals pay attention to the consequences of small changes in the levels of the activities they pursue

is something thats value CAN change.

A value that does not change

A logical, systematic approach to the solution of a scientific problem

A testable prediction, often implied by a theory

well-tested explanation that unifies a broad range of observations and becomes law

a variable (often denoted by y ) whose value depends on that of another. it responds

The experimental factor that is manipulated; the variable whose effect is being studied.

Reaching the incorrect conclusion that one event causes another because the two events tend to occur together

a statement of fact or a hypothesis ex microsoft larges producer of operating systems in the world

makes a value argument - opinion of speaker can not prove

4 categories: labor-human capital (physical or intellectual can be a gift (athletic) or developed training, education, experience), natural resources-land (can be found in nature, and can be used in production of goods/svc oil, fracking, gas, forest, land tree wind water minerals NOT crops they are grown by people) can not be made/culivated by humans, capital-machinery, factories, equipment (money is NOT a resource), entrepreneurship

consists of two groups-household an firms and interact in two markets the goods and services markets in which firms sell and household buy an the factor market in which households sell factors of production to business firms or other employees. It provides an overview of demand and supply in product and factor markets and suggests how these markets are linked to each other.

An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion. Elements of command, market, and traditional

as additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will decline.When government spends a certain amount more on reducing crime, for example, the original gains in reducing crime could be relatively large. But additional increases typically cause relatively smaller reductions in crime, and paying for enough police and security to reduce crime to nothing at all would be tremendously expensive.
The curvature of the production possibilities frontier shows that as additional resources are added to education—moving from left to right along the horizontal axis—the original gains are fairly large, but gradually diminish. THIS law IS the reason the PPF has a curved shape

production of possibilities suggest specialization occurs. implies that an economy is producing the goods/serv in which it has a comparative advantage. Nations specialize as well. Much of the land in the United States has a comparative advantage in agricultural production and is devoted to that activity. Hong Kong, huge population and tiny endowment of land, allocates virtually none of its land to agricultural use; that option would be too costly. Its land is devoted largely to nonagricultural use. • Total production can increase if countries specialize in the goods they have comparative advantage in and trade some of their production for the remaining goods.

A change in the quantity supplied of a good or service at every price; a shift of the supply curve to the left (decrease of supply) or right (increase of supply).

A variable that can change the quantity of a good or service supplied at each price. supply shifters include (1) prices of factors of production, (2) returns from alternative activities, (3) technology, (4) seller expectations, (5) natural events, and (6) the number of sellers. When these other variables change, the all-other-things-unchanged conditions behind the original supply curve no longer hold. Let's look at each of the supply shifters.

change in price of labor or other factor will change the cost of producing any given quantity of the good/service. This change in the cost of production will change the quantity that suppliers are willing to offer at any price. An increase in factor prices should decrease the quantity suppliers will offer at any price, shifting the supply curve to the left. A reduction in factor prices increases the quantity suppliers will offer at any price, shifting the supply curve to the right.
EX coffee growers must pay a higher wage to the workers they hire to harvest coffee or must pay more for fertilizer. Such increases in production cost will cause them to produce a smaller quantity at each price, shifting the supply curve for coffee to the left. A reduction in any of these costs increases supply, shifting the supply curve to the right.

To produce one good or service means forgoing the production of another. The concept of opportunity cost in economics suggests that the value of the activity forgone is the opportunity cost of the activity chosen; this cost should affect supply.EX one opportunity cost of producing eggs is not selling chickens. An increase in the price people are willing to pay for fresh chicken would make it more profitable to sell chickens and would thus increase the opportunity cost of producing eggs. It would shift the supply curve for eggs to the left, reflecting a decrease in supply.

A change in technology alters the combinations of inputs or the types of inputs required in the production process. An improvement in technology usually means that fewer and/or less costly inputs are needed. If the cost of production is lower, the profits available at a given price will increase, and producers will produce more. With more produced at every price, the supply curve will shift to the right, meaning an increase in supply. EXComputers are much smaller and are far more powerful than they were only a few years ago—and much cheaper to produce. The result has been a huge increase in the supply of computers, shifting the supply curve to the right.
While you might usually think of technology as enhancing production, declines in production due to problems in technology are also possible. Outlawing the use of certain equipment without pollution-control devices has increased the cost of production for many goods and services, thereby reducing profits available at any price and shifting these supply curves to the left.

All supply curves are based in part on seller expectations about future market conditions. Many decisions about production and selling are typically made long before a product is ready for sale. Changes in seller expectations can have important effects on price and quantity.
Consider, for example, the owners of oil deposits. Oil pumped out of the ground and used today will be unavailable in the future. If a change in the international political climate leads many owners to expect that oil prices will rise in the future, they may decide to leave their oil in the ground, planning to sell it later when the price is higher. Thus, there will be a decrease in supply; the supply curve for oil will shift to the left.

Storms, insect infestations, and drought affect agricultural production and thus the supply of agricultural goods. If something destroys a substantial part of an agricultural crop, the supply curve will shift to the left. EXThe terrible cyclone destroyed some of the country's prime rice growing land. That shifted the supply curve for rice to the left. If there is an unusually good harvest, the supply curve will shift to the right.

The supply curve for an industry, such as coffee, includes all the sellers in the industry. A change in the number of sellers in an industry changes the quantity available at each price and thus changes supply. An increase in the number of sellers supplying a good or service shifts the supply curve to the right; a reduction in the number of sellers shifts the supply curve to the left. The market for cellular phone service has been affected by an increase in the number of firms offering the service. Over the past decade, new cellular phone companies emerged, shifting the supply curve for cellular phone service to the right.

a change in supply results from a change in a supply shifter an implies a SHIFT of the supply curve to the right or left. A change in price produces a change in quantity supplied and induces a movement along the supply curve. A change in price does NOT shift the supply curve. The second caution relates to the interpretation of increases and decreases in supply. an increase in supply is shown as a shift of the supply curve to the right; the curve shifts in the direction of increasing quantity with respect to the horizontal axis. a reduction in supply is shown as a shift of the supply curve to the left; the curve shifts in the direction of decreasing quantity with respect to the horizontal axis. Because the supply curve is upward sloping, a shift to the right produces a new curve that in a sense lies "below" the original curve. Students sometimes make the mistake of thinking of such a shift as a shift "down" and therefore as a reduction in supply. Similarly, it is easy to make the mistake of showing an increase in supply with a new curve that lies "above" the original curve. But that is a reduction in supply! focus on the fact that an increase in supply is an increase in the quantity supplied at each price and shifts the supply curve in the direction of increased quantity on the horizontal axis. Similarly, a reduction in supply is a reduction in the quantity supplied at each price and shifts the supply curve in the direction of a lower quantity on the horizontal axis. (page 25)

uses demand and supply curves to explain the determination of price and quantity in a market. The logic of the model of demand and supply is simple. The demand curve shows the quantities of a particular good or service that buyers will be willing and able to purchase at each price during a specified period. The supply curve shows the quantities that sellers will offer for sale at each price during that same period. By putting the two curves together, you should be able to find a price at which the quantity buyers are willing and able to purchase equals the quantity sellers will offer for sale.

a rightward shift of the demand curve. As the price rises to the new equilibrium level, the quantity supplied increases . Notice that the supply curve does not shift; rather, there is a movement along the supply curve. Demand shifters that could cause an increase in demand include a shift in preferences that leads to greater coffee consumption; a lower price for a complement to coffee, such as doughnuts; a higher price for a substitute for coffee, such as tea; an increase in income; and an increase in population. A change in buyer expectations, perhaps due to predictions of bad weather lowering expected yields on coffee plants and increasing future coffee prices, could also increase current demand.

a leftward shift of the demand curve. The equilibrium price falls. As the price falls to the new equilibrium level, the quantity supplied decreases.
Demand shifters that could reduce the demand for coffee include a shift in preferences that makes people want to consume less coffee; an increase in the price of a complement, such as doughnuts; a reduction in the price of a substitute, such as tea; a reduction in income; a reduction in population; and a change in buyer expectations that leads people to expect lower prices for coffee in the future.

a rightward shift of the supply curve. The equilibrium price falls. As the price falls to the new equilibrium level, the quantity of coffee demanded increases. Notice that the demand curve does not shift; rather, there is movement along the demand curve. Possible supply shifters that could increase supply include a reduction in the price of an input such as labor, a decline in the returns available from alternative uses of the inputs that produce coffee, an improvement in the technology of coffee production, good weather, and an increase in the number of coffee-producing firms.

a leftward shift of the supply curve. The equilibrium price rises. As the price rises to the new equilibrium level, the quantity demanded decreases. Possible supply shifters that could reduce supply include an increase in the prices of inputs used in the production of coffee, an increase in the returns available from alternative uses of these inputs, a decline in production because of problems in technology (perhaps caused by a restriction on pesticides used to protect coffee beans), a reduction in the number of coffee-producing firms, or a natural event, such as excessive rain.

•The equilibrium price is the price at which the quantity demanded equals the quantity supplied. It is determined by the intersection of the demand and supply curves.
•A surplus exists if the quantity of a good or service supplied exceeds the quantity demanded at the current price; it causes downward pressure on price. A shortage exists if the quantity of a good or service demanded exceeds the quantity supplied at the current price; it causes upward pressure on price.
•An increase in demand, all other things unchanged, will cause the equilibrium price to rise; quantity supplied will increase. A decrease in demand will cause the equilibrium price to fall; quantity supplied will decrease.
•An increase in supply, all other things unchanged, will cause the equilibrium price to fall; quantity demanded will increase. A decrease in supply will cause the equilibrium price to rise; quantity demanded will decrease.
•To determine what happens to equilibrium price and equilibrium quantity when both the supply and demand curves shift, you must know in which direction each of the curves shifts and the extent to which each curve shifts.
•The circular flow model provides an overview of demand and supply in product and factor markets and suggests how these markets are linked to one another.

intersection of the demand curve and the supply curve. Quantity demanded equals the quantity supplied.

eD=% change in quantity demanded divided % change in price

quantity does not respond at all to changes in price (E=0) demand curve is vertical

The greater the price elasticity of demand, the greater the responsiveness of quantity demanded to a price change. .Most important is the availability of substitutes, the importance of the item in household budget, and time.

The demand for a good is elastic if a substitute for it is easy to find. ex cars
The demand for a good is inelastic if a substitute for it is hard to find. ex gas

One reason price changes affect quantity demanded is that they change how much a consumer can buy; a change in the price of a good or service affects the purchasing power of a consumer's income and thus affects the amount of a good the consumer will buy. This effect is stronger when a good or service is important in a typical household's budget.
A change in the price of jeans, is probably more important in your budget than a change in the price of pencils. Suppose the prices of both were to double. You had planned to buy four pairs of jeans this year, but now you might decide to make do with two new pairs. A change in pencil prices, in contrast, might lead to very little reduction in quantity demanded simply because pencils are not likely to loom large in household budgets. The greater the importance of an item in household budgets, the greater the absolute value of the price elasticity of demand is likely to be.

Suppose the price of electricity rises tomorrow morning. What will happen to the quantity demanded?The answer depends in large part on how much time you allow for a response. If you are interested in the reduction in quantity demanded by tomorrow afternoon, you can expect that the response will be very small. But if you give consumers a year to respond to the price change, you can expect the response to be much greater. You expect that the absolute value of the price elasticity of demand will be greater when more time is allowed for consumer responses. Consider the price elasticity of crude oil demand. estimated short- and long-run price elasticities of demand for crude oil for 1971 to 2000 found that for virtually every country, the price elasticities were negative, and the long-run price elasticities were generally much greater (in absolute value) than were the short-run price elasticities.

of demand measures the responsiveness of the quantity demanded for a good to a change in the price of another good, ceteris paribus.

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price all other things unchanged

Time plays a very important role in the determination of the price elasticity of supply. Look again at the effect of rent increases on the supply of apartments. Suppose apartment rents in a city rise. If you are looking at a supply curve of apartments over a period of a few months, the rent increase is likely to induce apartment owners to rent out a relatively small number of additional apartments. With the higher rents, apartment owners may be more vigorous in reducing their vacancy rates, and, indeed, with more people looking for apartments to rent, this should be fairly easy to accomplish. Attics and basements are easy to renovate and rent out as additional units. In a short period of time, however, the supply response is likely to be fairly modest, implying that the price elasticity of supply is fairly low. A supply curve corresponding to a short period of time would look like S1 in Figure 4.10. It is during such periods that there may be calls for rent controls.
If the period of time under consideration is a few years rather than a few months, the supply curve is likely to be much more price elastic. Over time, buildings can be converted from other uses and new apartment complexes can be built. A supply curve corresponding to a longer period of time would look like S2 in Figure 4.10.

the total benefit of the activity minus its opportunity cost. Economists maintain that in order to maximize net benefit, consumers and firms evaluate each activity at the margin—they consider the additional benefit and the additional cost of another unit of the activity. Should you "supersize" your order at McDonald's? Will the additional beverage and the additional french fries be worth the extra cost? Should a firm hire one more worker? Will the benefits to the firm of hiring this worker be worth the additional cost of hiring him or her?.

If the marginal benefit of an additional unit of an activity exceeds the marginal cost, the quantity of the activity should be increased. If the marginal benefit is less than the marginal cost, the quantity should be reduced.Net benefit is maximized at the point at which marginal benefit equals marginal cost. The marginal decision rule is at the heart of the economic way of thinking. The rule basically says this: If the additional benefit of one more unit exceeds the extra cost, do it; if not, do not. This simple logic provides a powerful tool for the analysis of choice. Perhaps more than any other rule in economic analysis, the marginal decision rule typifies the way in which economists analyze problems. The marginal decision rule forms the foundation for the structure economists use to analyze all choices. At first glance, it may seem that a consumer seeking satisfaction from, say, pizza, has little in common with an entrepreneur seeking profit from the production of custom-designed semiconductors. But maximizing choices always follow the marginal decision rule—and that rule holds regardless of what is being maximized or who is doing the maximizing.
To see how the logic of maximizing choices works, you will examine a specific problem. You will then extend that problem to the general analysis of maximizing choices.

which is a boundary that limits the range of choices that can be made. It is assumed that consumers seek the greatest satisfaction possible within the limits of their incomes or budgets. A firm cannot produce beyond the limits of its production capacity at any point in time.

the loss in net benefits (surplus) resulting from a failure to carry out an activity at the efficient level.

1-marketplace must be competitive or function as if it were 2-concerns property rights (producer must possess rights to goods ans services they produce and consumers posses property rights to goods/svc when bought)( set of rules that specify the ways in which an owner can use a resource)

must be exclusive and transferable 1-exclusive property right is one that allows its owner to prevent others from using the resource. The owner of a house, for example, has the right to exclude others from the use of the house. If this right did not exist, ownership would have little value; it is not likely that the property could be exchanged in a market. And the inability to sell property would limit the incentive of owners to maintain it. 2-A transferable property right is one that allows the owner of a resource to sell or lease it to someone else. In the absence of transferability, no exchange could occur.

A situation that requires a competitive market with well-defined and transferable property rights.

price ceiling(rent control/gas prices govt imposed)- keeps a price from rising above a certain level. price floor(min. wage)- keeps price from falling below a certain level. neither causes demand or supply to change only set limits can cause a different choice of quantity demanded along a demand curve but DO NOT move the demand curve. Cause a different choice of quantity along a supply curve, but not shift the supply curve. CAN NOT change the equilibrium price

ex co required to pay 100 pollution each time produces a fridge production becomes more costly and the entire supply curve shifts up by 100 taking the additional external costs of pollution into account results in a higher price, a lower quantity of production, and a lower quantity of pollution.

a situation in which a market left on its own fails to allocate resources efficientlyWhen there is market failure, the private market fails to achieve efficient output, because either firms do not account for all costs incurred in the production of output and/or consumers do not account for all benefits obtained (a positive externality). In the case of pollution, at the market output, social costs of production exceed social benefits to consumers and the market produces too much of the product.

laws that specify allowable quantities of pollution and that also may detail which pollution-control technologies must be used ex tailpipe to reduce but can not eliminate pollution it is inflexible requires same standards for all polluters and control tech. has loopholes and shortcomings

l policies create incentives to allow firms some flexibility in reducing pollution. The 3 main categories of market-oriented approaches to pollution control are pollution charges, marketable permits, and better-defined property rights.

tax imposed on the quantity of pollution that a firm emits. offers incentive to reduce emissions as long as costs are less than the tax dep on cans

cap and trade - a program in which a city or state government issues permits allowing only a certain quantity of pollution. (divided to firms and can be free or sold and amount of permits can be reduced each year, the amount of pollution allowed per permit can be reduced)

what happens on your property ex train sparks and fire on your property should you have to build a fix, endangered species on your property prohibits land use

when the estimated rates of return go primarily to society; for example, providing free education

guarantee intellectual property rights (patents), govt assistance w/ the cost of r&d (fund directly-grant, tax breaks), cooperative research ventures between university and companies.

situations in which buyers and sellers are not equally well informed about the characteristics of goods and services for sale in the marketplace ex gemstones being treated with oils to enhance color ONE party has more info than the other party

a situation where either the buyer or the seller, or both, are uncertain about the qualities of what is being bought and sold. dont have all the nec. info. quantity NOT all info is KNOWN EX lemon car, poor quality employee.

the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction ex patient knows they are high risk ins but ins co does not (asymmetric information)

an input (quantity of a factor) that cannot be changed in the short run or period of time ex blg

an input whose quantity can be altered in the short run ex labor/food

The relationship between factors of production and the output of a firm

shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input shows the quantities of output that can be obtained from different amounts of a variable factor of production, assuming other factors of production are fixed.

the extra output or change in total product caused by the addition of one more unit of variable input

the additional output a firm produces as a result of hiring one more worker

the marginal product of a variable resource increases as each additional unit of that resource is employed

Decreasing satisfaction or usefulness as additional units of a product are acquired. When each additional unit of a variable factor adds less to total output, the firm is experiencing diminishing marginal returns.

Now the total product curve is downward sloping, and the marginal product curve falls below zero.When additional units of a variable factor reduce total output, given constant quantities of all other factors, the company experiences negative marginal returns

holds that the marginal product of any variable factor of production will eventually decline, assuming the quantities of other factors of production are unchanged.

Costs that do not vary with the quantity of output produced ex salaries and overhead

is cost that varies with the level of output.

is cost that does not vary with output.

is the sum of total variable cost and total fixed cost.

is total cost divided by quantity; it is the firm's total cost per unit of output.

which is total revenue divided by quantity

ATC = TC/Q You will also discuss average variable costs (AVC), which is the firm's variable cost per unit of output; it is total variable cost divided by quantity.

AVC = TVC/Q
You are still assessing the choices facing the firm in the short run, so you assume that at least one factor of production is fixed. Finally, you will discuss average fixed cost (AFC), which is total fixed cost divided by quantity,

AFC = TFC/Q
Marginal cost (MC) is the amount by which total cost rises with an additional unit of output. It is the ratio of the change in total cost to the change in the quantity of output.

MC=ΔTC/ΔQ

production processes that use a high ratio of capital to labor inputs

production that uses a large amount of labor reducing the capital ratio

a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed

factors that cause a producer's average cost per unit to fall as output rises-

the situation in which a firm's long-run average costs rise as the firm increases output

occur when long-run average cost stays the same over an output range.

a model of the market based on the assumption that a large number of firms produce identical goods consumed by a large number of buyers. The model of perfect competition also assumes that it is easy for new firms to enter the market and for existing ones to leave. And finally, it assumes that buyers and sellers have complete information about market conditions.

market price times the quantity the firm produces. the curve is linear upward sloping curve, the greater the price greater the curve

a producer that can set a price for a product, rather than accepting the market price- absence of rivals gives much more price setting power

the ability of a firm to make it impossible for rival firms to compete with it, either through advertising or in some other way

When a firm charges different prices for the same good or service to different consumers, even though there is no difference in the cost to the firm of supplying these consumers, the firm is engaging in ______________

A market in which there is only one buyer of a good, service, or factor of production is called a monopsony. Monopsony is the buyer's counterpart of monopoly. Monopoly means a single seller; monopsony means a single buyer.Thus, compared to a competitive market, a monopsony solution generates a lower factor price and a smaller quantity of the factor demanded. Like any firm with market control, monopsony does not efficiently allocate resources. Thus, they create deadweight loss.

. A buyer has monopsony power if it faces an upward-sloping supply curve for a good, service, or factor of production.
For example, a firm that accounts for a large share of employment in a small community may be large enough relative to the labor market that it is not a price taker. Instead, it must raise wages to attract more workers. It thus faces an upward-sloping supply curve and has monopsony power.

Monopolistic competition is a model characterized by many firms producing similar but differentiated products in a market with easy entry and exit.Restaurants are a monopolistically competitive sector; in most areas there are many firms, each is different, and entry and exit are very easy. Each restaurant has many close substitutes—these may include other restaurants, fast-food outlets, and the deli and frozen-food sections at local supermarkets. Other industries that engage in monopolistic competition include retail stores, barber and beauty shops, auto-repair shops, service stations, banks, and law and accounting firms.The model of monopolistic competition assumes a large number of firms. It also assumes easy entry and exit. This model differs from the model of perfect competition in one key respect: it assumes that the goods and services produced by firms are differentiated. This differentiation may occur by virtue of advertising, convenience of location, product quality, reputation of the seller, or other factors. Product differentiation gives firms producing a particular product some degree of price-setting or monopoly power. However, because of the availability of close substitutes, the price-setting power of monopolistically competitive firms is quite limited

an oligopoly, the fourth and final market structure that you will study, the market is dominated by a few firms, each of which recognizes that its own actions will produce a response from its rivals and that those responses will affect it.
The firms that dominate an oligopoly recognize that they are interdependent: What one firm does affects each of the others. This interdependence stands in sharp contrast to the models of perfect competition and monopolistic competition, where it is assumed that each firm is so small that it believes the rest of the market will, in effect, ignore what it does. A perfectly competitive firm responds to the market, not to the actions of any other firm. A monopolistically competitive firm responds to its own demand, not to the actions of specific rivals. These presumptions greatly simplify the analysis of perfect competition and monopolistic competition. That luxury does not exist in oligopoly, where the interdependence of firms is the defining characteristic of the market.
Some oligopoly industries make standardized products: steel, aluminum, wire, and industrial tools. Others make differentiated products: cigarettes, automobiles, computers, ready-to-eat breakfast cereal, and soft drinks.

implies new values of one variable at each value of the other variable

is a change from one point on the curve to another that occurs when the dependent variable changes in response to a change in the independent variable. If, for example, the ski resort can sell tickets at $50, they will sell 250 tickets at point D'. If the price increases to $60, the ski resort is willing to sell 300 tickets at point E'. This is a movement along a curve; the curve itself does not shift.