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Demand Shifters
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a factor other than price that can cause a change in demand for a good or service; examples include income, population, price of substitutes, price of complements, expectations, tastes
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Supply Shifters
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a factor other than price that can cause a change in the supply of a good or service; examples include input prices, technology, expectations, number of sellers
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Price Ceiling
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Usually imposed to keep down the price of something perceived as too expensive. To have any effect, it must be imposed below the market price.
Advantages: Protect low income individuals
Disadvantages: Bribing, extra fees
Advantages: Protect low income individuals
Disadvantages: Bribing, extra fees
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Price Floor
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Usually imposed to keep up the price of something perceived as too cheap. To have any effect, it must be set above the market price
Advantages: Protect sellers
Disadvantages: Gov. purchase increase; limited transactions
Advantages: Protect sellers
Disadvantages: Gov. purchase increase; limited transactions
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Change of Economic Surplus
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...
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Price Control
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An important government instrument in regulating the market. Mandated price that attempts to control the price of a good or service
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Consumer side (tax/subsidy)
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Tax: Both consumers & sellers burden tax
Sub: Both consumers & sellers benefit
Sub: Both consumers & sellers benefit
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Seller Side (tax/subsidy)
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Tax: both sellers and consumers burden tax
Sub: Both sellers and consumers benefit
Sub: Both sellers and consumers benefit
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Government Welfare
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any government subsidy to a particular group of people which provides them with an economic benefit that they would not have had if things were just left to the market
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Economic Surplus
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a surplus created by investing money in productive capital rather than using it for consumption
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Specialization
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the concentration of the productive efforts of individuals and firms on a limited number of activities
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Production Possibilities Frontier (PPF)
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a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology
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Absolute Advantage
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The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources
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Comparative Advantage
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The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors
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Law of Comparative Advantage
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The individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good
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Point of Specialization
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...
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Transaction Price
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the amount of consideration that a company expects to receive from a customer in exchange for transferring goods or services
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Gain from Trade
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a country that can consume more than it can produce as a result of specialization and trade
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Productivity of input
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the amount of output produced per unit of that input
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Marginal Product
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the extra output or change in total product caused by the addition of one more unit of variable input
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Total Product
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All the goods and services produced by a business during a given period of time with a given amount of input
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Average Product
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the average amount produced by each unit of a variable factor of production
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Profit-Maximizing strategy
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...
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Externality
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an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume
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Consumption Externality
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an externality that affects the consumption side of a market, which may be either positive or negative
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Production Externality
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an externality that affects the production side of a market, which may be either positive or negative
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Positive Externality
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a benefit received by someone who had nothing to do with the activity that generated the benefit
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Negative Externality
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the harm, cost, or inconvenience suffered by a third party because of actions by others
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Public Solutions to Externalities
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...
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Private Solutions to Externalities
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Moral codes and private sanctions, charities, relying on the self-interest of the relevant parties, and the relevant parties can enter into a contract.
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Coase Theorem
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the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
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-1
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If goods X and Y are complements, then the cross price elasticity of demand will be...?
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An example of an affective price ceiling would be the Gov. setting the price of wheat at _____ per bushel when the market price is at $4.25 per bushel.
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$3.75 (below)
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Harry produces 2 balloon rides and 4 boat rides an hour. Harry could produce more balloon rides but to do so he must produce fewer boat rides. Harry is _______ his production possibilities frontier.
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Producing On
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If the marginal product of a worker for a Calculator manufacturer is 10 calculators, and the price of a calculator is $10, then the firm's value of marginal product of labor is...?
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$100
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Law of Demand
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Holding everything else constant, when the price of product falls, the quantity demanded of he product will increase, and when the price of a product rises, the quantity demanded of the product will decrease
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Income Elasticity
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measures how changes in income affect the quantity of goods consumed; Ey= (% change in quantity)/(% change in income)
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Normal Good
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When income rises, if the consumption of a good increases (people consume more), then the good is called normal; i.e. houses, cars, high-quality food; Ey > 0
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Inferior Good
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When income decreases, if the consumption of a good decreases (people consume less), then the good is called inferior; i.e. fast food, thrift stores, Dollar Tree; Ey < 0
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Law of Supply
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Holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price causes decreases in the quantity supplied
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Value of Marginal Product of Labor (VMPL)
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Price of the good - marginal product of this labor
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Corrective tax
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Equal to the marginal damage (or external cost) of negative externality; AKA Pigouvian Tax
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Corrective Subsidy
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Equal to the external benefit of positive externality, or reduced external cost of production
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Tradable Pollution Permits
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Those firms that can reduce pollution at a low cost will sell whatever permits they get; The firms that can reduce pollution only at a high cost will buy whatever permits they need
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Issues with Coase Theorem
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1. difficulty assigning and claiming property rights; 2. high transaction costs; 3. free riders (someone who benefits without paying)
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