Microeconomics Test 1 (Chapters 1-3)

Study how people allocate their limited resources to satisfy their unlimited desires

Limited Nature of resources

1. Incentives
2. Trade-Offs
3. Oppurtunity Costs
4. Marginal Thinking
5. Gains from Trade

Why do we do the things we do

Motivation

Theory of Rational self: Individuals always try to better themselves

1. Positive: reward
-Ex-Allowance
2. Negative: Punishment
-Ex: detention
3. Direct: Obvious outcomes
-Ex: paying more for winning a game encourages better performance
4. Indirect: hidden unintended consequences
-Ex: Paying for winning a game, leads to people cheating

Forgone alternatives in any decision

what could you have done instead of coming to class? -sleep -eat-study

No such thing as a free lunch (Trade Off)

Whatever you give up to do what your doing

1. Going to class makes you give up studying
2. Going to college instead of getting a job

For each unit of a good you're going to buy, you must evaluate the cost and benefit of the additional purchase

The voluntary exchange of goods and services between 2 or more parties

When someone can produce more of a good than another country with the same resources

Bring Buyers and sellers together to exchange goods and services

When someone can produce at a lower opportunity cost than a competitor

The thing we're interested in plotting

1. Confusing Causation
2. Extrapolation- using your estimates from 1 graph and applying them to a different sample

1. Form hypothesis
2. Build a model for our hypothesis
3. Design a way to test our hypothesis
4. Evaluate your hypothesis

1. Experiment
2. Historical Data
3. Wait

1. Normative (Facts)
2. Positive (opinions)

Latin for one or the other; Only changing 1 thing that we can study (isolating a variable)

1. Exogenous variables- out of our control
2. Endogenous Variables- The variables we choose and are interested in testing

Model that illustrates the combination of outputs a society can produce if it uses all its resources
- represents trade offs that society faces in production

1. Efficient
2. Inefficient
3. Unattainable

Points on the graph because we utilize all our resources

Points inside the graph because the did not meet the expectations

Points outside graph because they impossible

Where resources are allocated among household and firms with no government interference

markets respond to supply and demand

A market with similar goods with many buyers and sellers such that each has only a small impact on market price and output;
-no individual makes a difference

The buyer or seller can influence market
-Example: Musicians and Iphones

Extreme example of an imperfect market- when there is only one company that supplies the entire market

Amount of a good or service buyers are willing to purchase at a certain price
- These are points on the demand Curve

1. Bar Graph
2. Pie Chart
3. Time-Series graph

scatterplot

1. It was able to model real world flight conditions
2. Allowed measurement of wing performance
3. Enabled independent control of each key variable

Spending on infrastructure, production facilities, that will increase future production possibilities

A graph of the relationship between the prices and the quantity demanded at those prices

A table that shows the relationship between the prices and the quantity demanded at those prices

All other things are equal; as the prices increase, the quantity demanded decreases. The demand curve should always slope downward.

The sum of all individual quantities demanded by each buyer in the market at each price

1. Normal
2. Inferior
3. Luxury
4. Substitutes
5. Compliment

As income increases, the consumers buy more normal goods
- Example: Nikes

As income rises, consumers buy less inferior goods
-Example: Can of soup

As income rises, consumers not only buy more luxury goods, but they also increase their purchases by a higher percentage than the increase of income

Goods that are used in place of each other
-Example: meat or chicken; Nike or adidas

2 goods that are used together
-Example: hamburger and fries or Peanut butter and Jelly

1. Normal goods fall and inferior goods rises (income less)
2. Price of substitute good falls
3. Price of complimentary good rises
4. Good falls out of style
5. Belief that price will decline in the future
6. The number of buyers decreases

1. Demand for normal good rises and inferior goods decreases (income rises)
2. the price of a substitute good rises
3. the price of a complimentary good falls
4. The good is in style
5. Belief price will rise in future
6. The number of buyers rises

Because Price changed

The amount of good or service producers are willing and able to sell at a certain price

A table that shows the relationship between price and quantity supplied

A graph that shows the relationship between the price and quantity supplied

As the price of a good increases, the quantity supplied increases
-Example: drug war

The sum of quantities supplied by each seller at each price

1. Cost of input increases
2. Business taxes increase or subsidies decrease
3. The number of sellers decrease
4. Belief that the price of a product will rise in future

1. Cost of input decreases
2. Taxes decrease or subsidies increase
3. The number of sellers increase
4. The price of product is expected to fall in future
5. Technological expansion/more efficient

Price at which quantity supplied equals quantity demanded

The point at which the demand and supply curve interact
-quantity supplied=quantity demanded

Quantity at which quantity demand equals quantity supplied

market price of any good will adjust to bring the quantity supplied to equal quality demanded

When the quantity supplied is less than the quantity demanded.
- Inventory Buildup
* Price must increase to bring market to equilibrium

When the quantity supplied is greater than the quantity demanded
- Inventory Depletion
*Price must decrease to bring market into equilibrium

Measures the responsiveness of buyers and sellers to changes in price or income

1.Price Elasticity of Demand
2. Price Elasticity of Supply
3. Income Elasticity of Demand
4. Cross Price Elasticity of Demand

Measure of the responsiveness of quantity demanded to a change in price
-% change in Quantiy demanded/ % change in price
*Answer should always be negative

Measures how a change in income affects spending
- % change in quantity demanded/% change in income

Measures the responsiveness of the quantity demanded of 1 good to a change in the price of another good
-% change in quantity demanded for good A/ % change in price of good B

Measures the responsiveness of quantity supplied to price change
- % change in quantitied supplied/ % change in price
*answer should always be positive

1. Substitutes- when many substitutes, price is elastic
2.Share of Budget
3. Necessity vs Luxury good
4. Time

1.Inferior goods E<0
2. Normal goods 0<E<1
3. Luxury Goods E>1

1. Compliments E<0
2. Substitutes E>0
3. Unrelated goods E=0

1. Flexibility of Producers
2. Ability to relocate
3. Time

1. Inelastic 0>E>-1
2. Elastic E<-1
3. Perfectly Inelastic E=0
4. Perfectly Elastic E=0
5. Unitary: E=-1

amount that consumers pay seller

1. When demand is elastic, firms decrease price to increase total revenue
2. When demand is inelastic, firms increase price to increase total revenue
3. The firm's goal is to operate where E=unitary

As time progresses, demand becomes more elastic

No time to adjust behavior

Period of time when consumers can partially adjust behavior

Period of time when consumers can fully adjust to market conditions

When the demand or supply becomes more elastic, the price changes become smaller while quantity changes became larger