Exam 1 terms and concepts
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| Models | Simplified version of reality, can be used to make predictions, which can be used to test model accuracy
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| Ceteris Paribus | Items not be analyzed are equal, frequent assumption used to focus on a particular part of an inquiry
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| Positive | Describes how it works, involves making forecasts, often asses policy based on efficiency
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| Normative | Prescribes how it should work, involve value judgements
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| Production Possibility Frontier | Used to show how efficient different scenarios of data are, increasing opportunity leads to bowed out
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| Scarcity | Not enough resources, making choices about "what to make"
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| Opportunity cost | How much less of one good can be produced if more than the other good is produced, the amount of given up
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| Effciency | Production if it produces on the production possibility frontier, allocation if it produces the mix of goods and services the people want to consumer
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| Economic growth | An increase in factors of production, resources such as land labor capital, human capital, inputs that are not used up in production, improved technology
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| Two country model | Sources of gains from trade between individuals and countries, stems from comparative advantage,
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| Circular Flow Model | Represents transactions within the economy as flows of goods, services, and money between households and firms, transactions occur in markets,
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| Circular Flow Model | shows how spending, productions, employment, income, and growth are related, how factor markets determine the economy's income distribution, how economy's total income is allocated to the owners of the factors of production
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| Supply and Demand Model | Competitive Market, operates through pressing toward and equilibrium
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| Competitive Market | Many buyers, many sellers(consumer, producers) none of whom influence the market price
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| Equilibrium | Changes when market is shocked, The Arab Spring(revolt of the people), no pressure to change, market clearing, where all goods and services are bought
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| The Demand Curve | Slopes downward, movement along can only occur when a price changes leads to the change in the quantity demanded
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| Demand | Fundamental relationship between price and quantity, estimated by the demand schedule
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| Demand Schedule | The price and the amount demanded by the consumers
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| Law of Demand | Ceteris Paribus, inverse relationship between price and quantity demanded
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| Demand Shifts | Market demand, change in number of consumers, income(normal directly related, inferior inversely related), expectation about future prices, tastes and preferences(substitutes and complement)
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| Market demand curve | More individuals more market demand, the horizonal sum of the individual demand curve of all consumers in the market
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| The Supply Curve | Estimated by supply schedule, graphically represented, slopes upward, movement along can only occur when a price change leads to a change in quantity supplied
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| Supply | A fundamental relationship between price and quantity supplied
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| Law of Supply | Ceteris Paribus, price and quantity are directly influenced
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| Market Supply Curve | The sum of individual supply curves for all producers
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| Supply Shifts | Changes: Number of suppliers, input prices(land, labor, capital), technology, expectations about future prices, related goods and service prices, increase in supply causes a rightward shift, decrease in supply causes left shift
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| Land, labor, capital | Rent, wage, capital
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| Model Price | The market moves to equilibrium price/point
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| Causes of Price Movements | Surplus, shortages
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| Surplus | When prices are above market clearing level, excess quantity supplied, pushes e-point down. To clear: drop quantity, dropping price, increasing demand
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| Shortage | When prices are below market clearing, pushes e-point up. To clear: increase production, increasing supply, increasing price, lowering demand
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| Changes in Supply and Demand | Singles shifts, simultaneous shifts(double shifts). The curve that shifts the greater distance has a greater effect on the changes in equilibrium price and quantity
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| Single Shifts | Demand shifts: move along supply line, directly related between price and quantity. Supply shifts: move along demand line, inversely related between price and quantity
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| Double Shifts | Same directions: quantity is predictable and price ambiguous. Opposite directions: quantity ambiguous and price is predictable
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| Price control and quotas | Meddling with markets, consumer surplus, producer surplus, trade gains
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| Consumer surplus | The difference between willingness to pay and price. Equal to the area below the market demand curve but above the price
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| Producer surplus | The difference between willingness to sell and price, equal to the area above the supply curve and below the price
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| Willingness to sell | The minimum price for a firm to supply goods and service
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| Total surplus | The total gain to society from the producers and consumers of a good, sum of consumer and producer surplus. Maximizes gain to the people
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| Market Intervention: Price Control | Price Ceilings, Price Floors
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| Price Ceilings | Max market price, below e-price, benefit successful buyers, causes a shortage. Inefficiencies: deadweight loss, black market, allocation among consumers, wasted resources, inefficiently low quality
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| Price Floor | Minimum markets price, above e-price, causes surplus. Benefit successful sellers, creates persistent surplus. Inefficiencies: deadweight loss, allocation of sales among sellers, wasted resources, Inefficiently high quality, illegal activity
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| Quantity Controls | Quotas
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| Quotas | Limit the quantity of a good that can be bought or sold, quota limit. The government issues licenses(right to sell a given quantity of the good). Inefficiencies: Deadweight loss, illegal activity
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| Quota Rent | Owner of the license: earnings that accrue from ownership of the right to sell the good, qual to difference between demand price and supply price at quota limit
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| OC(A)= B/A | Opportunity cost equation
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| QD(P)=n-P | Quantity Demand Equation
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| QS(P) = n +1/2P | Quantity Supply Equation
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| CS = WTP - P | Consumer Surplus Equation
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| PS = P - WTS | Producer Surplus Equation
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