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Economic resources include _____,______, and _____. |
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labor (workforce, skills, managerial talent); capital (not money but plant and equipment); and land (natural resources) |
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A scarce resource/ good is one for which ... |
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the choice of one alternative requires that another be given up. Example: Building vs. Parking Lot |
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Economics is the study of how... |
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society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants. |
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Decisions as to the proper allocation of resources within a society take place at different levels; e.g., individual, household, firm industry, state wide, and nationwide. Microeconomics is the branch of economics that studies____ |
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decision making by a single individual, household, firm, industry, or level of government. |
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is the branch of economics that studies decision making for the economy as a whole. |
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Economics is a science because it follows the scientific method; e.g., (1) (2) (3) |
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identification of a problem, model development, data collection and testing of the model. |
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A _____ is a simplified description of the reality used to understand and predict the relationship between variables. |
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The role of assumptions in a model is to ... |
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simplify a real world problem. |
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the objective of a model is not to ______ a real world situation, but to ______ it. |
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replicate/ mimic; explain |
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Positive vs. Normative Economics. b/c economists may have different goals (scientists: explain the causes of economic events vs. policymakers: improve economic outcomes) economists may use different analysis and language such as ... |
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Positive Statements: Descriptive- make a claim about how the world is. Normative Statements Prescriptive- make a claim about how the world ought to/ should be. |
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The demand curve shows the.. |
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shows the quantity demanded at different prices. essentially, it shows the quantity a demander is willing to buy at different prices. |
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in the equation of a straight line, b = |
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the vertical intercept-- the value Y takes when X = 0 |
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rise/ run. y2 - y1 / x2 - x1 |
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the consumer's gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price. |
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Total consumer surplus is measured by |
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an increase in the demand shifts the demand curve.... |
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outward, up and to the right |
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an increase in demand illustrates... |
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greater willingness to pay for the same quantity |
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Important demand shifters: what kinds of things will increase or decrease demand? |
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-income -population -price of substitutes -price of complements -expectations -tastes |
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a normal good is a good for which |
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demand increases when income increases |
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a good for which demand decreases when income increases (ramen)
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If two goods are substitutes, |
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a decrease in the price of one good leads to a decrease in demand for the other good. |
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Naturally, an increase in the price of a substitute will |
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increase demand for the other substituted good. |
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Good A is a complement to good B if... |
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greater consumption of A encourages greater consumption of B. (ink and printer) |
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If two goods are complements, a decrease in the price of one good leads to... |
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an increase in the demand for the other good. |
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Naturally, an increase in the price of a complement ... |
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decreases the demand for the complementary good. |
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the supply curve is a function that shows ... |
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the quantity supplied at different prices. essentially, it shows the quantity a supplier is willing to sell at different prices. |
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the supply and demand curve can be read both vertically and horizontally, therefore, |
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the supply curve tells us the maximum quantity that suppliers will supply at different prices or the minimum price at which suppliers will sell different quantities. |
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the producer's gain from exchange, or the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity |
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total producer surplus is measured by |
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a decrease in costs increases supply. therefore, a decrease in costs means that the supply curve shifts .. |
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In the supply curve, higher costs mean that the supply curve shifts... |
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Important supply shifters: |
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-technological innovations and changes in the price of inputs (wages of oil rig workers increase/ decrease cost of producing oil) -taxes and subsidies (+10 up) -expectations (speculation) -entry or exit of producers (NAFTA) -changes in opportunity costs |
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a decrease in the demand shifts the demand curve... |
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inward, down and to the left |
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The expectation of a reduction in the future oil supply.... (laredo gas) |
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the expectation of a future price increase shifts today's supply curve |
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the shifting of supply in response to price expectations is the essence of... |
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speculation, the attempt to profit from future price changes
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the loss of potential gain from other alternatives when one alternative is chosen
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Opportunity cost of a farmer increases when price of wheat increases, therefore using more of his land for another product (alternative). therefore, higher opportunity costs ______ quantity supplied |
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a decrease in opportunity costs shifts the supply curve... (farmer: wheat prices go back down) |
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a situation in which the quantity demanded is greater than the quantity supplied. |
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competition will push prices _______ whenever there is a surplus |
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competition will push prices _______ whenever there is a shortage |
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the point at which quantity demanded is equal to quantity supplied
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a maximum price allowed by law |
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When there is a surplus, sellers have an incentive to decrease their price and buyers have an incentive to offer lower prices.
When there is a shortage, sellers have an incentive to increase the price and buyers have an incentive to offer higher prices. T |
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Panel A: Unexploited gains from trade exist when quantity is below the equilibrium quantity. Buyers are willing to pay $57 for the 24th unit and sellers are willing to sell the 24th unit for $15, so not trading the 24th unit leaves $42 in unexploited gain from trade. Only at the equilibrium quantity are there no unexploited gains from trade. |
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Panel B: Resources are wasted at quantities greater than the equilibrium quantity. Sellers are willing to sell the 95th unit for $50, but buyers are willing to pay only $15 so selling the 95th unit wastes $35 in resources. Only at the equilibrium quantity are there no wasted resources. |
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A free market _______the gains from trade. The gains from trade can be broken down into producer surplus and consumer surplus, so we can also say that a free market _______ producer plus consumer surplus.
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Figure 4.4 illustrates how the gains from trade—producer plus consumer surplus—are maximized at the equilibrium price and quantity. |
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When we say that a free market maximizes gains from trade, we mean three closely related things... |
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1. The supply of goods is bought by the buyers with the highest willingness to pay.
2. The supply of goods is sold by the sellers with the lowest costs. 3. Between buyers and sellers, there are no unexploited gains from trade and
no wasteful trades. |
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An Increase in Supply Reduces ____and Increases ____ |
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An Increase in Demand Increases Price and Quantity An increase in demand shifts the demand curve up and to the right, moving the equilibrium from point a to point b, an increase in price and quantity |
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Panel A: An increase in quantity demanded is a movement along a fixed demand curve caused by a shift in the supply curve. Panel B: An increase in demand is a shift in the demand curve up and to the right |
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Panel C: An increase in supply is a shift in the supply curve down and to the right. Panel D: An increase in quantity supplied is a movement along a fixed supply curve caused by a shift in the demand curve. |
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Price of Oil; Supply and Demand Shock |
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maximum price allowed by law |
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Price Ceilings Create Wasteful Lines At the controlled price, the quantity of gasoline supplied is Qs and buyers are willing to pay as much as $3 for a gallon of gasoline. But the maximum price that sellers can charge is $1. The difference between what buyers are willing
to pay and what sellers can charge encourages buyers to line up to buy gasoline. Buyers will line up until the total price of gasoline, the out-of-pocket price plus the time cost, increases to $3 per gallon. Time spent waiting in line is wasted time. The total value of wasted time is given by the time cost per gallon multiplied by the quantity of gallons bought.
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A Price Ceiling Reduces the Gains from Trade At the controlled price, Qs units are supplied and buyers are willing to pay just slightly less than $3 for an additional gallon of gasoline that sellers are willing to sell for just slightly more than $1. Although mutually profitable, these trades are illegal. If all mutually profitable trades were legal, the gains from trade would increase by the green plus blue triangle.
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is the total of lost consumer and producer surplus when no all mutually profitable gains from trade are exploited. |
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What creates a deadweight loss? |
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When the price of oil is high, oil will only be used in the higher- valued uses. As the price falls, oil will also be used in lower-valued uses.
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When Prices Are Controlled, Resources Do Not Flow to Their Highest-Valued Uses Gains from trades are maximized when goods flow to their highest-valued uses. A price control prevents the highest-valued uses from outbidding lower-valued uses so some oil flows to lower-valued uses, even though it would be more valuable if used elsewhere |
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In a Free Market Goods Flow to Their Highest-Value Uses If all units of the good are allocated to the highest-valued uses, then consumer surplus is the area between the demand curve and the price up to the quantity supplied.
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Consumer Surplus Falls Under Random Allocation When there is a price control, the buyers with the highest-valued uses cannot outbid other buyers, so goods will flow to any buyer willing to pay more than the controlled price of $6. If goods are allocated randomly to buyers with values between
$30 and $6, the average value will be $18. Consumer surplus under random allocation is the green area. If goods were allocated to the highest-valued uses, consumer surplus would be larger, the red plus green areas. Thus, a price control misallocates resources, reducing consumer surplus.
1/2 30 + 1/2 6
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price ceiling on rental housing |
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Rent Control Creates Larger Shortages in the Long Run than in the Short Run A rent control below the equilibrium price generates a shortage. The short-run shortage is small since the apartment units are already built. In the long run, fewer new units are built and old apartments are torn down or turned into condominiums so the long-run shortage is much greater |
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Rent Control Reduces the Building of New Apartments As rent control began to be debated in Ontario, the construction of new apartments plummeted. After rent control was put into place, fewer apartments were built than non-rent-controlled homes. |
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minimum price allowed by law |
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A Price Floor Creates a Surplus (Minimum Wages Create Unemployment) At the minimum wage, the quantity demanded of labor falls below the market employment level and the quantity supplied rises, creating a surplus of labor.
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a price floor reduces the Gains from Trade At the minimum wage, employers are willing to hire more workers at just less than the minimum wage and workers are willing to work additional hours for just more than W0. Although mutually profitable, these trades are illegal. If all mutually profitable trades were legal, the gains from trade would increase by the green plus blue triangles. |
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A Price Floor Creates Quality Waste At the CAB-regulated fare, price is well above a seller’s willingness to sell. Sellers cannot compete by offering lower prices so they compete by offering higher quality. Higher quality raises costs and reduces seller profit. Buyers enjoy the higher quality, but would prefer less quality at a lower price. Thus, the price floor encourages sellers to waste resources by producing more quality than buyers are willing to pay for.
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is the stock of tools including machines, structures, and equipment |
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is the productive knowledge and skills that workers acquire through education, training, and experience |
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is knowledge about how the world works that is used to produce goods and service |
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are the "rules of the game" that structure economic incentives |
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r is someone who consumes a resource without working or contributing to the resource’s upkeep. |
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are the advantages of large-scale production that reduce average cost as quantity increases. |
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Landlocked Nations Have Lower GDP per Capita
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