purpose of economics, Why important?
how humans make decisions in the face of scarcity. Scarcity, Allocation Understanding Choices
types of market structures. advantages / disadvantages
circular flow diagram
pictures economy as 2 groups: household/firm—interact in two markets
how goods and services are used by house
decide how many employees needed to produce/sell
specialization/ benefit economy
allow workers focus on parts of production they have advantage.
division of labor increases production
How is utility, marginal utility, and diminishing marginal utility used in marginal analysis
Utility measures the satisfaction from consumption, while marginal utility is the additional satisfaction from one more unit of a good. Diminishing marginal utility states that as more units are consumed, the additional satisfaction gained decreases. In marginal analysis, these concepts help determine optimal consumption levels and production decisions, balancing costs and benefits to maximize utility or profit.
What is the function of the Production Possibilities Frontier? How do allocative efficiency and productive efficiency affect how production decisions are made?
Function: Shows maximum possible output combinations of two goods given resources and technology
Allocative Efficiency: Resources are used where they are most valued
Productive Efficiency: Goods are produced at the lowest possible cost.
law of demand: assume all other variables that affect demand are constant.
~ supply: ~ supply are held constant.
How do price ceilings and price floors affect demand and supply? Why are they used?
Price floors can create surpluses by increasing supply, while decreasing demand through artificial price hikes
Price ceilings can create shortages by increasing demand, while decreasing supply through artificial price drops.
However, neither price floors nor price ceilings shift demand or supply curves.
What does it mean when a market has reached equilibrium? (consider the market for goods and services, labour, and finances)
Point where quantity demanded equals quantity supplied.
How are consumer and producer surplus affected by price controls (I.e., price floors and price ceilings)?
Price Ceilings Reduce producer surplus, potentially increase consumer surplus but may cause shortages.
Price Floors Increase producer surplus, reduce consumer surplus, and maycause surpluses.
interest rate: The cost of borrowing money, typically expressed as an annual percentage of the loan amount.
What is the function of a price? How do price controls interfere with this function? What potential factors can affect price?
Prices signal the value of goods and services, guiding allocation of resources.
Supply and demand, production costs, competition, and market expectations
How does price elasticity affect demand and supply? How does having an elastic supply or an elastic demand differ?
Elastic demand/supply means quantity changes significantly with price changes. Inelastic demand/supply means quantity changes little with price changes.
What is perfect elasticity and inelasticity?
quantity demanded/ supplied changes infinitely in response to any change in price.
In: change in price = zero change in quantity
What is the function of an indifference curve? How are consumption choices made using it?
Indifference Curve: Represents combinations of goods that provide the same level of satisfaction.
Consumption Choices:Helps consumers make decisions to maximize utility given their budget constraints.
What factors make a firm perfectly competitive?
No barriers to entry, homogeneous products, many buyers and sellers.
How do fixed and variable inputs/costs affect a firm’s ability to produce in the short and long run?
Fixed inputs, like machinery, limit a firm's short-run production flexibility, affecting costs and output.
Variable inputs, such as labor and raw materials, can be adjusted in both the short and long run to optimize production and minimize costs.
Long-run flexibility allows firms to respond to market changes more effectively, affecting their scale and efficiency of operations.
When considering whether a firm should shut down or continue operating in the short run, how does average variable cost affect a firm’s decision making process?
If total revenue covers variable costs but is insufficient to cover both variable and fixed costs, a firm may choose to shut down temporarily to avoid incurring losses on fixed costs.
If revenue exceeds AVC, the firm can continue production, as it's covering all variable costs and contributing towards fixed costs. This decision is based on minimizing losses, as fixed costs are sunk in the short run.
How are oligopolies different from monopolies and monopolistic competitive firms?
Oligopoly: Few large firms dominate; interdependent pricing.
Monopoly:Single firm controls the market.
Monopolistic Competition:Many firms, differentiated products
How do cartels operate? What keeps them from turning on each other?
Firms collude to set prices/production to maximize collective profits.
Incentives to cheat and undercut each other, legal restrictions
What is the poverty line and the poverty rate? .
Poverty line: a threshold income level below which individuals or families are considered to be living in poverty
Poverty rate: the percentage of a population falling below this line, indicating the prevalence of poverty in a region or country.
When unions negotiate with employers for better wages how does it affect the supply and demand curve for labour? How do firms compensate for this reduced incentive to hire more workers?
Wage Negotiations:Can increase wages, potentially reducing the demand for labor.
Employer Compensation: Firms might automate, reduce workforce, or increase prices to offset higher wages.