Podcast
Questions and Answers
What is the opportunity cost associated with a choice?
What is the opportunity cost associated with a choice?
Which of the following is considered a factor of production?
Which of the following is considered a factor of production?
What does a point inside the Production Possibility Boundary (PPB) indicate?
What does a point inside the Production Possibility Boundary (PPB) indicate?
How does an increase in factors of production affect the PPB?
How does an increase in factors of production affect the PPB?
Signup and view all the answers
In which economic system are the four economic questions answered by a single central authority?
In which economic system are the four economic questions answered by a single central authority?
Signup and view all the answers
What type of decision involves comparing the cost with the value of producing one more unit?
What type of decision involves comparing the cost with the value of producing one more unit?
Signup and view all the answers
Which of the following is NOT considered a key economic issue?
Which of the following is NOT considered a key economic issue?
Signup and view all the answers
What does productivity growth refer to in economics?
What does productivity growth refer to in economics?
Signup and view all the answers
What happens to the equilibrium price and quantity when there is an increase in demand?
What happens to the equilibrium price and quantity when there is an increase in demand?
Signup and view all the answers
If demand decreases while the price remains the same, what immediate market condition is created?
If demand decreases while the price remains the same, what immediate market condition is created?
Signup and view all the answers
Which of the following will cause the supply curve to shift outwards?
Which of the following will cause the supply curve to shift outwards?
Signup and view all the answers
When equilibrium is disrupted by a decrease in supply, what effect does it have on price and quantity?
When equilibrium is disrupted by a decrease in supply, what effect does it have on price and quantity?
Signup and view all the answers
What is the equilibrium price when Qd = 100 - 3P and Qs = 20 + 2P?
What is the equilibrium price when Qd = 100 - 3P and Qs = 20 + 2P?
Signup and view all the answers
How is excess demand at a given price impacted in the market?
How is excess demand at a given price impacted in the market?
Signup and view all the answers
What necessitates a movement along the supply and demand curves to establish a new equilibrium?
What necessitates a movement along the supply and demand curves to establish a new equilibrium?
Signup and view all the answers
Which of the following describes the adjustment process after a decrease in demand?
Which of the following describes the adjustment process after a decrease in demand?
Signup and view all the answers
What type of statements express opinions that cannot be tested?
What type of statements express opinions that cannot be tested?
Signup and view all the answers
Which variable is affected by changes in an exogenous variable?
Which variable is affected by changes in an exogenous variable?
Signup and view all the answers
What does a negative correlation between two variables imply?
What does a negative correlation between two variables imply?
Signup and view all the answers
What does the term 'ceteris paribus' mean in economic analysis?
What does the term 'ceteris paribus' mean in economic analysis?
Signup and view all the answers
Which of the following correctly calculates the tuition index for 2025 based on the given values?
Which of the following correctly calculates the tuition index for 2025 based on the given values?
Signup and view all the answers
How does an increase in price typically affect the quantity demanded for a good?
How does an increase in price typically affect the quantity demanded for a good?
Signup and view all the answers
What is the index value of a good in the base year?
What is the index value of a good in the base year?
Signup and view all the answers
What factors can influence demand for a particular good?
What factors can influence demand for a particular good?
Signup and view all the answers
What does Own Price Elasticity of Demand measure?
What does Own Price Elasticity of Demand measure?
Signup and view all the answers
When the Own Price Elasticity of Demand is equal to 1, what does this indicate?
When the Own Price Elasticity of Demand is equal to 1, what does this indicate?
Signup and view all the answers
How does total revenue (TE) change for an elastic good when its price increases?
How does total revenue (TE) change for an elastic good when its price increases?
Signup and view all the answers
If the Own Price Elasticity of Demand is less than 1, how is the good classified?
If the Own Price Elasticity of Demand is less than 1, how is the good classified?
Signup and view all the answers
What happens to Total Expenditure (TE) for an inelastic good when the price decreases?
What happens to Total Expenditure (TE) for an inelastic good when the price decreases?
Signup and view all the answers
What characteristic defines elastic demand?
What characteristic defines elastic demand?
Signup and view all the answers
How is Supply Elasticity best defined?
How is Supply Elasticity best defined?
Signup and view all the answers
In what situation would total revenue increase for a good?
In what situation would total revenue increase for a good?
Signup and view all the answers
What does an elasticity of supply greater than 1 indicate?
What does an elasticity of supply greater than 1 indicate?
Signup and view all the answers
When a good is considered inelastic, what happens to the burden of a tax placed on that good?
When a good is considered inelastic, what happens to the burden of a tax placed on that good?
Signup and view all the answers
How does cross price elasticity behave when two goods are complements?
How does cross price elasticity behave when two goods are complements?
Signup and view all the answers
Which of the following statements about elastic supply is true?
Which of the following statements about elastic supply is true?
Signup and view all the answers
Which scenario illustrates a good with elastic supply?
Which scenario illustrates a good with elastic supply?
Signup and view all the answers
What happens to demand for inferior goods when consumer income rises?
What happens to demand for inferior goods when consumer income rises?
Signup and view all the answers
If the cross price elasticity (Exy) between two goods is greater than 0, what is the relationship between the goods?
If the cross price elasticity (Exy) between two goods is greater than 0, what is the relationship between the goods?
Signup and view all the answers
What does an elasticity of supply less than 1 indicate?
What does an elasticity of supply less than 1 indicate?
Signup and view all the answers
How does the burden of a tax shift when applied to a good with inelastic supply?
How does the burden of a tax shift when applied to a good with inelastic supply?
Signup and view all the answers
What outcome occurs when the price of a substitute good increases?
What outcome occurs when the price of a substitute good increases?
Signup and view all the answers
Which situation describes a normal good in terms of income elasticity?
Which situation describes a normal good in terms of income elasticity?
Signup and view all the answers
In what scenario would cross price elasticity of demand be negative?
In what scenario would cross price elasticity of demand be negative?
Signup and view all the answers
What happens to equilibrium price and quantity when there is an increase in demand?
What happens to equilibrium price and quantity when there is an increase in demand?
Signup and view all the answers
What market condition is created when demand decreases and the price remains unchanged?
What market condition is created when demand decreases and the price remains unchanged?
Signup and view all the answers
When the supply curve shifts outward, which of the following occurs?
When the supply curve shifts outward, which of the following occurs?
Signup and view all the answers
What occurs in the market when there is a decrease in supply?
What occurs in the market when there is a decrease in supply?
Signup and view all the answers
If the initial demand curve is represented by $Q_d = 100 - 3P$ and a shift causes a new equilibrium price of $P^* = 16$, what is the quantity demanded at this price?
If the initial demand curve is represented by $Q_d = 100 - 3P$ and a shift causes a new equilibrium price of $P^* = 16$, what is the quantity demanded at this price?
Signup and view all the answers
In which scenario would both equilibrium price and quantity decrease?
In which scenario would both equilibrium price and quantity decrease?
Signup and view all the answers
What would be the outcome of a shift in the supply curve due to a technological improvement?
What would be the outcome of a shift in the supply curve due to a technological improvement?
Signup and view all the answers
What happens to equilibrium price (P*) and quantity (Q*) when the demand decreases?
What happens to equilibrium price (P*) and quantity (Q*) when the demand decreases?
Signup and view all the answers
What effect does a constant price have on quantity supplied when there is an increase in supply?
What effect does a constant price have on quantity supplied when there is an increase in supply?
Signup and view all the answers
What best defines an exogenous variable in economic models?
What best defines an exogenous variable in economic models?
Signup and view all the answers
What does the term 'ceteris paribus' allow in economic analysis?
What does the term 'ceteris paribus' allow in economic analysis?
Signup and view all the answers
In the context of demand, what is the consequence of a price increase?
In the context of demand, what is the consequence of a price increase?
Signup and view all the answers
What defines the efficiency of points on the Production Possibility Boundary (PPB)?
What defines the efficiency of points on the Production Possibility Boundary (PPB)?
Signup and view all the answers
Which of the following best describes opportunity cost?
Which of the following best describes opportunity cost?
Signup and view all the answers
Which statement represents a positive correlation between two variables?
Which statement represents a positive correlation between two variables?
Signup and view all the answers
How does accelerated technological change impact economic systems?
How does accelerated technological change impact economic systems?
Signup and view all the answers
Which of the following statements is an example of a normative statement?
Which of the following statements is an example of a normative statement?
Signup and view all the answers
What does an index value of 100 represent?
What does an index value of 100 represent?
Signup and view all the answers
In microeconomics, marginal decisions are primarily concerned with which of the following?
In microeconomics, marginal decisions are primarily concerned with which of the following?
Signup and view all the answers
Which of the following economic systems focuses on the interaction of consumers and producers to answer economic questions?
Which of the following economic systems focuses on the interaction of consumers and producers to answer economic questions?
Signup and view all the answers
How does an increase in the price of a good typically affect the demand curve?
How does an increase in the price of a good typically affect the demand curve?
Signup and view all the answers
What implication does a point inside the Production Possibility Boundary (PPB) have?
What implication does a point inside the Production Possibility Boundary (PPB) have?
Signup and view all the answers
What is a defining characteristic of an endogenous variable?
What is a defining characteristic of an endogenous variable?
Signup and view all the answers
Which outcome is indicative of negative correlation between two variables?
Which outcome is indicative of negative correlation between two variables?
Signup and view all the answers
What happens to the Production Possibility Boundary (PPB) when there is an increase in factors of production?
What happens to the Production Possibility Boundary (PPB) when there is an increase in factors of production?
Signup and view all the answers
What result does a change in demand yield when all other factors remain constant?
What result does a change in demand yield when all other factors remain constant?
Signup and view all the answers
Which key economic issue refers to disparities in wealth distribution within a society?
Which key economic issue refers to disparities in wealth distribution within a society?
Signup and view all the answers
What does an absolute value of the Own Price Elasticity of Demand signify?
What does an absolute value of the Own Price Elasticity of Demand signify?
Signup and view all the answers
If the Own Price Elasticity of Demand is greater than 1, what can we conclude about the relationship between price and quantity demanded?
If the Own Price Elasticity of Demand is greater than 1, what can we conclude about the relationship between price and quantity demanded?
Signup and view all the answers
How does total expenditure (TE) behave for an elastic good when the price of the good increases?
How does total expenditure (TE) behave for an elastic good when the price of the good increases?
Signup and view all the answers
In the context of total expenditure, what is the expected outcome when the price of an inelastic good decreases?
In the context of total expenditure, what is the expected outcome when the price of an inelastic good decreases?
Signup and view all the answers
Which statement best represents the relationship between price and elasticity of demand?
Which statement best represents the relationship between price and elasticity of demand?
Signup and view all the answers
What effect does a higher own price elasticity of supply indicate regarding producer responsiveness?
What effect does a higher own price elasticity of supply indicate regarding producer responsiveness?
Signup and view all the answers
What is the primary metric used to measure the responsiveness of quantity supplied to price changes?
What is the primary metric used to measure the responsiveness of quantity supplied to price changes?
Signup and view all the answers
Which scenario would demonstrate a good with inelastic demand?
Which scenario would demonstrate a good with inelastic demand?
Signup and view all the answers
Under what condition does total revenue move in the direction of quantity demanded?
Under what condition does total revenue move in the direction of quantity demanded?
Signup and view all the answers
An increase in ______ causes the demand curve to shift outwards.
An increase in ______ causes the demand curve to shift outwards.
Signup and view all the answers
When demand increases, both ______ and quantity will increase.
When demand increases, both ______ and quantity will increase.
Signup and view all the answers
A decrease in demand causes a surplus at the original price, which pressures ______ to drop.
A decrease in demand causes a surplus at the original price, which pressures ______ to drop.
Signup and view all the answers
When supply increases, the equilibrium price will ______ and quantity will increase.
When supply increases, the equilibrium price will ______ and quantity will increase.
Signup and view all the answers
A decrease in supply creates a shortage, resulting in an increase in ______.
A decrease in supply creates a shortage, resulting in an increase in ______.
Signup and view all the answers
At equilibrium, quantity demanded equals quantity ______.
At equilibrium, quantity demanded equals quantity ______.
Signup and view all the answers
The equations representing the demand and supply curves are Qd = 100 - 3P and Qs = 20 + 2______.
The equations representing the demand and supply curves are Qd = 100 - 3P and Qs = 20 + 2______.
Signup and view all the answers
When demand decreases, the quantity demanded is now less than quantity ______.
When demand decreases, the quantity demanded is now less than quantity ______.
Signup and view all the answers
To find equilibrium, set Qd equal to Qs and solve for ______.
To find equilibrium, set Qd equal to Qs and solve for ______.
Signup and view all the answers
Econ Surplus is the sum of the CS and PS and is represented by the area bounded by the y axis and the ______ curve up to the qty exchanged in the market.
Econ Surplus is the sum of the CS and PS and is represented by the area bounded by the y axis and the ______ curve up to the qty exchanged in the market.
Signup and view all the answers
Price floors, price ceilings, and quotas are considered inefficient because they result in a reduction in the quantity exchanged in the market, leading to a loss of economic ______.
Price floors, price ceilings, and quotas are considered inefficient because they result in a reduction in the quantity exchanged in the market, leading to a loss of economic ______.
Signup and view all the answers
Firms can raise money by selling off ______ of ownership, which provide shareholders with a share of the firm's profits.
Firms can raise money by selling off ______ of ownership, which provide shareholders with a share of the firm's profits.
Signup and view all the answers
Accounting profits are calculated as total revenue minus explicit ______.
Accounting profits are calculated as total revenue minus explicit ______.
Signup and view all the answers
Economic profits include opportunity costs, which are also referred to as ______ costs.
Economic profits include opportunity costs, which are also referred to as ______ costs.
Signup and view all the answers
As P increases, quantity D ______.
As P increases, quantity D ______.
Signup and view all the answers
When the price of a substitute decreases, consumers will buy more of the ______.
When the price of a substitute decreases, consumers will buy more of the ______.
Signup and view all the answers
As consumers' tastes change towards a good, the demand for that good will ______.
As consumers' tastes change towards a good, the demand for that good will ______.
Signup and view all the answers
A decrease in the price of inputs will cause the supply curve to shift ______.
A decrease in the price of inputs will cause the supply curve to shift ______.
Signup and view all the answers
Government taxes increase the cost of production, leading to a shift of the supply curve ______.
Government taxes increase the cost of production, leading to a shift of the supply curve ______.
Signup and view all the answers
An increase in population typically results in an increase in ______.
An increase in population typically results in an increase in ______.
Signup and view all the answers
When the price of a complement increases, the demand for the good being analyzed will ______.
When the price of a complement increases, the demand for the good being analyzed will ______.
Signup and view all the answers
Es > 1 means % change in Qs > % change in P, indicating a good has ________ supply.
Es > 1 means % change in Qs > % change in P, indicating a good has ________ supply.
Signup and view all the answers
When a tax is placed on a good, it creates a ________ shifted supply curve.
When a tax is placed on a good, it creates a ________ shifted supply curve.
Signup and view all the answers
Income elasticity (Ey) measures the responsiveness of Qd to a change in ________.
Income elasticity (Ey) measures the responsiveness of Qd to a change in ________.
Signup and view all the answers
If Ey > 1, the good is considered ________.
If Ey > 1, the good is considered ________.
Signup and view all the answers
Complements are goods used ________, where an increase in the price of one leads to a decrease in the quantity demanded for the other.
Complements are goods used ________, where an increase in the price of one leads to a decrease in the quantity demanded for the other.
Signup and view all the answers
Substitutes are goods that can be used in ________ of one another.
Substitutes are goods that can be used in ________ of one another.
Signup and view all the answers
When Ey < 0, the good is defined as an ________ good.
When Ey < 0, the good is defined as an ________ good.
Signup and view all the answers
The burden of a tax on inelastic goods tends to fall more on the ________.
The burden of a tax on inelastic goods tends to fall more on the ________.
Signup and view all the answers
When the price of Good Y increases, the quantity demanded of Good X will also increase if they are ________.
When the price of Good Y increases, the quantity demanded of Good X will also increase if they are ________.
Signup and view all the answers
Disequilibrium prices are prices that are prevented from reaching ________.
Disequilibrium prices are prices that are prevented from reaching ________.
Signup and view all the answers
When prices are held too high, it creates excess supply (Qd < Qs) and the qty exchanged in the market is the ______.
When prices are held too high, it creates excess supply (Qd < Qs) and the qty exchanged in the market is the ______.
Signup and view all the answers
A ______ is a minimum price set in a market, such as a minimum wage.
A ______ is a minimum price set in a market, such as a minimum wage.
Signup and view all the answers
For a Price Ceiling to be binding, it must be set lower than the ______ price.
For a Price Ceiling to be binding, it must be set lower than the ______ price.
Signup and view all the answers
The consumer places a higher value on the first unit consumed and a lower value on each ______ unit after.
The consumer places a higher value on the first unit consumed and a lower value on each ______ unit after.
Signup and view all the answers
The Supply curve represents the total cost of ______ a good.
The Supply curve represents the total cost of ______ a good.
Signup and view all the answers
Markets are called efficient when they maximize the Economic ______ in the market.
Markets are called efficient when they maximize the Economic ______ in the market.
Signup and view all the answers
Consumer Surplus is the difference between how much the consumer ______ the product and the market price.
Consumer Surplus is the difference between how much the consumer ______ the product and the market price.
Signup and view all the answers
In a price floor scenario, the quantity exchanged will be ______.
In a price floor scenario, the quantity exchanged will be ______.
Signup and view all the answers
For a Price Floor to be effective, it must be higher than the ______ price in the market.
For a Price Floor to be effective, it must be higher than the ______ price in the market.
Signup and view all the answers
When prices are too low, it creates excess demand (Qd > Qs) and the qty exchanged in the market is the ______.
When prices are too low, it creates excess demand (Qd > Qs) and the qty exchanged in the market is the ______.
Signup and view all the answers
Study Notes
Economics & Scarcity
- Economics is the study of how people make choices in the face of scarcity.
- Scarcity exists because resources (land, labor, capital) are limited, but wants and needs are unlimited.
- Opportunity cost is the value of the best alternative forgone when making a choice.
Key Economic Issues
- Productivity growth
- Population aging
- Climate change
- Accelerated technological change
- Rising protectionism
- Growing Income inequality
Production Possibility Boundary (PPB)
- A graphical representation of all possible combinations of goods and services that can be produced using available resources.
- Points on the PPB are considered efficient, meaning all resources are fully utilized.
- Points inside the PPB are attainable but inefficient, indicating unused resources.
- Points outside the PPB are unattainable due to insufficient resources.
- Increases in resources or productivity cause the PPB to shift outwards, representing greater production potential.
Types of Economic Systems
- Traditional Economy: Economic decisions are based on customs and traditions.
- Command Economy: A central authority controls all economic decisions.
- Free Market Economy: Economic decisions result from interactions between consumers and producers in markets.
- Mixed Economy: Combines elements of all three systems.
Positive & Normative Statements
- Positive statements: Based on facts and are testable.
- Normative statements: Express opinions, beliefs, or values and are not testable.
Variables in Economic Models
- Exogenous variables: Independent variables that affect other variables within the model.
- Endogenous variables: Dependent variables that are influenced by exogenous variables.
- Assumptions: Simplifying statements used in models to simplify analysis.
Correlation & Causation
- Correlation: Two or more things occurring simultaneously.
- Causation: One thing directly influencing another.
- Positive Correlation: Two variables move in the same direction.
- Negative Correlation: Two variables move in opposite directions.
Index Numbers
- Express the value of a variable in a given year relative to a base year.
- Calculated as (Value in Current Year / Value in Base Year) * 100.
- The index number in the base year is always 100.
Demand
- Demand: The entire relationship between the price of a good and the quantity demanded at each price.
- Quantity Demanded: The specific quantity demanded at a given price.
- Law of Demand: Price and quantity demanded have an inverse relationship.
- Ceteris Paribus: The assumption that all other factors affecting demand are held constant to isolate the impact of price changes.
Factors Affecting Demand
- Increase in Demand: Shifts the demand curve outwards. Caused by increased income, population, tastes, favorable weather, rising prices of substitutes, or falling prices of complements.
- Decrease in Demand: Shifts the demand curve inwards. Caused by the opposite factors: decreased income, population, tastes, unfavorable weather, falling prices of substitutes, or rising prices of complements.
Supply
- Supply: The relationship between the price of a good and the quantity supplied at each price.
- Quantity Supplied: The specific quantity supplied at a given price.
- Factors Affecting Supply: Input prices, technology, weather, number of firms, and prices of complements and substitutes.
- Increase in Supply: The supply curve shifts outwards due to factors like decreased input prices, improved technology, favorable weather, more firms entering the market, or rising prices of complements.
- Decrease in Supply: The supply curve shifts inwards due to factors like increased input prices, technological setbacks, unfavorable weather, firms exiting the market, or falling prices of complements.
Equilibrium
- The point where quantity demanded equals quantity supplied (Qd = Qs).
- Market forces work to adjust prices and quantities to bring the market to equilibrium.
Solving for Equilibrium Price and Quantity
- Given demand and supply equations, equate Qd and Qs to solve for P*.
- Substitute P* into either Qd or Qs to find Q*.
Elasticity
- Measures the responsiveness of one variable to changes in another.
Own Price Elasticity of Demand
- Measures the sensitivity of quantity demanded to changes in the good's own price.
- Calculate by dividing the percentage change in quantity demanded by the percentage change in price.
- Take the absolute value of the elasticity.
Own Price Elasticity of Demand Interpretation
- Elastic: If E > 1, the percentage change in Qd is greater than the percentage change in P.
- Inelastic: If E < 1, the percentage change in Qd is less than the percentage change in P.
- Unit Elastic: If E = 1, the percentage change in Qd equals the percentage change in P.
Total Revenue and Own Price Elasticity
- Total Revenue (TR) = Price x Quantity
- TR changes in the direction of the larger change in price or quantity.
- For elastic goods (E > 1), TR moves with the change in quantity.
- For inelastic goods (E < 1), TR moves with the change in price.
Supply Elasticity
- Measures the responsiveness of quantity supplied to changes in price.
- Calculate by dividing the percentage change in Qs by the percentage change in P.
- Elastic Supply: Es > 1. Quantity supplied is highly responsive to price changes.
- Inelastic Supply: Es < 1. Quantity supplied is less responsive to price changes.
Elasticity and Taxes
- Taxes cause supply curves to shift left, reducing quantity supplied.
- Tax Incidence: Refers to how the burden of a tax is distributed between buyers and sellers.
- Inelastic goods tend to have a higher tax incidence on consumers, as they are less able to reduce their demand when prices increase.
Income Elasticity of Demand
- Measures how quantity demanded changes in response to changes in income.
- Income Elasticity of Demand Formula: (% change in quantity demanded) / (% change in income).
- Normal Goods: Ey > 0. Quantity demanded increases as income increases.
- Inferior Goods: Ey < 0. Quantity demanded decreases as income increases.
Cross Price Elasticity of Demand
- Measures how the quantity demanded of one good is affected by changes in the price of another good.
- Cross Price Elasticity of Demand Formula: (% change in quantity demanded of good X) / (% change in the price of good Y)
- Complements: Exy < 0. Quantity demanded of one good decreases when the price of a complementary good increases.
- Substitutes: Exy > 0. Quantity demanded of one good increases when the price of a substitute good increases.
Introduction to Economics
- The study of choice involves allocating scarce resources to satisfy unlimited wants and needs. Land, labor, and capital are scarce resources, (Factors of Production).
- Opportunity cost represents the value of the next best alternative forgone when making a choice.
Key Economic Issues
- Productivity growth, population aging, climate change, accelerated technological change, rising protectionism, and growing income inequality are crucial economic issues.
Production Possibility Boundary (PPB)
- Illustrates the maximum combinations of goods and services an economy can produce with its available resources.
- Points on the PPB represent efficient production, utilizing all available resources.
- Points inside the PPB signify attainable but inefficient outcomes, suggesting that some resources are idle.
- Points outside the PPB are unattainable due to insufficient resources.
- An increase in resources or productivity expands the PPB, enabling the production of more goods and services. A shift in the PPB reflects changes to the production capacity.
Decision Makers and Choices
- Consumers strive to maximize utility, or satisfaction.
- Producers seek to maximize profits.
- Marginal decisions involve the choice to consume or produce one additional unit, comparing its cost to its value.
Types of Economic Systems
- Traditional: Economic activities are based on established traditions and customs.
- Command: A central authority makes all economic decisions.
- Free Market: The interaction of consumers and producers determines economic outcomes.
- Mixed Market: Combines elements of traditional, command, and free market systems.
Positive and Normative Statements
- Positive statements: Empirical and testable using data.
- Normative statements: Express opinions or values, not necessarily testable.
Variables
- Exogenous variables: Independent variables that influence the behavior of other variables in a model.
- Endogenous variables: Dependent variables that are influenced by exogenous variables.
Assumptions
- Simplifying statements made for analysis, often representing abstractions from reality.
Correlation and Causation
- Correlation: Two or more variables occur simultaneously.
- Causation: One variable directly affects the other.
- Positive Correlation: Variables move in the same direction.
- Negative Correlation: Variables move in opposite directions.
Index Numbers
- Ratios comparing current values to the value in the base year.
- The base year has an index value of 100.
- Calculate index values for a given year by dividing the current year's value by the base year's value and multiplying by 100.
Demand and Quantity Demanded
- Demand: Represents the entire relationship between price and the quantity demanded at each price.
- Quantity Demanded: Refers to the amount of a good desired at a specific price.
- There exists an inverse relationship between price and quantity demanded, leading to a downward-sloping demand curve.
- Changes in price only result in movements along the demand curve, altering quantity demanded.
- Ceteris paribus means "holding everything else constant," allowing analysis of one factor while keeping others fixed.
Factors Affecting Demand
- Increase in Demand: Shifts the demand curve outwards; caused by factors like increased income, population growth, favorable tastes, favorable weather, higher prices of substitutes, or lower prices of complements.
- Decrease in Demand: Shifts the demand curve inwards; caused by factors like decreased income, population decline, unfavorable tastes, unfavorable weather, lower prices of substitutes, or higher prices of complements.
Supply and Quantity Supplied
- Supply (S): Entire relationship between price and the quantity supplied at each price.
- Quantity Supplied (Qs): Amount of a good a seller is willing and able to produce at a specific price.
- Changes in price lead to movements along the Supply curve (S), altering quantity supplied.
Factors Affecting Supply
- Increase in Supply: Shifts the supply curve outwards (right), caused by factors like lower input prices, lower prices for substitutes, technological advancements, favorable weather, increased number of firms, or higher prices for complements.
- Decrease in Supply: Shifts the supply curve inwards (left), caused by factors like higher input prices, higher prices for substitutes, technological setbacks, unfavorable weather, decreased number of firms, or lower prices for complements.
Equilibrium
- The point where quantity demanded equals quantity supplied (Qd = Qs).
- Market forces work to adjust prices and quantities to bring the market to equilibrium. This results in the equilibrium price (P*) and equilibrium quantity (Q*).
Solving for Equilibrium Price and Quantity
- Given demand and supply equations, equate Qd and Qs to solve for P*.
- Substitute P* into either Qd or Qs to find Q*.
Elasticity
- Measures the responsiveness of one variable to changes in another variable.
Own Price Elasticity of Demand
- Measures how quantity demanded changes in response to a change in the good's own price.
- Calculate by dividing the percentage change in quantity demanded by the percentage change in price.
- Take the absolute value of the elasticity.
Own Price Elasticity of Demand Interpretation
- Elastic: If E > 1, the percentage change in Qd is greater than the percentage change in P.
- Inelastic: If E < 1, the percentage change in Qd is less than the percentage change in P.
- Unit Elastic: If E = 1, the percentage change in Qd equals the percentage change in P.
Total Revenue and Own Price Elasticity
- Total Revenue (TR) = Price x Quantity
- Total Revenue will change in the direction of the larger percentage change in Qd or P.
- For elastic goods, the change in Qd is larger, so TR moves with Qd.
- For inelastic goods, the change in P is larger, so TR moves with P.
Supply Elasticity
- Measures the responsiveness of quantity supplied to changes in price.
- Calculate by dividing the percentage change in Qs by the percentage change in P.
- Elastic Supply: Es > 1. Quantity supplied is highly responsive to price changes.
- Inelastic Supply: Es < 1. Quantity supplied is less responsive to price changes.
Factors Influencing Supply Elasticity
- Production flexibility, ability to expand capacity, and time horizon.
- Firms with greater flexibility and capacity have more elastic supply over time, and conversely if capacity cannot be scaled readily, supply will be inelastic.
Taxes and Elasticity
- A tax on a good shifts the supply curve to the left.
- The tax burden, or incidence, refers to who bears the larger portion of the tax, buyers or sellers.
- Inelastic goods tend to have more of the tax burden passed on to buyers.
Income Elasticity of Demand
- Measures the responsiveness of Qd to a change in income.
- Calculate by dividing the percentage change in Qd by the percentage change in Income.
- Elastic Good: Ey > 1, Qd is sensitive to income changes.
- Inelastic Good: Ey < 1, Qd is not as sensitive to income changes.
Income Elasticity and Goods Classification
- Normal Good: Ey > 0, Qd increases with income.
- Inferior Good: Ey < 0, Qd decreases with income.
Cross Price Elasticity of Demand
- Measures the demand responsiveness of one good to a change in the price of a different good.
- Calculate by dividing the percentage change in Qd of good X by the percentage change in the price of good Y.
- Complements (used together): Exy < 0, a price increase in Y leads to a Qd decrease in X.
- Substitutes (used in place of each other): Exy > 0, a price increase in Y leads to a Qd increase in X.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Test your understanding of economic principles related to scarcity and productivity. This quiz covers key economic issues, opportunity cost, and the Production Possibility Boundary. Challenge yourself with questions that explore how choices are made under limited resources.
