Economics Test 1 - Elasticity, Demand, and Supply: Notes and Definitions PDF

Budget constraint - all possible consumption combinations of goods\ that someone can afford, given the prices of goods, when all income\ is spent; the boundary of the opportunity set. Opportunity set - all possible combinations of consumption that\ someone can afford given the prices of goods and...

Budget constraint - all possible consumption combinations of goods\ that someone can afford, given the prices of goods, when all income\ is spent; the boundary of the opportunity set. Opportunity set - all possible combinations of consumption that\ someone can afford given the prices of goods and the individual's\ income (all income does not need to be spent). Given the price of the two goods and a budget amount, a budget\ constraint can be illustrated graphically.\ With a limited amount of income to spend on things, consumers must\ choose what they need and want. opportunity cost indicates what people must give up to obtain what they\ desire. The cost of one item is the lost opportunity to do or consume something else.\ The opportunity cost is the value of the next best alternative.\ A fundamental principle of economics is that every choice has an opportunity cost. Marginal analysis - examining the benefits and costs of choosing a\ little more or a little less of a good. Utility - satisfaction, usefulness, or value one obtains from consuming\ goods and services. Law of diminishing marginal utility - as a person receives more of a\ good, the additional (or marginal) utility from each additional unit of\ the good declines **\ **Law of diminishing returns - as additional increments of resources to\ producing a good or service are added, the marginal benefit from\ those additional increments will decline Productive efficiency - when it is impossible to produce more of one\ good (or service) without decreasing the quantity produced of\ another good (or service) Comparative advantage - when a country can produce a good at a\ lower opportunity cost than another country Demand - the amount of some good or service consumers are willing and\ able to purchase at each price. Price - what a buyer pays for a unit of the specific good or service. Quantity demanded - the total number of units of a good or service\ consumers are willing to purchase at a given price Supply - the amount of some good or service a producer is willing to supply\ at each price. Quantity supplied - the total number of units of a good or service\ producers are willing to sell at a given price. Price controls - laws that governments enact to regulate prices. Price ceiling - keeps a price from rising above a certain level, a legal maximum price that one pays for some good or service Price floor - keeps a price from falling below a given level, is the lowest price that one can legally pay for some good or service. Law of supply - assuming all other variables that affect supply are held\ constant**,** **\ Law of demand - keeping all other variables that affect demand constant,** **Labor market** - the supply and demand for labor. **Law of demand in labor markets** Higher salary or wage (price) in the labor market decrease in the quantity of labor\ demanded by employers.\ Lower salary or wage (price) increase in the quantity of labor demanded. **Law of supply labor markets:\ ** Higher price for labor higher quantity of labor supplied.\ Lower price for labor lower quantity supplied. Equilibrium - the quantity supplied, and the quantity demanded are equal.\ At the equilibrium wage, employers can find workers, and workers can find jobs. **Elasticity**- is an economics concept that measures the responsiveness of\ one variable to changes in another variable. **Price elasticity**-is the ratio between the percentage change in the quantity\ demanded (Qd) or supplied (Qs), and the corresponding percent change in\ price. **Price elasticity of demand** - percentage change in the quantity demanded\ of a good or service divided the percentage **Price elasticity of supply** - the percentage change in quantity supplied\ divided by the percentage change in price. An elastic demand or elastic supply is one in which the elasticity is\ greater than one, indicating a high responsiveness to changes in\ price. Inelastic demand or inelastic supply - elasticities that are less than\ one, indicating low responsiveness to price changes. Unitary elasticities indicate proportional responsiveness of either\ demand or supply **Infinite elasticity or perfect elasticity** - either the quantity demanded (Qd) or supplied\ (Qs) changes by an infinite amount in response to any change in price at all. In both cases, the supply and the demand curve are horizontal.\ The quantity supplied or demanded is extremely responsive to price changes, moving from zero for prices close to P to infinite when price reach P. **Zero elasticity or perfect inelasticity** - a percentage change in price, no\ matter how large, results in zero change in quantity. The vertical supply curve and vertical demand curve show that there will\ be zero percentage change in quantity (a) supplied or (b) demanded,\ regardless of the price. **Constant unitary elasticity**, in either a supply or demand curve, occurs\ when a price change of one percent results in a quantity change of one\ percent.\ A demand curve with constant unitary elasticity will be a curved line.\ Notice how price and quantity demanded change by an identical amount in\ each step down the demand curve. **Constant Unitary Elasticity**\ A constant unitary elasticity supply curve is a straight line reaching up from the\ origin.\ Between each point, the percentage increase in quantity demanded is the same\ as the percentage increase in price. **Tax incidence** - way the tax burden is divided between\ buyers and sellers. If demand is more inelastic than supply, consumers bear most of the\ tax burden. If supply is more inelastic than demand, sellers bear most of the tax\ burden. Elasticities are often lower in the short run than in the long run. On the demand side of the market, it can sometimes be difficult to change\ Qd in the short run, but easier in the long run. On the supply side of markets, producers of goods and services typically\ find it easier to expand production in the long term of several years rather\ than in the short run of a few months. In most markets for goods and services:\ in the short run - prices bounce up and down more than quantities.\ in the long run - quantities often move more than prices.\ **Cross-price elasticity of demand** - the percentage change in the quantity of good\ A that is demanded because of a percentage change in the price good B **Wage elasticity of labor supply** - the percentage change in labor supplied divided\ by the percentage change in wages. **Wage elasticity of labor demand** - the percentage change in labor demanded\ divided by the percentage change in wages. **Interest rate elasticity of savings** - the percentage change in the quantity\ of savings divided by the percentage change in interest rates. **Interest rate elasticity of borrowing** - the percentage change in the\ quantity of borrowing divided by the percentage change in interest rates. **Budget constraint** - shows the possible combinations of two goods\ that are affordable given a consumer's limited income. **Total utility** - satisfaction derived from consumer choices.