arec 250
Terms
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- scarcity principle
- -having more of one good thing usually means having less of another
- trade-offs
- -giving up some of one good to get more of another
- cost-benefit principle
- -an individual should take an action if, and only if, the benefits from taking the action are at least as great as the costs
- opportunity cost
- -the value of the next best option (giving up electricity of the dam to save salmon)
- sunk cost
- -costs that are borne whether or not an action is taken
- economic surplus
- -difference between the benefit and cost of an action
- marginal analysis
- -compare the benefit and cost of the next unit of a good, not the average of a number of goods
- incentive principle
- -a person is more likely to take an action if its benefits rises, and less if cost rises
- market
- -place where voluntary exchange takes place between buyers and sellers
- centrally planned market
- -government makes all decisions
- free market
- -decentralized free markets
- mixed market
- -mix of markets and governments
- rival goods
- -your consumption of the good reduces my consumption
- excludable good
- -i can prevent you from consuming the good
- private goods
- -excludable and rival
- common property
- -non excludable and rival
- club goods
- -excludable and non rival
- public goods
- -non rival and non excludable
- Why is the demand curve downward?
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-as they buy more and more units, they become satisfied and only willing to take another unit if the price lowers
-as the price rises, they cannot afford as many units - substitution effect
- -increase in price causes them to switch to other goods
- income effect
- -increase in the price reduces their purchasing power
- Supply curve
- -for each price, the number of units the seller is willing to provide
- Why is supply curve upward sloping?
- -as we expand a company we first turn to those whose opportunity cost is lowest
- Market equilibrium
- -price and quantity of a good are unchanging
- excess supply
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-amount supplied exceeds the demanded (Qs-Qd)
-above equilibrium price - excess demand
-
-demanded exceeds the supplied (Qd-Qs)
-below equilibrium - change in quantity demanded
- -movement along the demand curve
- change in demand
- -shift in the entire demand curve
- why might demand shift?
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-change in price of goods
-change in income of consumers - complements
- -two goods that need to be consumed together
- substitutes
- -goods that can be exchanged for one another
- normal good
- -demand for normal good increases when income rises (and vice versa)
- inferior goods
- -the demand for an inferior good falls when income rises (and vice versa)
- change in quantity supplied
- -movement along supply curve in response to a price change
- change in supply
- -shift in the supply curve
- Why might supply shift?
-
-changes in input prices
-technological change - increase in demand, supply the same
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-price up
-quantity up - decrease in demand, supply the same
-
-price down
-quantity down - increase supply, demand same
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-price down
-quantity up - decrease supply, demand same
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-price up
-quantity down