Vocabulary
What is opportunity cost?
What is the explicit cost plus the implicit cost?
What is one example of a shift that raises prices and quantity supplied?
What is an increase in demand? Any increase in demand will raise the equilibrium price and quantity demanded, which is the same as quantity supplied at the equilibrium point.
This type of price control sets a maximum legal price.
What are price ceilings?
What is the difference between comparative and absolute advantage?
What is comparative advantage is a measure of OC – those that have comparative advantage sacrifice less to make something. Absolute advantage is absolute – it is a measure of sheer productive capabilities and who can make something with fewer resources.
In this class, people behave rationally. This means they will only take an action if they believe that their personal ____ is greater than their personal ____.
What is benefit, cost?
This condition has to be true to determine the effects of a market shift.
What is ceteris paribus (all else equal)?
Name one factor that can shift the supply curve.
What are technology, government incentives, natural disasters, labor supply?
This type of price control is only binding when it is set above the equilibrium price.
What is a price floor?
What are two pieces of information we can directly or indirectly glean from two individuals' constant-cost PPF?
What is comparative advantage and absolute advantage can be calculated by comparing intercepts? An acceptable price range in which trade occurs can be calculated by comparing opportunity costs.
I love grilled cheese sandwiches. Everyday, I make myself two grilled cheese sandwiches with salami which costs me $4/sandwich. What is my benefit of making the third sandwich?
What is < $4?
What is a market equilibrium? Why is it important?
What is the point at which the quantity supplied is equal to the quantity demanded? This is the only stable point in a market, in which price and quantity supplied/demanded will not change.
Sabrina Carpenter recently endorsed the Awesome Chair that I invented. How might this affect supply?
Nothing. Sabrina’s influence may affect taste (and therefore demand), but it will not influence supply.
A binding price ceiling creates this kind of market disequilibrium.
What is a shortage?
Why do economists believe that specialization increases societal productivity? Explain in terms of PPFs.
What is specialization increases societal productivity because it allows us to use resources more efficiently? Using our comparative advantages, we can do more with less resources. Everyone is better off.
You and your friend have an ECON midterm tomorrow. Your friend decides to go to the movies for two hours tonight. The price of going (transit, ticket, etc.) is $20. They are only going because the tickets are $3 off – they tell you that, at $23, they would prefer to stay home and study. What can you determine about your friend’s benefit of studying for those two hours?
What is your friend’s benefit of studying lies somewhere between $20 and $23. At $23, the cost (or the benefit of studying) of going to the movies exceeds the benefit of going? But at $20, the benefit of going to the movies exceeds the cost of not studying. Therefore, the true benefit of going to the movies lies somewhere between $20 and $23.
Is my used 2006 Volvo a normal good or an inferior good?
What is an inferior good? People tend to buy more used cars when incomes lower.
Suppose that the market for pink ponies is found by the curves QD = 20 - P and is QS = P. Now suppose that the government imposes a $4 tax on each pink pony sold. Draw a graph and find the old and new equilibrium points! (Hint: think of the tax as an increased cost or a decrease in benefit)
What is see graph? At EQ1, Q = 10 and P = 10. At EQ2, Q = 8 and P = 12.
The government sets a maximum price on the price of butter. Butter is an input for croissants, and the price of croissants does not change after the government implements the maximum price. Name the type of price control implemented and determine its effect on the market.
What is a nonbinding price ceiling, since the supply of croissants doesn’t seem to change at all?
Given the following PPF, determine which party will be the consumer and which party will be the producer. For either good.
What is Japan will specialize in cars and China will specialize in TVs because Japan has an OC of 1.25 for making cars and .8 for making TVs while China has an OC of 11/8 for making cars and 8/11 for making TVs?
I turned down an offer to make $200k/year as a backup dancer to Charli XCX for my studies. Assume I am a rational actor. What does this decision show about my marginal cost? Come up with a plausible explanation for my decision.
What is since people will make any decision in which MB >= MC, the fact that a MB of $200k/year does not exceed my MC suggests that I stand to lose more earnings by going on tour than by finishing my education? Maybe I really value my time here, or maybe I stand to make a ton of money with the degree I will earn.
This occurs when the price is above the equilibrium price.
What is a surplus? Qs > Qd
Suppose that some major changes have recently occurred in the phone market. Come up with a story that explains why either a) market price for a phone has changed but quantity has stayed constant or b) market quantities for a phone have changed but price has stayed constant.
What is both conditions need a shift in supply AND demand. Their shifts will cancel out either changes in quantity or changes in price.
Suppose the supply curve for pineapples is given by Qs = 50P - 200 and the demand curve for pineapples is given by Qd = -25P + 1000. The government is deciding to implement price controls that would cause a shortage of 300 pineapples. What price controls would the government implement, and what is the price that they would set?
What is a price ceiling, at $12? At equilibrium, Qs = Qd. At the disequilibrium, Qs = Qd - 300.
Determine an acceptable price range for trading Lady Gaga collectible cards in terms of Taylor Swift collectible cards. (Hint: first, calculate opportunity costs to determine who should produce which good. Then remember that an individual will only trade for the good they are not making if that good is “cheaper” than if they made it themselves: I will buy your grilled cheese if you sell it for $2 if it costs me $2.50 to make, but I won’t buy it if I can make my own for $1.50)
What is the price can fall anywhere in the range of .75 <= Price <= 2? Romeo’s OC of making Lady Gaga collectible cards is 2, and Joaquin’s OC is .75. Romeo will specialize in Taylor Swift cards and Joaquin will specialize in Lady Gaga cards. Price range can be calculated by the formula OCproducer <= Price <= OCconsumer.
The market for applesauce is undergoing some interesting changes. Year 1, the market is stable. In Year 2, despite an unusually cold season decreasing the apple harvest, new technology has offset the decreased apple output so that the supply of applesauce remains stable. Year 3 sees the return of normal temperatures. All else equal, what can we conclude about the supply curve of applesauce between Year 1 and Year 3?
What is the supply increases? New technology has increased the supply, reflecting a decrease in cost. The cost was temporarily affected by a decrease thanks to technology and an increase due to a poor harvest. But between years of normal harvests, it is clear that the increase in supply is thanks to the new technology, marginal cost.