Fundamentals
Name the four resources.
*hint: think CELL
Capital
Entrepreneurial Ability
Land
Labor
What is the Law of Demand?
A principle in economics that states that as the price of a good, service, or resource rises, the quantity demanded will decrease, and vice versa, all else held constant.
What is the Law of Supply?
A principle in economics that states that as the price of a good, service, or resource rises, the quantity supplied will increase, and vice versa, all else held constant.
In other words, the higher the price, the higher the quantity supplied. The lower the price, the lower the
quantity supplied.
What is Market Equilibrium?
The price and quantity where the demand and supply curves intersect.
Scarcity.
A condition that results from the inability of limited
resources to satisfy unlimited wants.
James decides to spend 20 dollars to go see a movie instead of studying for his exam. What is his opportunity cost?
$20 and the time spent studying for the exam.
What are three reasons why the demand curve slopes downward?
Income Effect, Diminishing Marginal Utility, & Substitution Effect
What concept helps to explain the law of supply?
Diminishing marginal productivity: If at least one input of production is fixed, the marginal productivity of additional variable resources will eventually fall, all else held constant.
Determine the equilibrium price and quantity.
Price ($) QD QS
4 100 10
5 90 30
6 80 50
7 70 70
8 60 90
9 50 110
10 40 130
11 30 150
Price = $7
Quantity = 70
Marginal.
additional, one more, incremental, etc.
What is the rule for marginal decision making?
What is the difference between quantity demanded and market demand?
Quantity demanded is the quantity of a good or service consumers are willing and able to buy at a certain price. Only changes when price changes.
Market demand is a representation of the total/overall demand of a good or service. Only changes when anything other than price changes (think determinants).
Suppose we have two producers in the market for bread. How would we determine the market supply for bread?
Add the amount each producer is willing and able to produce at each price point.
Explain the difference between the two types of disequilibrium.
Shortage: A situation in which the quantity demanded is greater than the quantity supplied at the current market price. Also called excess demand.
Surplus: A situation in which the quantity supplied is greater than the quantity demanded at the current market price. Also called excess supply.
Opportunity Cost.
the value of the next-best forgone alternative
Carlos and Paula are fruit producers. Carlos can harvest 30 apples or 12 oranges in one day. Paula can harvest 24 apples or 18 oranges in one day. Who has the comparative advantage in apple production?
Carlos
Jackie and Carla want to buy candy bars. At a price of $2, Jackie is willing to buy 5 candy bars, and Carla is willing to buy 3. What is the demand for candy bars at a price of $2?
8 candy bars
Explain the effects of taxes and subsidies on producers.
A tax on a producer causes a decrease in the supply (more expensive to produce).
A subsidy on a producer causes an increase in the supply. (incentive to produce more; ex. renewable energy)
Explain the difference between price ceilings and price floors.
Price Ceiling: A maximum legal price at which a good, service, or resource can be sold.
Price Floor: A minimum legal price at which a good, service, or resource can be sold.
Gains from Trade.
The benefit or wealth that accrues to a buyer or seller as a result of trading one good, service, or resource for another.
What should a producer do if they have a comparative advantage in the production of a certain good?
They should specialize.
A weather forecast suggested that this upcoming winter is going to be the coldest one yet. Describe what will happen to the demand for winter coats.
A new piece of technology makes harvesting wheat 5 times more efficient. What will happen to the supply of wheat?
The supply of wheat will increase; the curve will shift to the right.
Determine what makes a price ceiling and a price floor binding.
A price ceiling is binding when it is below the market equilibrium.
A price floor is binding when it is above the market equilibrium.
Marginal Decision Making.
The process of making choices in increments by evaluating the additional or marginal benefits against the additional or marginal costs.