Module 1
What is the Cost Benefit Principle (it has to do with decision making).
Costs and benefits are the incentives that shape our decisions.
What is the Law of Demand?
As prices increase, demand decreases (vice versa).
What is the Law of Supply?
As prices increase, supply increases (vice versa).
What is a shortage versus a surplus? Give an example.
Shortage: Demand exceeds supply (covid-19 toilet paper)
Surplus: Supply exceeds demand. (Christmas decorations in the summer).
What is scarcity? How is it different from a shortage?
Scarcity: Resources are limited so you have to make decisions.
Shortage: When demand exceeds supply.
What is a Sunk Cost? Give an example.
A cost that has been incurred and cannot be reversed.
Examples:
Paying rent, buying a movie ticket
What is a movement versus a shift? What causes a movement on the demand graph?
If the demand graph shifts right, is it increase or decrease? Left?
A movement is a change along the line (price causes a movement). A shift is the graph physically moving.
Right = Increase, Left = Decrease
When supply shifts to the right is it an increase or decrease? What about left?
Right - Increase
Left - Decrease
What is Consumer Surplus and Producer Surplus? What is Economic Surplus.
Consumer: The economic surplus you get from buying something when your marginal
benefit is above the price.
Producer: The economic surplus you get from selling something when the price is
above the marginal cost.
Economic = Consumer + Producer
What does ceteris paribus mean in economics?
Ceteris paribus (Latin): Holding other things constant.
You are shopping at Walmart for a brand-new water bottle for the new school year, your budget is $25 but they cost $30.
What is your willingness to pay?
What is the opportunity cost of NOT buying a water bottle.
Willingness to pay is $25.
OC of not buying a water bottle is keeping $30.
Identify the following for both graphs:
Is it a shift or movement?
Is QD or Demand changing?
Increase or Decrease?
G1) Shift, Increase in demand.
G2) Movement, increase in QD
Identify the following:
Is it a shift or movement?
Is QS or Supply changing?
Increase or Decrease?
G1) Movement in QS, Increasing
G2) Shift in Supply, decreasing
Identify the following for both graphs:
Is it a shortage or surplus?
What is the new QD and QS?
G1) Shortage, QD 55, QS, 15
G2) Surplus, QD 20, QS 75
Does a movement change the QD/QS or Demand/Supply?
What about a shift?
Movement = Change QD/QS
Shift = Change in Demand/Supply
What is the marginal principle? Give an example.
Marginal Benefits = Marginal Cost
We naturally stop at the point where these two are equal. (Watching TV, the more you watch the more the marginal benefit goes up until you watch too much)
What are the 6 shifters for Demand.
(After answer we will create definitions and examples)
Income (normal and inferior goods), Price of related goods (complements and substitutes), Expectations, congestion and network effects, type and number of buyers.
What are the 5 shifters for Supply?
Input Costs, Productivity/Technology, Price of Related inputs (complements and substitutes of production), expectations, type/number of sellers
What is Market Efficiency, DWL and the causes of Deadweight Loss?
Market Efficiency: Producing a given quantity of output at the lowest possible cost.
DWL: Loss of surplus.
DWL Causes:
Market Power, Externalities, Information Problems, Irrationality, Government Regulations
Where do Shortages and Surpluses occur on the graph?
Above Price = Surplus
Below Price = Shortage
On the PPF identify the following:
What is a PPF?
Where do we consume?
Where can't we consume and why?
PPF: Different sets of output that are attainable with your resources.
We consume on the line. As we are using max resources. (A,C,D,B)
We can't consume below because we are underproducing or above because we don't have the resources. (E, F)
Identify what shifters are changing the demand. Also is demand increasing or decreasing.
1.) You get a raise and stop buying ramen noodles.
2.) The price of hamburgers rises, so people buy more hot dogs. Also, the demand for hamburger buns goes down.
3.) A gym gets overcrowded, so you stop going because the wait for equipment is too long.
1.) Income - Inferior Good. Demand for ramen decreases.
2.) Complement and Substitutes. Demand for hotdogs increases, demand for hamburgers decrease.
3.) Congestion. Demand for the gym decreases.
Identify what shifters are changing the supply. Also is supply increasing or decreasing.
1.) The price of flour goes down, so bakeries make more cupcakes.
2.) A new bakery opens, so people are able to buy more bread.
3.) The price of T‑shirts rises, so a factory makes fewer hoodies.
1.) Input Prices, Supply Increases
2.) Type/Number of sellers, Supply Increases
3.) Substitute, Supply for T-shirts increases.
Which one of the graphs is underproduction and overproduction occurring?
G1) Underproduction
G2) Overproduction