Final Exam: Chapter 3

Microeconomics 211 with Mc Daniel at Arizona State University - Tempe

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By: Ashley D'Angelo
Created: 2011-12-12
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Allocation Systems

the process of determining who gets the goods and services and who doesn't

Types of Allocation Systems

Government (or Third Party)

First-Come First-Served

Lottery

Market (Highest Bidder)

Allocation Systems: Government (Incentives)

-be a member of government; help determine allocation

NO INCENTIVES TO

-improve production, efficiency, or quantity supplied

(because there's no profit for producers)

*no reason for economy to grow*

Allocation Systems: First-Come First-Served (Incentives)

-be first

NO INCENTIVES TO:

-improve quality, value, or amount of good and services supplied

*no growth, standards of living will not rise*

Allocation Systems: Lottery (Incentives)

NONE

Allocation Systems: Markets (Incentives)

-improve quality & quantity of goods provided

*economies grow & expand, standard of living increases*

Conditions in Which Markets can Fail

-Public Goods (no incentives to make quality public goods)

-Asymmetric Information (full disclosure rule)

-Externalities (markets don't always create best incentives)

EX: education, pollution

The Price System

Prices = Denominated in Monetary Units

$$ is not necessary, but it's easier than barter

Barter

The exchange of goods and services for other goods and services

REQUIRES: double coincidence of wants

Double Coincidence of Wants

two people bartering have to agree on wanting what the other has

Advantages of Monetary Exchange

EVERYONE WANTS MONEY!

Reduces Transaction Costs

(eliminates double coincidence of wants)

Calculating Relative Prices and Opportunity Costs is Easier

Demand

"The quantity of a well defined good or service that consumers are willing to purchase at every possible price at a given period of time, holding all else constant"

Quantity Demanded

The amount consumers are willing and able to buy at a specific price

Law of Demand

-Inverse/negative relationship between price and quantity demanded

•Ceteris Paribus

As price rises, quantity demanded falls

As price falls, quantity demanded rises

Demand Curve

There is an inverse relationship between price and quantity demanded

Along demand curve, determinants of demand are constant

If determinants of demand change, demand curve shifts

Determinants of Demand

Non-price factors that determine demand

Income/Wealth

Tastes and Preferences

Price of related goods

Expectations of future and/or income

Number buyers

Income

Flow Concept

Income Increases: Demand for normal goods increases; demand for inferior goods decreases

Income Decreases: Demand for inferior goods increases; demand for normal goods increases

Normal Goods

•Examples – Starbucks lattes, movie tickets, gas, insurance policies, health care, steaks

Most goods are normal

Inferior Goods

•Examples – packaged noodles, cheap liquor, lentils

Wealth

Stock Concept

Wealth Decreases if:

–Households borrow

–Value of assets (stocks, bonds, real estate) decline

–Households spend down savings

Wealth Decreases: Demand for normal goods decreases; demand for inferior goods increases

Wealth Increases: Demand for inferior goods decreases; demand for normal goods increases

Price of Related Goods

Substitute Goods

Complimentary Goods

Price of Related Goods: Substitute Goods

-can be used in place of another good like it

*as the price of a good increases, the demand for its/a substitute good increases*

EX: price of beef increases, demand for chicken increases

Price of Related Goods: Complimentary Goods

-goods that are used/purchased along with another good

*as the price of a good rises, demand of its complementary good decreases*

EX: price of ipods increases, demand for headphones decreases

Expectations of Future/Income

-Income expected to increase in future, consume (demand) more (normal) goods today

REVERSE IS ALSO TRUE

-Prices expected to decrease in future, consume (demand) less (normal) goods today

REVERSE IS ALSO TRUE

Number of Buyers

Population

-more people = more buyers = increased demand

Demographics

-different people buy different things

EX: young people v. old people; students v. professionals; drinkers v. smokers

Supply

The quantity of a well defined good or service that producers are willing and able to offer for sale at every possible price, holding all else constant

Quantity Supplied

The amount producers are willing and able to _supply at a specific price

Law of Supply

Positive/demand relationship between price&quantity supplied

Ceteris Paribus: as price rises, quantity supplied rises; price falls quantity supplied falls

*higher prices = greater profits = ability to supply more*

Determinants of Supply

Non-price factors that determine supply:

Price and availability of resources/inputs

Technology / productivity

Price of related goods (in production)

Expectations of suppliers

Number of suppliers

Price and Availability of Resources/Inputs

•As the prices of resources fall, production gets cheaper and firms are willing and able to supply more at every possible price

•As prices of resources increase or availability decreases, firms are willing and able to supply less at every possible price

Technology/Productivity

Increase in technology/productivity = more output with the same input

Price of Related Goods (In Production)

Producers face opportunity cost

Resources used in production of one good = can't be used in production of another

*Price of a substitute in production increases = supply decreases as resources are used in production of the other good*

Expectations of Suppliers

–Expect Lower future prices = increase supply today

–Expect Higher future prices = decrease supply today

Number of Producers

•Market supply is the sum of all individual supply curves

•More producers, more available at every possible price

Equilibrium

Occurs when quantity supplied equals quantity demanded

If the Market System is Allowed to Operate...

there will be no persistent shortages or surpluses

Market Interference

*Can lead to shortages or surpluses*

-Price Ceiling

-Price Floor

Price Ceiling

price is not allowed to rise above a set value

*Price floor below the equilibrium leads to a shortage of goods and services*

Price Floor

price is not allowed to fall below a set value

*Price floor above the equilibrium leads to a surplus of goods and services*

Shortage

a quantity supplied that is smaller than the quantity demanded at a given price

Occurs When: price is less than the equilibrium price

Surplus

a quantity supplied that is larger than the quantity demanded at a given price

Occurs When: price is greater than the equilibrium price

Shape of the PPC

determines whether opportunity costs are increasing or constant

Constant Opportunity Cost

Opportunity cost is always the same

*1 additional unit of good x always costs units of good y*

Increasing Opportunity Cost

Opportunity cost increases as production increases

*1 additional unit of good x costs more and more units of good y as additional units of x are produced*

Terms of Trade

range of acceptable prices - depends on relative opportunity costs

About this deck

By: Ashley D'Angelo
Created: 2011-12-12
Size: 45 flashcards
Views: 8

About StudyBlue

“I have used this website for three exams, and I see a huge difference in my test results.”
Naj