A market in equilibrium leaves no cash on the table for individuals, but there may be gains achievable through collective action.
What is the efficiency principle?
economic efficiency is an important goal for society to achieve (no cash on the table)
all goods and services are produced in their socially optimal quantity
Socially Optimal quantity of a good
quantity where there is no cash on the table
cash on the table
when the buyer and seller can't take advantage of the difference in their reservation prices (because of disagreement or regulations)
difference between the buyer's reservation price and the seller's reservation price for a given quantity of a good
difference between the market price and the seller's reservation price for a given qty of a good
difference between buyer's reservation price and the market price for a given qty of a good
qty demanded > qty supplied at a given price
qty supplied >qty demanded at a given price
equilibrium price has established an equilibrium quantity
quantity that buyers and sellers agree to at the equilibrium price
price at which the quantity demanded = the quantity supplied
nothing changes unless and outside force acts on the situation
Seller's reservation price
lowest price that sellers are willing to receive for a given quantity of a good
Change in Supply
shift of the entire supply curve. caused by change in:
-# of sellers
Change in quantity supplied
movement along the supply curve. only caused by a change in price!!!
the quantity of a good that sellers are able/want to sell at each possible price
buyer's reservation price
the highest price that buyers are willing to pay for at a given quantity of a good
when income rises, the demand for the good rises.
when income falls, the demand rises (i.e. ramen noodles and broke college kids)
Change in demand
shift of the entire demand curve. Caused by change in:
-# of buyers
- price of another good
-income of buyers
Change in qty demanded
movement along the demand curve. only caused by a change in price!!!!!
increase the price of a good--> buyer can't buy as large of a quantity of the good at a higher price
causes the demand curve to slope downward because an increase in price will decrease demand; people will purchase substitutes instead.
shows the quantity of a good that buyers want to buy and are able to buy at each possible price
total cost of x units of activity
total benefit of x units of activity
change in total benefits resulting from a 1-unit change in the level of the activity
change in total costs of an activity resulting from a 1-unit change in the level of the activity
costs that cannot be recovered and should be ignored when trying to decide whether or not to do an activity
All choices have what?
an opportunity cost
net benefits are measured in...
dollars, not percentages
people have goals, and will try to follow them as best they can
the cost of everything you have to sacrifice in order to take an action (including the next best alternative to that action)
the difference between the benefits of tasking an action and its costs
someone who has well-defined goals and tries to fulfill them the best they can
our resources are finite and our wants/needs are infinite;producing more of one thing means producing less of another
people choose to take an action only if the benefits outweigh the costs
a person can complete a task using fewer resources than the other person.
A person has a lower opportunity cost of completing a task than the other person
The Principle of Comparative Advantage
everyone does best when each person or country concentrates on the activities for which their opportunity cost is lowest.
The Principle of Increasing Opportunity Cost
to expand the production of any good, a person or country should first employ those resources with the lowest opportunity cost, then move on to the resources with higher opportunity costs
each person or country should specialize in a task in which they have a comparative advantage.
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