AREC 202

• The Scarcity Principle


  having more of one good thing usually means having less of another
• The Cost-Benefit Principle


  the extra benefits from taking the action are at least as great as the extra costs
• The Incentive Principle


  more likely to take an action if its benefit rises, and less likely to take it if its costs rises
• Economics


  the study of how people make choices under conditions of scarcity and of the results of those choices for society
• Absolute Advantage


  a task being performed in less time compared to anothers
• Comparative Advantage


  his or her opportunity cost of performing a task is lower than anothers
• Opportunity Cost


  what you must give up in order to get it
• PPF

  Production Possibility Frontier
• Circular-Flow Diagram


  model that represents the transactions in an economy by flows around a circle
• if price goes up, quantity demanded goes down
• Law of Demand


  the higher the relative price of a good, the smaller is the quantity demanded during a given period
• Buyer's Reservation Price


  maximum willingness to pay
• q - quantity of the good
• p - marginal buyer's reservation price for this quantity
• Horizontal Interpretation


  at a given price, how much will buyers buy
• Vertical Interpretation


  given the quantity to be sold, what price is the marginal consumer willing to pay
• when price goes down, quantity demanded goes up
• Demand Rightward Shift


  if buyers are willing to buy more at each price, then demand has increased
• Demand Leftward Shift 


  if buyers are willing to buy less at each price, then demand has decreased
• change in the price of a good = change in the quantity demanded (movement along the curve)
• change in a non-price determinant of demand = change in demand (shift in the demand curve)
• Substitutes


  goods that can serve as replacements for one another (one price increases -> demand for other increases)
• Complementary Goods


  used in conjunction together (one price decreases -> demand for the other increases; vice versa)
• Normal Goods


  goods for which demand increases as income increases (vice versa)
• Inferior Goods


  goods for which demand decreases as income increases
• Supply Curve

  price change = quantity supply change
• the higher the price of a good, the greater is the quantity supplied
• Seller's Reservation Price


  smallest amount at which a seller is willing to sell
• Equilibrium

  the quantity demanded of a good = the quantity supplied of that good
• Surplus

  when the quantity supplied exceeds the quantity demanded (above the equilibrium level)
• Shortage

  when the quantity demanded is exceeds the quantity supplied (below the equilibrium level)
• demand for a normal good increases when income increases
• demand for an inferior good increases when income decreases
• Buyer's Surplus

  buyer's reservation price - market price
• Seller's Surplus

  market price - seller's reservation price
• Total Surplus

  buyer's surplus + seller's surplus
• Elasticity


  measures how much one variable changes in response to a change of another variable
• Price Elasticity

  the change of quantity demanded following a change in price
• % change in QD

  (change in QD / initial QD) x 100
• % change in price

  (change in $ / initial $) x 100