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reward and penalties that regulate behavior ex. captains paid by number of surviving members instead of paid to take members

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incentives

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the value of what you give up when you make a choice helps us evaluate trade offs helps us understand behavior

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opportunity cost

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How much of the additional income you get to keep after taxes (marginal benefit). • What you give up to move i.e. friends, family, lower cost of living (marginal cost)

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offered a higher paying job, what would the marginal benefits and the marginal costs be

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specialization ex. despite the fact that Martha Stewart specializes in home living, she does not clean her own house in order to focus on her career

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production increases through ___

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wealth, economic growth

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in this economy, ___ is important to ___

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large amounts of physical and human capital. Things are produced in a relatively efficient manner. Use of the latest technological knowledge

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what makes a country rich

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North and South Korea are extremely similar geographically, but South Korea is way more prosperous due to economy and incentives

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Institutions matter

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new ideas, they are the lifeblood of economic growth

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Macroeconomists are especially interested in the incentives to produce

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economics busts and booms, no economy grows at a constant rate not all are normal (The Great Depression)

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what can not be avoided when it comes to the economy

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an increase in the general level of prices (one of the most common macro problems) caused by the sustained increase in money supplythr

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inflation

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The Federal Reserve Bank

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____ Is often called to combat inflation

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consume more than we otherwise could

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trade allows us all to

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1) trade is better when preferences differ 2) trade increases productivity through specialization and the division of knowledge 3) trade increases productivity through specialization and comparative advantage

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three benefits of trade

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specialization increases knowledge increases productivity

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specialization, productivity, knowledge

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trade is not possible without specialization trade connects all markets which increases division of knowledge

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___ is not possible without ___

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comparative advantage, lowest opportunity cost.

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A country has a in producing goods for which it has the

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The ability to produce the same good using fewer inputs than another producer (not important because it doesn't mean that they can produce the good cheaper)

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absolute advantage-

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How much can we produce? What will it cost us to change our mix of production?

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PPF Model answers:

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the behavior of the buyer

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demand represents-

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shows the quantity demanded at different prices

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A Demand Curve

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the quantity that buyers are willing (and able) to purchase at a particular price.

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The Quantity Demanded:

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price, demand

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pay close attention: the quality demanded shifts because of ____, and is not the same as ____

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negatively correlated (if one goes up, the other goes down and vice versa) 5 people are willing to pay $50, while 10 people are willing to pay $40

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price and quantity demanded are

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horizantally- How much buyers are willing and able to purchase at a certain price. Vertically: The highest price buyers are willing to pay for a certain quantity.

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demand and supply curve can be read two ways

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the customers gain for exchange

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consumer surplus

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sum of consumer surplus of all buyers

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total consumer surplus

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consumers buy more at every price level, (or consumers are willing to pay more for each quantity

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An "increase in demand" means that

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consumers buy less at every price level, (or they reduce the price they're willing to pay for a given quantity.)

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A "decrease in demand" means that

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1)Income 2. Population 3. Price of Substitutes 4. Price of Complements 5. Expectations 6. Tastes

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important demand shifters (6)

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decrease in price

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increase in quantity demand means

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increase in price

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decrease in quantity demands mean

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demand increases when income increases (and vice versa).

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A Normal Good:

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demand decreases when income increases (and vice versa)

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inferior good

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the number of buyers

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what changes as a population changes

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a decrease in the price of one good leads to an increase in the demand for the other (or vice versa).

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Two goods are Complements if

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shows the quantity supplied at different prices

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supply curve

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the quantity that producers are willing and able to sell at a particular price

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quantity supplied

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there is a direct relationship between price and quantity supplied

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Law of Supply

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quantity rises and falls

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with supply, when price rise and falls

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the cost of producing a good is not equal across all suppliers.

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why does the supply curve slope up

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producer's gain from exchange, the difference between the market price and the minimum price at which producers would be willing to sell a certain quantity.

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Producer Surplus is the

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sum of the producer surplus of each seller.

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Total producer surplus is the

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1. Technological Innovations 2. Input Prices 3. Taxes and Subsidies 4. Expectations 5. Entry or Exit of Producers 6. Changes in Opportunity Costs

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Important Supply Shifters (6)

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decrease, increases, more

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A ____ in the price of an input (all else equal) ____ profits and encourages ____ supply (and vice versa)

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increases (and vice versa)

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As more producers enter a market, supply

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Higher

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___(Opportunity) Costs Reduce Supply

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when quantity demanded and quantity supplied are the same no shortages, no surplus

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equlibbrium

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equllibrium

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free markerts ALWAYS move towards

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change to a higher price and quantity (vice versa)

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an increase in demand cause the equilibrium to

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change to a lower price and higher quantity

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an increase in supply causes the equilibrium to

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change to a higher price and lower quanitity

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a decreases in supply causes the equilibrium to

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Goods must be produced at the lowest possible cost. Goods must satisfy the highest valued demands.

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Equilibrium in a free market yields two important results:

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a movement along

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an increase in demand causes what to the supple curve

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a maximum price allowed by law.

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price ceilings

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1) Shortages 2. Reduction in Product Quality 3. Wasteful Lines and Other Costs of Search 4. Loss of Gains from Trade 5. Misallocation of Resources

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Price ceilings that involve a maximum price below the market price create five important effects

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difference between the Qd and the Qs at the controlled price.

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The shortage =

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costumers than good, Reduce quality or Reduce service

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At the controlled price, sellers have more ____, so they

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bribery and wasteful lines.

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Price controls that create shortages lead to

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max price and the price ceiling.

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The highest bribe a buyer would pay is the difference between his

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between the max price and the price ceiling

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The maximum wait time (translated into monetary terms) for a buyer is the difference

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total of lost consumer and producer surplus when all mutually profitable gains from trade are not exploited.

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Dead-weight Loss is the

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Price controls distort signals and eliminate incentives-- leading to a misallocation of resources. ex. if there is a drought, but price control for water is the same, and you wash your car once a week, since the price has not changed, you won't know that anything is wrong, so you keep using the same amount, where there are some people who may need the water more than you no incentive to send the good to the "right" people

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misallocation of resources

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a regulation that prevents rents from rising to equilibrium levels, shortage smaller in the short run

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Rent Control:

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general public does not understand the effects may benefit ruling elite (those with bargaining power)

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why does price control happen?

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a minimum price allowed by law

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price floor

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surpluses, lost gains from trade, wasteful increase in quality, misallocation

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4 common effects of price floor

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producers loss cause the consumers will not pay floor price

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lost gain from trade (floor)

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ex. airlines due to the price floor, airlines will be fighting for for better quality since they are all expensive, but so few people flew because people did not want to pay, so airlines were spending all this extra money for better quality for nothing

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wasteful increases in quality

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causes their surplus to decline dramatically (consumers because they have to spend extra time)

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price control does what for producers and consumers

Macroeconomics Chapter 1-5 – Flashcards

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