# ECON 1000 Test 2

gasucaxa's version from 2017-02-07 22:46

## Section

Negative-sum environment– a situation in which the sum of gains and losses over all people is negative in value
Zero-sum environment– a situation in which the sum of gains and losses over all people is exactly equal to zero
Positive-sum environment– a situation in which the sum of gains and losses over all people is positive in value
Win-win outcome– an outcome for which all people are better off than they would have been if the outcome was not realized (i.e., everybody “wins”).
Win-lose outcome– an outcome for which some people are better off and some people are worse off than they would have been if the outcome was not realized (i.e., some people “win” but other people “lose”).
consumer’s surplus– a measure of the net gain that a buyer realizes from making a purchase, equal to the difference between his reservation price for the item and the price he actually pays for the item.
producer’s surplus– a measure of the net gain that a seller realizes from making a sale, equal to the difference between the price she actually receives for the item and her reservation price for the item.
social surplus– a measure of the net gains to society from a trade, equal to the summation of the individual gains (or losses) from the trade over all members of society.
total social surplus– a measure of the total gains from trade realized by society, defined as Social Surplus, added over all units traded.
total consumers’ surplus– a measure of the total gains from trade realized by all consumers, defined as each individual’s Consumer’s Surplus, added over all units purchased.
total producers’ surplus– a measure of the total gains from trade realized by all sellers, defined as each individual’s Producer’s Surplus, added over all units sold.
efficient level of trade– the level of trade which maximizes Total Social Surplus
deadweight loss– the difference between maximum possible Total Social Surplus and realized Total Social Surplus. By construction, Deadweight Loss is zero at the efficient level of trade and is positive at any other level of trade.
open-ended fallacy– a logical error whereby someone incorrectly concludes that simply because there are benefits (to some people) from higher levels of an activity, that more of the activity is always better.
money– an asset that is socially and legally accepted as a medium of exchange. three functions of money:  medium of exchange an asset used as payment when purchasing goods/services  store of value an asset that serves as a means of holding wealth  unit of measure a basic measure of economic activity
demand– the relationship between the price of a good and the quantity that consumers are willing and able to purchase, all other factors fixed
supply– the relationship between the price of a good and the quantity that firms are willing and able to sell, all other factors fixed
Law of Demand– all other factors fixed, a greater quantity of a good will be demanded at lower prices (demand curves are downward sloping).
Law of Supply– all other factors fixed, a greater quantity of a good will be supplied at higher prices (supply curves are upward sloping).
“Horizontal Interpretation” of Demand Curve– start by focusing on a particular price, and then go over to the demand curve horizontally to determine the corresponding quantity demanded at this particular price.
“Vertical Interpretation” of Demand Curve– start by focusing on a particular quantity demanded, and then go up to the demand curve vertically to determine the corresponding price at which this particular quantity would be demanded.
“Horizontal Interpretation” of Supply Curve– start by focusing on a particular price, and then go over to the supply curve horizontally to determine the corresponding quantity supplied at this particular price.
“Vertical Interpretation” of Supply Curve– start by focusing on a particular quantity supplied, and then go up to the supply curve vertically to determine the corresponding price at which this particular quantity would be supplied.
buyer's reservation price– the maximum amount of money that he is willing to give up to acquire the item.
seller’s reservation price– the minimum amount of money that she is willing to accept in exchange for the item.
equilibrium– a “stable state” for a system which will persist as long as outside factors do not change. At the market equilibrium no individual buyer and no individual seller can alter his or her own behavior in such a way as to increase his or her own surplus.
excess supply– a situation in which quantity supplied is greater than quantity demanded (resulting in “downward pressure” on price).
excess demand– a situation in which quantity demanded is greater than quantity supplied (resulting in “upward pressure” on price).
stable– if we are there we will stay there, unless outside forces change
unique– there is one and only one equilibrium, a property which follows from the “Law of Demand” and “Law of Supply”
self enforcing– at higher prices there is downward pressure on price; at lower prices there is upward pressure on price therefore if we are at some other price, we will be pushed toward the equilibrium price
Increase in Demand– a change in demand consistent with consumers being more willing to purchase the good, in that at every price the new quantity demanded is greater than the previous quantity demanded (visually, such a change is illustrated as a “rightward shift” of the demand curve).
Decrease in Demand– a change in demand consistent with consumers being less willing to purchase the good, in that at every price the new quantity demanded is less than the previous quantity demanded (visually, such a change is illustrated as a “leftward shift” of the demand curve).
Increase in Supply– a change in supply consistent with firms being more willing to sell the good, in that at every price the new quantity supplied is greater than the previous quantity supplied (visually, such a change is illustrated as a “rightward shift” of the supply curve).
Decrease in Supply– a change in supply consistent with firms being less willing to sell the good, in that at every price the new quantity supplied is less than the previous quantity supplied (visually, such a change is illustrated as a “leftward shift” of the supply curve).
Determinants of Demand (factors that change demand)– changes in the following will result in an increase in demand: (1) a decrease in the price of a Complement Good; (2) an increase in the price of a Substitute Good; (3) an increase in income (for a Normal Good); (4) a decrease in income (for an Inferior Good); (5) an increased preference for the good by consumers; (6) an increase in “market size”; (7) an expectation of higher future prices. Changing any of these factors in “the opposite direction” would result in a decrease in demand.
Determinants of Supply (factors that change supply)– changes in the following will result in an increase in supply: (1) a decrease in the cost of any factors of production used to produce the good; (2) an improvement in technology that reduces production costs; (3) a favorable realization of “natural events”; (4) an increase in “market size”; (5) an expectation of lower future prices. Changing any of these factors in “the opposite direction” would result in a decrease in supply.
Role of Profits in a free market economy– profits serve as a vital “signaling device” in free market economies, directing resources to their most valuable use.
entrepreneur– someone who organizes and manages a business, typically with considerable initiative and exposure to risk.
Role of the Entrepreneur– profits can only serve as effective signals insofar as someone is able to recognize, appreciate, and respond according to different levels of profit.