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# Summary notes - Test1: Market economy: allocates resources...

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Test1: Market economy: allocates resources through the decentralized decisions of firms and households Command or centrally planned economy: all production and distribution decisions are made by a central authority, like a government Opportunity cost : what you have to give up to get something. o Explicit and implicit costs Market failure can be influenced by market power : the ability of a single person or firm to unduly influence market prices Positive statements : describe world as is (descriptive analysis) Normative statements : describe how world should be (prescriptive analysis) PPF = production possibilities frontier Comparative advantage : can produce at lower opportunity cost than someone else Absolute advantage: can produce a good using fewer inputs (e.g. less time) Productivity = quantity produced / number of inputs used Elasticity of demand: % change in Qd / % change in price. Drop –ve sign Midpoint formula: Ep = (Q 2 – Q 1 ) / ([Q 2 + Q 1 ] / 2) ÷ (P 2 – P 1 ) / ([P 2 + P 1 ] / 2) o Inelastic: E<1 (% change Q < % change P), Elastic: E>1 o Perfectly inelastic E=0, perfectly elastic E=infinity o Necessities inelastic. Luxuries, close substitutes, long time horizon elastic Downwards demand curve: top left elastic, midpoint unit elastic, bottom right inelastic Total revenue = price x quantity o TR will increase if P increases, if demand is inelastic. o TR will decrease if P increases, if demand is elastic. o TR max when price elasticity = 1 Income elasticity = % change in Q d / % change in income. Sign matters. o E I > 0, then normal good. (increase Q if increase income). o E I < 0, then inferior good. o E I between 1 and -1, good is income inelastic o E I >1 or E I < -1, good is income elastic o necessities income inelastic, luxuries income elastic Cross-price elasticity of demand, E ab = % change Qd of ‘a’ / % change P of ‘b’ o E>0, substitutes. E<0, complements Elasticity of supply: always +ve. o

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## This note was uploaded on 03/13/2011 for the course ECON 1B03 taught by Professor Hannahholmes during the Spring '08 term at McMaster University.

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Summary notes - Test1: Market economy: allocates resources...

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