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Unformatted text preview: EC 101 Study Guide 04/10/2009 17:41:00 Key Terms • Positive Economics- What is • Normative Economics- What ought to be • Microeconomics- Economic decisions of individuals; (indiv. consumers, firms markets.) • Macroeconomics- Economics as economy as a whole; study of all consumers, firms and markets. • Determinants of Demand- Factors attriubted to an increase or decrease in demand. o Ex: Price, Income/Budget, Price of related goods, tastes and preferences, expectations • Normal Goods- Goods whose demand increases when income increases • Inferior Goods- Goods whose demand decreases when income increases. o Ex/ public transportation, cosmic brownies. • Substitutes- Goods that are interchangable Demand goes up when the price of a subsitute goes up (because people will demand more your product since it’s a lower price). o Ex/ Coke and Pepsi • Complements- related goods, that may be used together Demand goes down when the price of a complement increases. o Ex/ Gin and Tonic. • Quantity Demanded- The amount of a good demanded at a specific price • Quantity Supplied- The amount of a good supplied at a specific price. • Substitution Effect- the change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative substitutes. • Income Effect- the change in a quantity demanded of a good that results from the effect of a change in the good’s price on consumers’ purchasing power. • Equilibrium- Free market price; where the demand and supply curves meet. • Disequilibrium- Getting the price wrong; o When the price is set too low, there is excess demand, or a shortage. There is an upward pressure on price and price increases toward Equilibrium. Once at equilibrium the shortage is gone. o When the price is too high, there is a surplus. Downward pressure on price, and price decreases towards equilibrium. Once at equilibrium the surplus is elliminated. • Price Floor- A government or group imposed limit on how low a price can be charged for a product. In order for a price floor to be effective, it must be greater than equilibrium price. o Gets the price too high o Results in a surplus • Price Ceiling- A government or group imposed limit on how high a price can be charged for a product. Must be lower than equilibirum price ....
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