CLEP Microeconomic Notes 1

Positive externality benefits people not directly

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Positive externality – benefits people not directly involved b) Negative externality – causes harm for people that are not directly involved b.i)Company dumps toxic waste in water supply, someone smoking in a restaurant, construction noise, neighbors barking dog 23) Positional Externality – occurs when one party attempt so “one up” the other a) Jim buys wife a $1000 ring, friend Jon buys his wife a $2000 ring 24) Substitute Goods - goods that can be used in place of the other a) Pepsi & Coke 25) Complementary Goods – Hot dogs and hot dog buns a) When the price of one rises or falls the demand for the complimentary goods will also rise or fall 26) Law of Supply – direct positive relationship between quantity supplied and price a) Increase in price (P) = increase in quantity (Q) supplied b) Decrease in price (P) = decrease in quantity (Q) supplied 27) Supply is the relationship between price of the good and amount of a good a firm is willing and able to produce 28) Supply Curve – Upward positive slope a) Slopes upward due to the direct relationship between quantity and price 29) Moral Hazard – when people make less of an effort to avoid misfortune a) When someone doesn’t honk when a crash will occur because he wants to sue the owner 30) Rational Self Interest – Adam Smith – a) Producers of goods and services that act in their own self interest will improve public welfare or public interest a.i) Ex: construction worker who builds a road, gets paid benefits him, others use the road benefits them b) Invisible Hand Theory – by doing what is best for us, we ultimately do what is best for society b.i)Invisible hand guided the free market towards public goods b.ii) The free markets thrive on the basis of mutual self interest 31) Inferior Products – Walmart soda – demand is increased when income is decreased 32) Griffen – an inferior good that does not have a substitute (bread) 33) Normal Products – aka Superior Goods - Coke & Pepsi – demand is increase when income is increased 34) Veblen goods – snob goods, luxury cars, high end wines - “status” purchases a) Decrease in price causes a decrease in demand b) do not follow law of demand c) known as conspicuous consumption
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35) Barter – a direct exchange without using money 36) Price Floor (5) = surplus(7) – price cannot go below (floor stops it) a) Consumers must pay more than market, they no longer purchase b) Companies are guaranteed higher prices and produce more 37) Price Ceiling (7)= shortage (8) – price cannot go above (ceiling stops it) a) Shortage because suppliers cannot charge market prices so they produce less b) Consumers can buy the same produce for less so they purchase more b.i)(remember this by letter counts match - more letters in the words 7/8 -ceiling and shortage, less letters in the words 5/7 floor and surplus) – also C- comes before F in the alphabet so at the bottom is C of the equilibrium, at the top of the equilibrium is F.
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