impact on quantity demanded of an elastic good when price changes slightly - quantity demanded changes even more than price because of the availability of substitutes (ex: wheat, coke/pepsi) quantity demanded changes less than price because consumers need the product (ex: gas) - impact on quantity demanded of an inelastic good when price changes slightly potential for profit has what impact on competition? - creates more competition by drawing new firms toward the industry losses impact competition in what way? - creates less competition as firms leave the industry in pursuit of more profitable enterprises potential for profit attracts new firms to the industry and thus... - supply increases, driving price down and thus reducing profitability losses chase firms out of the industry and thus... - supply decreases, causing prices to rise and losses to disappear what is the impact of the "invisible hand" - pushes resources towards their most profitable use when profit is present in an industry, the invisible hand... - causes new businesses to enter that industry, causing price to fall, and the profitability to decrease when losses are present in an industry, the invisible hand... - causes businesses to leave for more profitable industries, leading to a rise in price as a result of decreased supply, making businesses that remain more profitable the zero profit theorem suggests that when the cycle of resources from one industry to another ceases... - equilibrium is reached every transaction must have... - a buyer and a seller voluntarily participating in the transaction mutual benefit is when... - consumers pay less than they would have been willing, sellers charge more than they had to spend on production consumer surplus - when a consumer pays less for a product than they would have been willing to. marginal benefit>price producer surplus - when a seller is able to charge more for their product than they had to spend on production. market price>cost of production when both consumer surplus and consumer surplus are present in a market, that market is said to be... - efficient total welfare - when marginal benefit for society exceeds marginal cost for society deadweight loss - when total welfare is below maximum. meaning the market could do better if the invisible hand pushed resources to more profitable areas. this is the result of underproduction or overproduction. deadweight loss is a measure of... - inefficiency supply - the relationship between the price of the good and the quantity supplied individual supply - follows marginal cost for each optimizing firm to maximize that firm's profit market supply - horizontal sum of individual supply for all firms at every price supply shock - a shift of the whole supply curve from one place on the plain to another. causes the quantity produced to change at every price. marginal cost for seller changes changes in quantity supplied cause supply to move - to a new point on the same curve changes in supply cause supply to move - to a new place on the price/quantity plain increase in supply moves supply curve ________ on the plain, decrease in supply moves the supply curve _______ on the plain - right, left changes in quantity demanded are the result of ... - a change in price of the good changes in supply are the result of... - a change in something other than the price examples of causes for supply change - changes in expectations, productivity, opportunity cost, production cost, future profitability estimates, number of sellers, substitutes in production, complements in production substitutes in production - two goods that compete for the same producing resources complements in production - two goods produced together at the same time predator/prey relationship - maintains equilibrium in the ecosystem until something changes (ex: drought) who creates supply - producers who creates demand - consumers the market economic system is ________ but not ________ - efficient, fair command economic system is _______ but is ________ - inefficient, fair economics - the study of how people interact to allocate scarce resources economics is a _______ science because... - social - it is a study of people and how they make decisions resources are... - scarce allocation of scarce resources requires... - decisions why do we study economics? - to understand what is going on in the world and how people make decisions in order to help understand their responses correlation - two things change in ways that cannot be proven to be related causation - one thing changes, in turn causing a change in something else along with it correlation vs causation - just because two things move in the same direction, and may even be similar in nature, does not mean that one caused the other omitted variables - influential factors that were not considered example of omitted variable - new tax states that area above roofline is not to be taxed, parents build more attic space for kids to use, good nesting place for storks, stork population rises (tax law omitted variable that caused rise in stork and child populations) tradeoff - giving up one thing to get something else scarcity - when wants and needs exceed the limits of resources _________ is scarce - everything equity - everybody gets an equal piece or share; "fairness"