Chapters 1 -5 Flashcards
Production possibilities boundary
The boundary that shows the maximum amount of how much of something can be made vs another with a certain amount of resources
Factors of production
Land
Labour
Capital
Opportunity cost is the price of ___?
the next best option
List the four key economic problems
What is produced and how
What is consumed and by whom
Why are resources sometimes idle
Is productive capacity growing
Why are free markets self organizing
When individual consumers and producers peruse self interests, collective outcome is coordinated
What are the three decision makers in any economy
Producers
Consumers
Government
Two characteristics of production?
Specialization
Division of labour
Globalization
The increased importance of international trade (loose definition)
The three pure types of economic systems
Traditional
Command
Free market
Governments intervene to___
Correct market failures
Provide public goods
Offset the effects of externalities
Normative statement
Value judgment
- what ought to be (this should be this way)
Positive statement
A statement of fact
Theory’s Include
variables
assumptions
predictions
Correlation vs Causation
Correlation: related movements
- Positive: x increases when y decreases
- Negative: inverse
Real Income
The Buying power of income
Quantity demanded and Price are___ related
Negatively
Price change causes a shift ____ the demand curve
Along
A change in variables other than income will cause the demand curve to
shift to a new position
What factors determine the quantity demanded of a good
Consumer income Prices of related products consumer tastes population significant changes in weather
Quantity supplied
the quantity that firms are willing to offer for sale
Quantity supplied and price
positively related
Variables that cause a shift in the demand curve
Prices of inputs number of suppliers taxes or subsidies Tech Significant changes in weather Prices of other products
Market Equilibrium
Every buyer finds a seller and every seller finds a buyer
Increase in supply and equilibrium
Increases quantity and decreases price
Decrease in supply and equilibrium
Rise in price and fall in quantity
Increase in demand and equilibrium
Increase in both price and quantity
Decrease in demand and equilibrium
Decreases in price and in quantity
Elastic demand
When demand is responsive to price
Perfectly elastic vs Perfectly inelastic demand curves
PE: horizontal
PIE: Vertical
In the long run, demand is more___
elastic
factors that affect elasticity of demand
availability of substitutes
consumer budget
Small fraction of budget: less elastic
Large portion : more elsatic
Unit elastic
Revenue is constant as the relative change in price has the same effect on quantity
When is total expenditure at a maximum?
When demand elasticity is = 1
What is excise tax?
the tax on the sale of a particular product
Tax incidence
Who bares the cost of an excise tax?
Explain tax incidence
the excise tax cost is distributed between consumers and producers based on price elasticity of demand
Normal Goods
Income elasticity that is positive and less than 1
- necessity item
Products for which the income elasticity is positive and larger than 1
- Luxury good
Inferior goods
Income elasticity of demand less than 1
Complement goods have cross elasticity ____ than 0
smaller
Substitute goods have cross elasticity of demand ____ than 0
larger
Price floor
Minimum permissible price that can be charged
Price floor leads to excess___
supply (set above the eq)
Price ceiling
Maximum price that can be charged
Price ceiling causes excess___
demand
price ceilings can lead to…
Black markets
Economic surplus
the value gained by producers and consumers
area below the demand curve and above the supply curve
Where is economic surplus maximized?
at the equilibrium point
deadweight loss
the overall loss of surplus to society when prices are not set at equilibrium
Economic Inefficiency
Government intervention and policies that cause deadweight loss
Policy makers make____ statements
Normative
The job of the economist is to make___ statements based on the policy’s actual effect
positive
