Concepts

Question 1

What is Economics

Answer 1

The study of the allocation of scare resources

Question 2

What is scarcity

Answer 2

When the demand for a good or service is greater than the quantity of it

Question 3

What is opportunity cost?

Answer 3

The value of the next best use of a scarce resource

Question 4

What is positive analysis

Answer 4

Analysis of how things actually work

Question 5

What is normative analysis

Answer 5

An analysis of how things should work

Question 6

What is the law of demand?

Answer 6

As price increases, quantity demanded decrease

Question 7

What is demand

Answer 7

The desire, willingness, and ability for consumers to pay a certain price for a certain good.

Question 8

What does ceteris paribus mean?

Answer 8

All else equal

Question 9

What shifts demand?

Answer 9

Population, income, preferences, quality of a good, price of substitutes

Question 10

What is supply?

Answer 10

The total quantity of a good that producers are willing to to provide

Question 11

Why does demand slope down?

Answer 11

Because as price increases, consumers’ marginal willingness to pay decreases. This is due to the law of demand.

Question 12

Why does supply slope up?

Answer 12

Rising prices induce additional supply for suppliers who have a opportunity cost of giving up a resource.

Question 13

What are diminishing marginal returns?

Answer 13

Diminishing marginal are proportionally smaller profits or benefits derived from producing a good as more money is invested in it.

Question 14

What are shifts In the supply curve?

Answer 14

Anything that changes opportunity cost: wages, price of inputs, taxes, subsidies, trade barriers, tech.

Question 15

What causes movement along the supply curve

Answer 15

Changes in quantity of a good.

Question 16

What is Equilibrium?

Answer 16

Market equilibrium occurs when the state in which supply and demand balance each other and no force is acting to change the outcome. On a graph, it is when the supply and demand curves intersect.

Question 17

What is supply Schedule

Answer 17

How much is supplied at every price

Question 18

What is Marginal Willingness to Supply

Answer 18

The price at which the marginal supplier covers her marginal opportunity cost

Question 19

How does tax change equilibrium

Answer 19

Shifts supply curve up and left

Question 20

How does a price floor change equilibrium?

Answer 20

Shifts the supply curve up and left

Question 21

How does a change in supply effect equilibrium (housing)

Answer 21

An increase in supply, all other things unchanged, will cause the equilibrium price to fall and quantity demanded will increase. A decrease in supply will cause the equilibrium price to rise and quantity demanded will decrease.

Question 22

What is the equation for Elasticity?

Answer 22

% Change in Quantity / % Change in Price

Question 23

What is Elasticity of demand?

Answer 23

Change in Q / Change in P * P/Q

Question 24

Definitions of Elasticity

Answer 24

|Elas| < 1 ) “Inelastic”
|Elas| > 1 ) “Elastic”
|Elas| = 1 ) “Unit Elastic

Question 25

What happens to Elasticity with changes in Demand

Answer 25

When prices fall demand rises and quantity demanded rises, when prices rise demand falls and quantity demanded falls

Question 26

What is consumer surplus?

Answer 26

Consumer surplus is the total willingness to pay, of all consumers, minus the total amount paid.

Question 27

What is producer surplus?

Answer 27

Producer surplus is the amount received by sellers, minus the opportunity of cost of selling (producing).

Question 28

What is total surplus?

Answer 28

Total Surplus is the sum of Consumer and Producer Surplus

Question 29

What is deadweight loss?

Answer 29

A Deadweight Loss (“DWL”) is the amount of total surplus that could be obtained under some other market quantity, but for some reason is not obtained.

Question 30

What does an excise tax do?

Answer 30

A parallel vertical shift in the marginal opportunity cost of sellers so a parallel vertical shift of the supply curve.

Question 31

What is marginal benefit

Answer 31

The change in benefit that occurs with a small change In x

Question 32

What is the budget constraint equation?

Answer 32

P1X1 + P2X2 = Y

Question 33

What is the slope of the indifference curve?

Answer 33

Solve: MU1*change in x1 + MU2*change in x2 = 0 = = MU1/ MU2

Question 34

What is the substitution effect?

Answer 34

The substitution effect is the change in a consumer’s consumption choices that results from a change in the relative prices of two goods

Question 35

What is the Income effect?

Answer 35

The income efect is the change in a consumer’s choices that results from a change in the purchasing power of the consumer’s income.

Question 36

Why does demand slope down

Answer 36

Substitution Effect: increased slope of budget line pushes the optimum to the “Northwest,” more x2, less x1. Change in p1/p2 is pure opportunity cost effect. Income Effect: increased price pushes budget line down, like decreased income, with a normal good this reduces x1