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1
Q
A
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2
Q

What is a Budget Constraint?

A

All possible combinations of goods someone can afford given prices and income

It can be represented in a diagram to illustrate the combinations of goods purchasable within the budget.

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3
Q

What does a budget constraint diagram represent?

A

The combinations of goods that can be purchased with a given budget

The curve shows the maximum number of goods that can be bought.

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4
Q

What are Sunk Costs?

A

Costs made in the past that cannot be recovered

These should not affect current decisions according to the budget constraint framework.

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5
Q

What is the principle of ignoring sunk costs when making decisions?

A

Focus on future costs and benefits rather than past expenditures

This helps in making better economic choices.

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6
Q

How is Opportunity Cost calculated?

A

Cost of what is given up divided by the cost of what is gained

It reflects the trade-offs involved in decision-making.

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7
Q

What does the slope of a budget constraint indicate?

A

The relative price of the goods being purchased

A steeper slope indicates a greater opportunity cost.

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8
Q

What is the Production Possibilities Frontier (PPF)?

A

A model showing all possible combinations of goods a society can produce with available resources

It illustrates the trade-offs and opportunity costs in production.

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9
Q

What characterizes a close economy?

A

A country that does not engage in trade with other countries

This limits access to goods and services produced elsewhere.

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10
Q

How does scarcity impact decision-making?

A

It forces individuals to choose, leading to opportunity costs

Every choice made has a cost associated with the next best alternative.

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11
Q

What is Productive Efficiency?

A

Producing goods in a way that maximizes output without increasing the quantity of other goods

It occurs when production is on the PPF.

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12
Q

What does Allocative Efficiency mean?

A

Producing the mix of goods that society most desires

It reflects the optimal distribution of resources based on consumer preferences.

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13
Q

Define Marginal Analysis.

A

Comparing the benefits and costs of small changes in production or consumption

It helps in making rational economic decisions.

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14
Q

What is Marginal Cost?

A

The change in total cost from one option to another

This is critical for both consumers and producers when making decisions.

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15
Q

What is Absolute Advantage?

A

When a country can produce a good using fewer resources than another country

This indicates higher productivity.

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16
Q

What is Comparative Advantage?

A

When a country can produce a good at a lower opportunity cost than another country

It suggests specialization and trade can lead to increased efficiency.

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17
Q

What is Intra-Industry Trade?

A

International trade of goods within the same industry

This involves importing and exporting similar goods.

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18
Q

What is the Grubel Lloyd Index?

A

A measure of intra-industry trade within an industry

Values closer to one indicate high intra-industry trade.

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19
Q

What does equilibrium price refer to?

A

The price at which the quantity of a good demanded equals the quantity supplied

It is the point where supply and demand balance.

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20
Q

What happens to domestic prices when a country exports a good?

A

Domestic prices increase while the quantity produced also rises

This affects consumers and producers differently.

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21
Q

What are the two types of reasoning in economics?

A

Positive reasoning and normative reasoning

Positive reasoning deals with ‘what is’, while normative reasoning addresses ‘what should be’.

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22
Q

Fill in the blank: The law of increasing opportunity cost states that if you increase the production of one good, the opportunity cost to produce the additional good will _______.

A

increase

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23
Q

True or False: The slope of the PPF is constant.

A

False

The slope of the PPF changes due to varying opportunity costs.

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24
Q

What is the effect of economies of scale on production costs?

A

As output increases, average production costs decline

This leads to lower prices for consumers.

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25
What is the equilibrium price if this country does not trade?
7 ## Footnote Equilibrium price is where the supply and demand curves intersect, which is at (5, 7)
26
What is the equilibrium quantity if this country does not trade?
5 ## Footnote (5,7) is the equilibrium point
27
What is the world price with free trade?
$6 ## Footnote Where the black line is drawn
28
What is the domestic quantity demanded at the world price with free trade?
6 ## Footnote Looking at the intersection of the demand and price with free trade line
29
What is the amount of the domestic supply at the world price with free trade?
4 ## Footnote Looking at the intersection of the price of free trade and supply line
30
At the world price with free trade, this country will ______.
import ## Footnote To determine whether the country imports or exports at the world price, look at where the world price intersects both the demand and supply curve
31
What is the amount of imports at the world price?
2 ## Footnote quantity demanded (6) - quantity supplied (4) = amount of imports (2)
32
What are the gains from trade?
1 ## Footnote Gains of trade are represented by the triangular area between the world price and the domestic supply and demand. Mathematically, this is shown by: 1/2 * (Price difference) * (Import quantity) = 1
33
Define consumer surplus.
A consumer’s willingness to pay for a good is the maximum price at which they’re willing to buy that good ## Footnote Individual consumer surplus is the net gain to an individual buyer from the purchase of a good
34
What is individual consumer surplus?
The net gain to an individual buyer from the purchase of a good ## Footnote It’s equal to the difference between the buyer’s willingness to pay and the price paid
35
What is total consumer surplus?
The sum of the individual consumer surpluses of all the buyers of a good in a market
36
Define individual producer surplus.
Net gain to an individual seller from selling a good ## Footnote Equal to the difference between the price received and seller’s cost
37
What is total producer surplus?
The sum of individual producer surpluses of all sellers of a good in a market
38
What is total surplus (or social surplus/economic surplus)?
The sum of surplus going to buyers and surplus going to sellers
39
What is a market economy?
Decisions about what prices are available and what prices are determined through interaction of supply and demand
40
What is a competitive market?
One in which there is a large number of buyers and sellers and no one can control the market price
41
What characterizes a free market (capitalist)?
One in which the government does not intervene or influence market prices in any way
42
What is a planned/command economy?
An economy where economic decisions are passed down from government authority and where resources are owned by the government
43
What is demand?
The relationship between the price of a certain good/service and the quantity of that good/service someone is willing and able to buy
44
What does the law of demand state?
The inverse relationship between price and quantity demanded
45
What is a demand schedule?
A table that shows the quantity demanded at each price
46
What is a demand curve?
Graph showing the relationship between price and quantity demanded
47
Define ceteris paribus.
Assumption that no relevant economic factors, other than the product’s price, are changing
48
What shifts the demand curve?
Anything that affects the buying decision, other than the product price
49
What is a normal good?
A good/service whose demand increases when a consumer’s income increases
50
What is an inferior good?
A good/service whose demand decreases when a consumer’s income increases
51
What does a supply curve show?
The relationship between price and quantity supplied
52
What is the law of supply?
The relationship that a higher price leads to a high quantity supplied of a certain good/service
53
What are factors that increase supply?
1. Favorable natural conditions for production 2. A fall in input prices 3. Improved technology 4. Lower product taxes 5. More producers in the market
54
What is equilibrium?
Price and quantity combination where supply equals demand
55
What happens when quantity demanded and quantity supplied aren’t the same?
The result is a surplus or shortage
56
Define surplus.
A situation where quantity demanded is less than quantity supplied
57
Define shortage.
A situation where quantity demanded is greater than quantity supplied
58
What is marginal analysis?
Examining the benefits and costs of choosing a little more or a little less of a good
59
What is price elasticity of demand?
The percentage change in quantity divided by the percentage change in price
60
If |<1, what does this indicate about demand?
The demand curve is inelastic
61
If |>1, what does this indicate about demand?
The demand curve is elastic
62
What does it mean if demand is unit elastic?
If |=1
63
What is the elasticity of demand?
The percentage change in quantity divided by the percentage change in price.
64
What does it mean if the demand curve is inelastic?
If |<1, consumers aren’t very responsive to price changes.
65
What does it mean if the demand curve is elastic?
If |>1, consumers are very responsive to price changes.
66
What does it mean if the demand curve is unit elastic?
If |=1, the percentage change in quantity demanded is equal to the percentage change in price.
67
What is a perfectly elastic demand curve?
Horizontal lines show that an infinite quantity will be demanded at a specific price.
68
What is a price ceiling?
A legal maximum price that reduces the quantity supplied.
69
What is deadweight loss?
The loss of total surplus from transactions that no longer occur due to price control.
70
What is the effect of a price ceiling on consumer allocation?
It creates a shortage, leading to inefficient allocation as not the highest willingness to pay consumers get the good.
71
What happens to product quality under a price ceiling?
Sellers have no incentive to compete on quality, leading to reduced product quality.
72
What is an excise tax?
A tax charged on each unit of a good or service sold.
73
How is tax burden shared between buyers and sellers?
The tax burden is shared based on the elasticity of demand and supply.
74
What is the formula for tax revenue?
Tax Revenue = Tax Amount x Quantity Sold.
75
What is elasticity?
Measures the responsiveness of one variable to changes in another variable.
76
What factors affect demand elasticity?
* Availability of substitutes * Necessities vs. luxuries * Share of the consumer's budget * Short run vs. long run * Competitive dynamics
77
What is the difference between elastic and inelastic demand?
Elastic demand: small price change causes large quantity change; Inelastic demand: large price change causes small quantity change.
78
What is the point elasticity approach?
An easier method for calculating elasticity.
79
What is the midpoint (arc) elasticity approach?
A more accurate method that uses average price and quantity to calculate elasticity.
80
What does a perfectly inelastic demand curve look like?
A vertical line showing no change in quantity demanded regardless of price changes.
81
What is income elasticity of demand?
How sensitive the quantity demanded of a good is to changes in consumer income.
82
What characterizes normal goods in terms of income elasticity?
Positive income elasticity (demand increases as income rises).
83
What characterizes inferior goods in terms of income elasticity?
Negative income elasticity (demand decreases as income rises).
84
What is cross-price elasticity of demand?
The percentage change in quantity of good A demanded due to a percentage change in the price of good B.
85
What is the relationship between substitutes and cross-price elasticity?
Substitutes have positive cross-price elasticities (E>0).
86
What is the relationship between complements and cross-price elasticity?
Complements have negative cross-price elasticities (E<0).
87
What is wage elasticity of supply?
How sensitive workers are to changes in wages when deciding how much to work.
88
What is interest elasticity of savings?
How sensitive people's saving behavior is to changes in interest rates.
89
How does price elasticity affect total revenue when demand is elastic?
Price increases lead to a decrease in total revenue.
90
How does price elasticity affect total revenue when demand is inelastic?
Price increases lead to an increase in total revenue.
91
How does price elasticity affect total revenue when demand is unitary elastic?
Price changes do not affect total revenue.
92
What is scarcity in economics?
Scarcity refers to the limited availability of resources (land, labor, capital) to satisfy all human wants and needs.
93
Define trade-offs in the context of economics.
Trade-offs involve giving up one thing to obtain another due to limited resources.
94
What is opportunity cost?
Opportunity cost is the highest-valued forgone alternative when a choice is made.
95
What components make up total opportunity cost?
Total opportunity cost includes direct (explicit) costs and indirect (implicit) costs.
96
What does microeconomics focus on?
Microeconomics focuses on individual households and firms, analyzing specific industries or markets.
97
What are some examples of microeconomic analysis?
* A union negotiating higher pay in one company * A bank lending to one firm but not another * Firms deciding how much to produce based on costs and consumer demand.
98
What does macroeconomics consider?
Macroeconomics considers the economy as a whole, including overall output, employment, inflation, and growth.
99
What topics fall under macroeconomics?
* Unemployment trends * Inflation rates * Interest rates for all borrowers * Government policies like monetary and fiscal policy.
100
What is the purpose of economic models?
Models are simplified representations of reality that help predict relationships and test hypotheses.
101
What does the circular flow diagram illustrate?
The circular flow diagram illustrates interactions between households and firms in the goods & services market and the labor market.
102
What is behavioral economics?
Behavioral economics examines how people make decisions, potentially deviating from purely rational choices.
103
What is a function in economic terms?
A function describes a relationship, indicating how changes in one variable affect another.
104
How is percentage change calculated?
Percentage change is calculated as (Change in quantity) / (Original quantity).
105
What is the Production Possibilities Frontier (PPF)?
The PPF shows all possible combinations of two goods/services an economy can produce given its resources and technology.
106
What does the slope of the PPF represent?
The slope of the PPF measures the opportunity cost between two goods.
107
What is the law of increasing opportunity costs?
The law states that as production of one good increases, the opportunity cost of producing additional units rises.
108
What are economies of scale?
Economies of scale refer to the reduction in average costs per unit as production increases.
109
What defines absolute advantage?
Absolute advantage is when one producer can generate more output than another with the same resources.
110
Define comparative advantage.
Comparative advantage occurs when one producer's opportunity cost of making a good is lower than another's.
111
What is the significance of trade?
Trade allows consumption beyond a country's PPF by focusing on what each party does relatively best.
112
What are the key components of a competitive market?
A competitive market consists of many buyers and sellers of the same good or service, where no individual can influence the price.
113
Define demand in economics.
Demand is the relationship between prices and the quantities that consumers are willing and able to buy.
114
What does the demand curve typically look like?
The demand curve is typically downward-sloping, indicating a negative relationship between price and quantity demanded.
115
What are the important macroeconomic goals?
* Growth in the standard of living (GDP growth) * Low unemployment * Low inflation (stable purchasing power)
116
What are the policy tools used in macroeconomics?
* Monetary policy (interest rates, bank lending, money supply) * Fiscal policy (government spending, taxation)
117
Fill in the blank: __________ & __________ drive all economic choices.
[Scarcity] & [Opportunity Cost]
118
Fill in the blank: __________ deals with individual decisions; __________ deals with aggregate outcomes.
[Micro] deals with individual decisions; [Macro] deals with aggregate outcomes.
119
Fill in the blank: __________ & __________ generate efficiency gains because of comparative advantage.
[Specialization] & [Trade]
120
Fill in the blank: __________ explains price/quantity movements in competitive markets.
[Supply & Demand]
121
Fill in the blank: __________ goals focus on growth, employment, and price stability.
[Macroeconomic]

Intro to Microeconomics (3 decks)

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