econ 1 quizzes 1 & 2 Flashcards
what is “the invisible hand?”
the theory that when people follow their own best interests it benefits the price system and everything gets allocated properly
what is specialization?
deciding to produce more of one thing than the other in order to maximize profits/resources
what is opportunity cost?
what you give up when you do something
what is absolute advantage?
who can make the most, regardless of what they can make more of
what is comparative advantage?
lower opportunity cost
how do you know how much to produce?
look at ppf/ppc
what is the first law of supply?
as price goes up, sellers offer more aka supply curve slopes up
exceptions: antiques, labour
what is the first law of demand?
as price goes up, people buy less aka demand curve slopes down
partial exceptions: diamonds, medication
what is a binding price ceiling?
a maximum price set below equilibrium
how does a price ceiling create a shortage?
creates a gap where the price lines up with a particular supply which is less than the corresponding demand, and that gap is the shortage
what is a binding price floor?
a minimum price set above equilibrium
how does a price floor create a surplus?
creates a gap where the price lines up with a particular demand which is less than the corresponding supply, and that gap is the surplus of goods
how do you solve for equilibrium?
set equations for supply and demand equal to each other
what is elasticity?
responsiveness of demand to change in price (%ΔQ / %ΔP)
extra accurate equation: [(ΔQ/Q) / (ΔP/P)]; not slope, but kind of like slope
if E > 1 ..
inelastic - steeper
if E < 1 ..
elastic - flatter
Elasticity for gas, grapes, pepsi, salt
gas — relatively inelastic
grapes — relatively elastic
pepsi — perfectly elastic
salt — perfectly inelastic
what is the second law of supply?
supply is more elastic in the long run
what is the second law of demand?
demand is more elastic in the long run
where is CS
area below the demand and above equilibrium
where is PS
area above the supply curve and below equilibrium
where is TC
area below the supply curve and left of the equilibrium quantity
where is TR
area below equilibrium price and left of the equilibrium quantity (PS + TC)
what is a trade deficit and why is it harmless?
importing more goods than you export
not inherently bad because you are still exporting cash, and you are getting something you need — cahs outflow to a grocery store is a trade deficit, but it’s good because you need food
also, likely to be exporting goods to other places
