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Third Year > Econ final exam > Flashcards

Econ final exam Flashcards

1
Q

What is the Definition of Economics

A

A social science concerned with making optimal choices under conditions of scarcity

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2
Q

What is Scarcity

A

There is scarcity of economic resources that restricts options and requires choices. The opportunity cost of choice is what you lose for that choice

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3
Q

What must we assume about consumers in Purposeful Behaviour?

A

They make rational decisions

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4
Q

What is a marginal analysis

A

Compares marginal costs to marginal benefits.

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5
Q

What is the scientific method

A

Observe, formulate a hypothesis, test the hypothesis, accept/reject/modify the hypothesis, continue to test hypothesis

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6
Q

Definition of Microeconomics

A

Concerns the study of the individual firm, consumer, or market.

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7
Q

Definition of Macroeconomics

A

Concerns the study of entire economy or major aggregate of the economony

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8
Q

Positive economics

A

Something that is factual

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9
Q

Normative economics

A

Something that “ought to be” made by policy makers. They are judgements

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10
Q

What is the economic problem

A

Unlimited wants, but limited income

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11
Q

What is the budget line?

A

A schedule or curve that shows various combinations of two products a consumer can by with a fixed money income.

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12
Q

What is an opportunity cost

A

What isn’t being bought due to the other option in a budget line

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13
Q

What are the factors of production?

A

Land, labor, capital, human capital, entrepreneurial ability, technology

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14
Q

What is Laizzez-faire capitalism

A

No government implications, keeping the gov from interfering. The only government implications are to protect from theft (property rights) and legal contract enforcement. Adam Smith father of this.

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15
Q

What is the Invisible Hand?

A

If we let the market be, producers and consumers will come up with an efficient and equal price (market). Prominent in Adam Smith’s model

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16
Q

What is the command system

A

All government power. Everything is owned by government. North Korea.

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17
Q

What is the market system?

A

It is a mix of decentralized decision making with some government control. Most of the world uses this. Private ownership of resrources and private markets are dominant.

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18
Q

What is private property?

A

Promotes rights to own, produce, promote ideas, and grow. Encourages people to cooperate by helping to ensure that only mutually agreeable economic transactions occur

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19
Q

What is the freedom of enterprise?

A

Ensures that entrepreneurs and rivate businesses are free to obtain and use economic resources to produce their choice of goods and services and sell to chosen markets.

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20
Q

What is the Freedom of choice

A

Enables owners to employ or dispose of their property and money as they see fit

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21
Q

What is self-interest

A

Gives direction and consistency to what otherwise would be chaotic.

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22
Q

What is competition

A

Need competition to function. Competition amongst buyers and sellers diffuses economic power within the businesses and households that make up the economy.

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23
Q

What is market and prices

A

Decisions made on each side of the market determine a set of product and factor prices that guide resource owners, entrpreneurs, and consumers

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24
Q

What is technology and capital goods

A

advanced technology and capital goods are encouraged as it helps market economies achieve greater efficiency in production

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25
Q

Specialization

A

divison of labour, geographic specialization

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26
Q

What does it mean to have an active but limited government?

A

Governement is prominent in the market system, and may be needed to alleviate market failures. Must take action during recession or inflation.

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27
Q

What is consumer sovereignty?

A

It determines the types and quantities of goods. It is consumer willingness to pay.

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28
Q

How will the goods and services be produced?

A

Minimize the cost per unit using the most efficient techniques.

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29
Q

How will the system accommodate change?

A

Changes in consumer tastes, changes in technology, changes in resource prices

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29
Q

Who will get the output?

A

Consumers with the ability and willingness to pay will get the product. Ability depends on income. Preference on WTP.

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30
Q

How will the system promote progress?

A

technological advance, capital accumulation.

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31
Q

What is creative destruction?

A

The hypothesis that the creation of new products and production methods destroys the market power of existing monopolies. Technological advances can rid people of jobs

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32
Q

3 Merits of the market system

A

efficiency, incentives, freedom

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33
Q

What is the coordination problem?

A

central planners in command systems have to coordinate millions of individual decisions by consumers, resource suppliers, and businesses. One person has to do everything. Impossible to do everything.

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34
Q

What is the incentive problem?

A

A failure somewhere can result in a chain reaction of problems. The economy is like a linkage.

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35
Q

What is the law of demand?

A

As price increases quantity decreases, and vice versa.

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36
Q

What are the reasons for LoD?

A

law of diminishing marginal utility and income effect and substitution effect

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37
Q

What are the determinants of demand?

A

Change in consumer tastes and prefernces, change in number of buyers, change in income, changes in prices of related goods, changes in consumer expectations.

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38
Q

What are normal goods

A

Increase income incerase goods. Use more due to changes

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39
Q

What are inferior goods?

A

Increase income, decrease goods. Stop using things due to changes.

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40
Q

What is a complementary good?

A

Goods that go together. Toothbrush and toothpaste. increase P decrease Q

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41
Q

What is a substitute good

A

Goods that can be replaced by one another even if different producer. Coke and pepsi. Increase P increase D.

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42
Q

What shifts a curve along the curve

A

Change in quantity demanded.

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43
Q

What shifts a curve forward or back

A

the determinants of demand. Taste differences, # of buyers, change in income. A change in demand.

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44
Q

What is the law of supply

A

As price rises, Qs increases as well and vice versa

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45
Q

What are the determinants of supply

A

A change in factor prices, a change in technology, a change in taxes and subsidies, a change in prices of other goods, a change in producer expectations, a change in the number of sellers

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46
Q

What is market equilibrium

A

Where demand and supply intersect. This means the market is efficient.

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47
Q

When is there a surplus?

A

When quantity supply is greater than quantity demanded

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48
Q

When is there a shortage

A

When quantity demanded is larger than quantity supply

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49
Q

When is there a price floor?

A

When the governement intiates nothing lower than a certain price. Compare quantity supply/demand. Protects consumers

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50
Q

When is there a price ceiling?

A

When the governement intiates nothing higher than.a certain price. Compare supply/demand. Protects suppliers

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51
Q

When is a ceiling binding

A

When a ceiling is below equilibrium, it aids suppliers to get their product sold.

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52
Q

When is a floor binding

A

Above equilibrium. Protects consumers.

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53
Q

What is efficient allocation?

A

When there is efficient resource allocation.

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54
Q

What is an inefficient allocation

A

When there is unemployment or wasted resources. Like immigrants with medical degrees are not qualified in Canada to do their primary job.

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55
Q

What is a consumer surplus

A

Difference between what a consumer is willing to pay and what the consumer actually pays.

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56
Q

What is producer surplus?

A

Difference between the actual price a producer receives and the minimum price they would accept

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57
Q

What is an externality?

A

A cost or benefit accruing to a third party external to the transaction. Someone else benefits or harmed.

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58
Q

What is a positive externality?

A

Too little is produced, and demand-side market failures. Ex: roommate who’s a good cook. Benefits

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59
Q

What is a negative externality?

A

Too much is produced, suppl-side market failures. Ex: noise pollution from neighbors. Harmed

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60
Q

How do you correct negative externalities?

A

Through direct controls of government intervention, and Pigovian tax.

61
Q

What are the effects of government interventions for neg externalities?

A

Moves the supply curve back, saying “that’s enough”. To reduce the quantity made.

62
Q

How do you correct positive externalitites?

A

Subsidies and government provision.

63
Q

What is the optimal reduction of an externality?

A

When society’s MC and MB of reducing the externality are equal.

64
Q

What is asymmetric information?

A

When one party to a transaction possesses substantially more information than the other party

65
Q

what can inadequate information about sellers cause?

A

Under allocation of resources?

66
Q

What is the moral hazard problem?

A

The tendency for a personto alter their behaviour after a contract is signed in ways that are costly to another party

67
Q

What is an example of the MHP?

A

Driving recklessly with car insurance

68
Q

What is a demand-side market failure?

A

When it is not possible to charge consumers for the product.

69
Q

What is a private good?

A

Produced by firms in the market. Offered for sale.

70
Q

What are the characteristics of a private good?

A

Rivalry and exclludability

71
Q

What is a public good?

A

Provided by the government, offerd for free.

72
Q

What are the characteristics of a public good

A

Nonrival, nonexcludability.

73
Q

What is the free-rider problem?

A

Creates the desire to go and take free goods that you may not need and burdens the cost/work on someone who does.

74
Q

What is a quasi-public good?

A

Could be provided through the market system. Because of positive externalities, the government provides them. Privately operated but free to the public. Can be priced but not.

75
Q

What is the reallocation process?

A

How resources are reallocated from the production of private goods to the production of public and quasi-public goods.

76
Q

How is the reallocation process done?

A

Through government. Taxes individuals and businesses. Takes the money and spends on production of public goods.

77
Q

What is the public choice theory?

A

The economic analysis of government decision-making, politics, and elections. The majority are voting systems.

78
Q

What is the majority voting system?

A

Difficult to correctly discern voter preferences. Hinfers the ability of government to deliver what the voters want.

79
Q

What are the two inefficient voting outcomes?

A

“Yes” vote TC>TB and “No” vote TB>TC

80
Q

What are interest groups?

A

Those who have a strong preference for a public good may band together

81
Q

What is political logrolling?

A

The trading of votes to secure a favourable outcome.

82
Q

What is elasticity?

A

Gives a measure of the level of responsiveness (sensitivity) of quantity demanded by consumers to a change in price.

83
Q

True or false: Elasticity of demand includes negatives.

A

False

84
Q

When is something elastic?

A

When the result is larger than 1

85
Q

When is there unit elastic?

A

When it is equal to 1

86
Q

When is something inelastic?

A

When it is lower than 1

87
Q

If total revenue changes in the opposite direction…

A

It is elastic

88
Q

If total revenue changes in the same direction…

A

It is inelastic

89
Q

If there is no change…

A

Itis unit elastic

90
Q

What is substitutability?

A

The larger the number of substitute goods available the more price elastic.

91
Q

What is the proportion of income?

A

The greater the proportion of income spent on a good, the greater the price elasticity of demand for it.

92
Q

What are luxuries versus necessities?

A

The more a good is considered a luxury rather than a necessity the greater the price elasticity.

93
Q

What is time regarding Price elasticity?

A

Product demand is more elastic the longer the period under consideration. Consumers need time to adjust to changes in price. Less time= less elastic.

94
Q

What changes in the formula for cross-elasticity?

A

The quantity demanded is a different product to the price on the bottom. Seeing if one affects the other.

95
Q

If the cross elasticity is positive…

A

It is a substitute good

96
Q

If the cross elasticity is negative…

A

It is a complementary good

97
Q

If the cross elasticity is near zero/equal to zero…

A

It is an independent good

98
Q

What changes for income elasticity of demand

A

Instead of price it is the percentage change in income on the bottom.

99
Q

If income elasticity is above 0…

A

Superior/positive good

100
Q

If income elasticity is below 0…

A

Inferior good

101
Q

What is the division of burden?

A

Producers are burdened when there is tax on substitutes. Consumers are burdened when things are inelastic because they have to have it whether its expensive or not, taxed items.

102
Q

What does a more inelastic curve look like?

A

Steeper

103
Q

What does a more elastic curve look like?

A

Flatter

104
Q

What is a perfectly elastic curve look like?

A

Straight horizontal line

105
Q

What does a perfectly inelastic curve look like?

A

Straight vertical line.

106
Q

What is the law of diminishing marginal utility?

A

The principle that added satisfaction declines as a consumer acquires additional units of a given product.

107
Q

What is total utility?

A

Total amount of satisfaction

108
Q

What is marginal utility?

A

The extra satisfaction for consuming one more unit

109
Q

What does the curve look like for marginal utility?

A

Increasing at a decreasing rate.

110
Q

What is utility maximization?

A

At each step, pick where MU/P is highest

111
Q

What is the substitution effect in marginal utility?

A

The impact a change in a product’s price has on its relative expensiveness and consequently on the quantity demanded.

112
Q

What is the income effect in marginal utility?

A

The impact that a change in the price of a product has on a consumer’s real income and therefore quantity demanded of that good.

113
Q

What is the economic cost?

A

the payment that must be made to obtain and retain the services of a resource.

114
Q

What are explicit costs?

A

Payments to nonowners for outside resources

115
Q

What are implicit costs?

A

Self-employed different choices. The opportunity cost of using self-owned resources.

116
Q

What is the short run?

A

The period is too brief for a firm to alter its plants capacity.

117
Q

What is the long-run?

A

Have time to alter plant capacity. All inputs are variable.

118
Q

What is the law of diminishing returns?

A

Assume all inputs are the same, in the short run, a firm can for a tie increase its output by adding units of labour to its fixed plant

119
Q

What are sunk costs?

A

Costs that happened in ths past, already incurred in costs. Should not affect decision making in the present.

120
Q

What are fixed costs?

A

Do not vary in outputs, same throughout.

121
Q

What are variable costs?

A

Varys with outputs. Different throughout.

122
Q

What are total costs?

A

TFC+TVC

123
Q

What are average fixed costs?

A

TFC/Q

124
Q

What are average variable costs?

A

TVC/Q

125
Q

What are average total costs?

A

TC/Q

126
Q

what is marginal cost?

A

deltaTC/deltaQ or deltaTVC/Q

127
Q

What is an economy of scale?

A

When costs are spread over a larger number of goods, at efficient production. Q increases and costs are down. As plant size increases, a number of factors will lead to lower average total costs of production. Down sloping

128
Q

What is a diseconomy of scale?

A

In the time of expansion of a firm may lead to higher average total costs. Up sloping.

129
Q

What are the 4 market structures?

A

perfect competition, monopolistic competition, oligopoly, and monopoly.

130
Q

What are the characteristics that distinct the structures?

A

Number of firms in the industry, whether those firms produce a standardized product, or differentiated product, how easy entry and exit is, how much control firms have over the price of their product.

131
Q

What are the characteristics of a perfectly competitive market?

A

Very large numbers, standardized (exact) products, price-takers, easy entry and exit

132
Q

What are the two methods to product maximization

A

Total revenue-total cost, and marginal revenue-marginal cost.

133
Q

When is the profit maximized for the MC=MR approach?

A

When MC=MR. If not attainable select the highest MR. Only applies if MR>AVC. P=MC in perfect competition.

134
Q

How do you minimize loss in the MC=MR approach?

A

Pick smallest amount of loss. Still produce if P>AVC.

135
Q

When should you shut down in the short run for MC=MR

A

When P<AVC or smallest loss is at 0 quantity.

136
Q

What are the characteristics of a monopoly?

A

Single seller, no close substitutes, price maker, blocked entry, non-price competition.

137
Q

What is a monopoly?

A

Exists when a single firm is the sole producer of a product or service for which there are no close substitues?

138
Q

What are examples of monopoly goods?

A

Natural resources.

139
Q

Geography can cause monopoly T/F?

A

True, like air Canada, they can jack prices because they one of the only airlines.

140
Q

What are the barriers to entry in a Monopoly?

A

legal barriers, ownership of essential resources, pricing and other strategic barriers. Economies of scale.

141
Q

What does the curve look like for monopoly?

A

Downward sloping demand curve, MR<P.

142
Q

How do we find price for monopoly?

A

Find where MR=MC and go up to demand curve.

143
Q

What is price discrimination of the first degree?

A

The monopoly knows the exact willingness to pay of each customer and charge the highest.

144
Q

What is the price discrimination of the second degree?

A

Charging different prices to the same customer for different units of purchase? Firms will charge lower prices to people who buy large quantities.

145
Q

What is price discrimination of the third degree?

A

The market can be segmented and when segments have different elasticities of demand. Like charging elderly and children lower prices.

146
Q

What are the characteristics of monopolistic competition?

A

The relatively large number of sellers, differentiated products, easy entry and exit.

147
Q
A
148
Q
A
149
Q
A

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