Econ final exam Flashcards
What is the Definition of Economics
A social science concerned with making optimal choices under conditions of scarcity
What is Scarcity
There is scarcity of economic resources that restricts options and requires choices. The opportunity cost of choice is what you lose for that choice
What must we assume about consumers in Purposeful Behaviour?
They make rational decisions
What is a marginal analysis
Compares marginal costs to marginal benefits.
What is the scientific method
Observe, formulate a hypothesis, test the hypothesis, accept/reject/modify the hypothesis, continue to test hypothesis
Definition of Microeconomics
Concerns the study of the individual firm, consumer, or market.
Definition of Macroeconomics
Concerns the study of entire economy or major aggregate of the economony
Positive economics
Something that is factual
Normative economics
Something that “ought to be” made by policy makers. They are judgements
What is the economic problem
Unlimited wants, but limited income
What is the budget line?
A schedule or curve that shows various combinations of two products a consumer can by with a fixed money income.
What is an opportunity cost
What isn’t being bought due to the other option in a budget line
What are the factors of production?
Land, labor, capital, human capital, entrepreneurial ability, technology
What is Laizzez-faire capitalism
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.
What is the Invisible Hand?
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
What is the command system
All government power. Everything is owned by government. North Korea.
What is the market system?
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.
What is private property?
Promotes rights to own, produce, promote ideas, and grow. Encourages people to cooperate by helping to ensure that only mutually agreeable economic transactions occur
What is the freedom of enterprise?
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.
What is the Freedom of choice
Enables owners to employ or dispose of their property and money as they see fit
What is self-interest
Gives direction and consistency to what otherwise would be chaotic.
What is competition
Need competition to function. Competition amongst buyers and sellers diffuses economic power within the businesses and households that make up the economy.
What is market and prices
Decisions made on each side of the market determine a set of product and factor prices that guide resource owners, entrpreneurs, and consumers
What is technology and capital goods
advanced technology and capital goods are encouraged as it helps market economies achieve greater efficiency in production
Specialization
divison of labour, geographic specialization
What does it mean to have an active but limited government?
Governement is prominent in the market system, and may be needed to alleviate market failures. Must take action during recession or inflation.
What is consumer sovereignty?
It determines the types and quantities of goods. It is consumer willingness to pay.
How will the goods and services be produced?
Minimize the cost per unit using the most efficient techniques.
How will the system accommodate change?
Changes in consumer tastes, changes in technology, changes in resource prices
Who will get the output?
Consumers with the ability and willingness to pay will get the product. Ability depends on income. Preference on WTP.
How will the system promote progress?
technological advance, capital accumulation.
What is creative destruction?
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
3 Merits of the market system
efficiency, incentives, freedom
What is the coordination problem?
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.
What is the incentive problem?
A failure somewhere can result in a chain reaction of problems. The economy is like a linkage.
What is the law of demand?
As price increases quantity decreases, and vice versa.
What are the reasons for LoD?
law of diminishing marginal utility and income effect and substitution effect
What are the determinants of demand?
Change in consumer tastes and prefernces, change in number of buyers, change in income, changes in prices of related goods, changes in consumer expectations.
What are normal goods
Increase income incerase goods. Use more due to changes
What are inferior goods?
Increase income, decrease goods. Stop using things due to changes.
What is a complementary good?
Goods that go together. Toothbrush and toothpaste. increase P decrease Q
What is a substitute good
Goods that can be replaced by one another even if different producer. Coke and pepsi. Increase P increase D.
What shifts a curve along the curve
Change in quantity demanded.
What shifts a curve forward or back
the determinants of demand. Taste differences, # of buyers, change in income. A change in demand.
What is the law of supply
As price rises, Qs increases as well and vice versa
What are the determinants of supply
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
What is market equilibrium
Where demand and supply intersect. This means the market is efficient.
When is there a surplus?
When quantity supply is greater than quantity demanded
When is there a shortage
When quantity demanded is larger than quantity supply
When is there a price floor?
When the governement intiates nothing lower than a certain price. Compare quantity supply/demand. Protects consumers
When is there a price ceiling?
When the governement intiates nothing higher than.a certain price. Compare supply/demand. Protects suppliers
When is a ceiling binding
When a ceiling is below equilibrium, it aids suppliers to get their product sold.
When is a floor binding
Above equilibrium. Protects consumers.
What is efficient allocation?
When there is efficient resource allocation.
What is an inefficient allocation
When there is unemployment or wasted resources. Like immigrants with medical degrees are not qualified in Canada to do their primary job.
What is a consumer surplus
Difference between what a consumer is willing to pay and what the consumer actually pays.
What is producer surplus?
Difference between the actual price a producer receives and the minimum price they would accept
What is an externality?
A cost or benefit accruing to a third party external to the transaction. Someone else benefits or harmed.
What is a positive externality?
Too little is produced, and demand-side market failures. Ex: roommate who’s a good cook. Benefits
What is a negative externality?
Too much is produced, suppl-side market failures. Ex: noise pollution from neighbors. Harmed
How do you correct negative externalities?
Through direct controls of government intervention, and Pigovian tax.
What are the effects of government interventions for neg externalities?
Moves the supply curve back, saying “that’s enough”. To reduce the quantity made.
How do you correct positive externalitites?
Subsidies and government provision.
What is the optimal reduction of an externality?
When society’s MC and MB of reducing the externality are equal.
What is asymmetric information?
When one party to a transaction possesses substantially more information than the other party
what can inadequate information about sellers cause?
Under allocation of resources?
What is the moral hazard problem?
The tendency for a personto alter their behaviour after a contract is signed in ways that are costly to another party
What is an example of the MHP?
Driving recklessly with car insurance
What is a demand-side market failure?
When it is not possible to charge consumers for the product.
What is a private good?
Produced by firms in the market. Offered for sale.
What are the characteristics of a private good?
Rivalry and exclludability
What is a public good?
Provided by the government, offerd for free.
What are the characteristics of a public good
Nonrival, nonexcludability.
What is the free-rider problem?
Creates the desire to go and take free goods that you may not need and burdens the cost/work on someone who does.
What is a quasi-public good?
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.
What is the reallocation process?
How resources are reallocated from the production of private goods to the production of public and quasi-public goods.
How is the reallocation process done?
Through government. Taxes individuals and businesses. Takes the money and spends on production of public goods.
What is the public choice theory?
The economic analysis of government decision-making, politics, and elections. The majority are voting systems.
What is the majority voting system?
Difficult to correctly discern voter preferences. Hinfers the ability of government to deliver what the voters want.
What are the two inefficient voting outcomes?
“Yes” vote TC>TB and “No” vote TB>TC
What are interest groups?
Those who have a strong preference for a public good may band together
What is political logrolling?
The trading of votes to secure a favourable outcome.
What is elasticity?
Gives a measure of the level of responsiveness (sensitivity) of quantity demanded by consumers to a change in price.
True or false: Elasticity of demand includes negatives.
False
When is something elastic?
When the result is larger than 1
When is there unit elastic?
When it is equal to 1
When is something inelastic?
When it is lower than 1
If total revenue changes in the opposite direction…
It is elastic
If total revenue changes in the same direction…
It is inelastic
If there is no change…
Itis unit elastic
What is substitutability?
The larger the number of substitute goods available the more price elastic.
What is the proportion of income?
The greater the proportion of income spent on a good, the greater the price elasticity of demand for it.
What are luxuries versus necessities?
The more a good is considered a luxury rather than a necessity the greater the price elasticity.
What is time regarding Price elasticity?
Product demand is more elastic the longer the period under consideration. Consumers need time to adjust to changes in price. Less time= less elastic.
What changes in the formula for cross-elasticity?
The quantity demanded is a different product to the price on the bottom. Seeing if one affects the other.
If the cross elasticity is positive…
It is a substitute good
If the cross elasticity is negative…
It is a complementary good
If the cross elasticity is near zero/equal to zero…
It is an independent good
What changes for income elasticity of demand
Instead of price it is the percentage change in income on the bottom.
If income elasticity is above 0…
Superior/positive good
If income elasticity is below 0…
Inferior good
What is the division of burden?
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.
What does a more inelastic curve look like?
Steeper
What does a more elastic curve look like?
Flatter
What is a perfectly elastic curve look like?
Straight horizontal line
What does a perfectly inelastic curve look like?
Straight vertical line.
What is the law of diminishing marginal utility?
The principle that added satisfaction declines as a consumer acquires additional units of a given product.
What is total utility?
Total amount of satisfaction
What is marginal utility?
The extra satisfaction for consuming one more unit
What does the curve look like for marginal utility?
Increasing at a decreasing rate.
What is utility maximization?
At each step, pick where MU/P is highest
What is the substitution effect in marginal utility?
The impact a change in a product’s price has on its relative expensiveness and consequently on the quantity demanded.
What is the income effect in marginal utility?
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.
What is the economic cost?
the payment that must be made to obtain and retain the services of a resource.
What are explicit costs?
Payments to nonowners for outside resources
What are implicit costs?
Self-employed different choices. The opportunity cost of using self-owned resources.
What is the short run?
The period is too brief for a firm to alter its plants capacity.
What is the long-run?
Have time to alter plant capacity. All inputs are variable.
What is the law of diminishing returns?
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
What are sunk costs?
Costs that happened in ths past, already incurred in costs. Should not affect decision making in the present.
What are fixed costs?
Do not vary in outputs, same throughout.
What are variable costs?
Varys with outputs. Different throughout.
What are total costs?
TFC+TVC
What are average fixed costs?
TFC/Q
What are average variable costs?
TVC/Q
What are average total costs?
TC/Q
what is marginal cost?
deltaTC/deltaQ or deltaTVC/Q
What is an economy of scale?
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
What is a diseconomy of scale?
In the time of expansion of a firm may lead to higher average total costs. Up sloping.
What are the 4 market structures?
perfect competition, monopolistic competition, oligopoly, and monopoly.
What are the characteristics that distinct the structures?
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.
What are the characteristics of a perfectly competitive market?
Very large numbers, standardized (exact) products, price-takers, easy entry and exit
What are the two methods to product maximization
Total revenue-total cost, and marginal revenue-marginal cost.
When is the profit maximized for the MC=MR approach?
When MC=MR. If not attainable select the highest MR. Only applies if MR>AVC. P=MC in perfect competition.
How do you minimize loss in the MC=MR approach?
Pick smallest amount of loss. Still produce if P>AVC.
When should you shut down in the short run for MC=MR
When P<AVC or smallest loss is at 0 quantity.
What are the characteristics of a monopoly?
Single seller, no close substitutes, price maker, blocked entry, non-price competition.
What is a monopoly?
Exists when a single firm is the sole producer of a product or service for which there are no close substitues?
What are examples of monopoly goods?
Natural resources.
Geography can cause monopoly T/F?
True, like air Canada, they can jack prices because they one of the only airlines.
What are the barriers to entry in a Monopoly?
legal barriers, ownership of essential resources, pricing and other strategic barriers. Economies of scale.
What does the curve look like for monopoly?
Downward sloping demand curve, MR<P.
How do we find price for monopoly?
Find where MR=MC and go up to demand curve.
What is price discrimination of the first degree?
The monopoly knows the exact willingness to pay of each customer and charge the highest.
What is the price discrimination of the second degree?
Charging different prices to the same customer for different units of purchase? Firms will charge lower prices to people who buy large quantities.
What is price discrimination of the third degree?
The market can be segmented and when segments have different elasticities of demand. Like charging elderly and children lower prices.
What are the characteristics of monopolistic competition?
The relatively large number of sellers, differentiated products, easy entry and exit.
