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ECON Chapter 1-4 > ECON Micro > Flashcards

ECON Micro Flashcards

1
Q

Definition of Economics

A

Economics studies how individuals make choices to allocate limited resources to satisfy unlimited wants.

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2
Q

Definition of Scarcity

A

The fundamental economic problem of having limited resources to meet unlimited wants.

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3
Q

Definition of Opportunity Cost

A

The value of the next best alternative forgone to satisfy a want or obtain something.

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4
Q

What are Resources and Factors of Production?

A

*Land: Natural resources, mineral deposits, climate.

*Labor: Human effort and skills, e.g., accountants, plumbers.

*Capital: Machinery and buildings used in production.

*Entrepreneurship: Organizing resources, raising capital, making business policy decisions, taking risks.

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5
Q

Definition of Goods

A

Items that provide satisfaction.

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6
Q

Definition of Economic Goods

A

Scarce goods where demand exceeds supply.

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7
Q

Definition of Services

A

Intangible tasks performed for others, such as medical or legal assistance.

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8
Q

Definition of Market

A

Arrangements for exchanging goods/services.

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9
Q

Definition of Price System

A

Constantly changing prices due to supply and demand; signals scarcity and abundance.

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10
Q

Definition of Voluntary Exchange

A

Mutually beneficial trade making both parties better off.

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11
Q

Definition of Demand

A

Schedule showing quantity of a good/service people will purchase at various prices.

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12
Q

Definition of Law of Demand

A

A negative or inverse relationship between price and quantity demanded, holding all things constant.
– At a higher price people buy less; at a lower price people buy more.
– Relative prices must be distinguished from money prices since people respond to changes in relative prices.

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13
Q

Definition of Supply

A

A schedule showing the relationship between price and the quantity supplied for a specified time period, other things being equal.

The amount of a product or service that firms are willing to sell at alternative prices.

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14
Q

What is the Law of Supply?

A

Firms will produce and offer for sale more at a higher price; firms offer less at a lower price.

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15
Q

What is the Demand Curve?

A

Graph with a negatively sloped line showing the inverses relationship between price and quantity demanded.
(other things being equal)

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16
Q

What is the Supply Schedule vs Supply Curve?

A

Schedule: Graph relating prices to quantity supplied at each price.

Curve: Graph representing the supply schedule

A positively sloped line (curve) showing the direct relationship between price and quantity supplied, all else being equal

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17
Q

Shifts and Equilibrium: How does Income Effect Determinants of Demand?

A

With Normal Goods demand increases as as income rises.
With Inferior Goods demand falls as income rises.

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18
Q

Shifts and Equilibrium: What are Determinants of Supply

A

Technology and productivity, input prices, price expectations, taxes/subsidies, number of firms in the industry.

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19
Q

Shifts and Equilibrium: How do Tastes and Preferences affect Determinants of Demand?

A

– The prices of related goods
 Substitutes
Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change.
 Complements
Two goods are complements when a change in the price of one causes an opposite shift in the demand curve for the other.

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20
Q

How do future price expectations affect the Market Supply Curve?

A

Sellers who expect the price of an item in the market to rise in the future reduce the amount that they make available for sale today.

Buyers who anticipate a higher price of that item will seek to purchase more units of the item today.

Thus, the market supply curve will shift leftward, and simultaneously the market demand curve will shift rightward.

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21
Q

Determinants of Demand

A

Income
Tastes and preferences
The price of related goods
Expectations
Market size (number of buyers)

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22
Q

Shifts and Equilibrium: How do Expectations affect Determinants of Demand?

A

Future prices
 Income
 Product availability

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23
Q

When the price of a good goes up, what happens?

When the price of a good goes down, what happens?

What are we holding constant in these situations?

A

People buy less of it, other things being equal.

People buy more, other things being equal.

– Income
– Tastes and preferences
– Prices of other goods
– Many other factors

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24
Q

Shifts and Equilibrium: What are Changes in Demand/Supply?

A

Shifts in curves due to non-price factors.

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25
Q

What is Equilibrium Price?

A

Price where quantity demanded equals quantity supplied.

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26
Q

What are Market Dynamics?

A

Adjustments to new equilibrium due to shifts in demand and supply.

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27
Q

Price Controls and Rationing: What is the Price Ceiling?

A

Legal maximum price; causes shortages if below equilibrium.

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28
Q

Price Controls and Rationing: What is the the Price Floor?

A

Legal minimum price; causes surpluses if above equilibrium.

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29
Q

Price Controls and Rationing: What is Nonprice Rationing?

A

Methods include queues, random assignment, coupons.

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30
Q

Price Controls and Rationing: What is the Black Market?

A

Results from price ceilings, where goods are sold illegally at higher prices.

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31
Q

What is Economic Growth?

A

Illustrated by an outward shift of the production possibilities curve.

Over time, it is possible to have more of everything. The PPC can be used to illustrate the trade-off between present and future consumption.

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32
Q

What is Efficiency?

A

Maximum output with given resources; minimal cost production.

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33
Q

What is Specialization?

A

Organization of activity among different individuals and regions leads to greater productivity.

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34
Q

Government Interventions: What is Support Price

A

Government-imposed price floor to prevent prices from falling.

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35
Q

Government Interventions: Minimum Wage

A

Legal minimum hourly wage; affects employment and wage dynamics.

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36
Q

Government Interventions: Quantity Restrictions

A

Bans, licensing requirements, import quotas affecting market dynamics.

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37
Q

What is Consumer Surplus?

A

Difference between willingness to pay and actual payment.

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38
Q

What is Producer Surplus?

A

Difference between actual revenue and minimum acceptable revenue.

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39
Q

What is Total Surplus?

A

Combined value of consumer and producer surplus from trade.

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40
Q

What are Incentives?

A

Rewards for engaging in a particular activity.

The nature of self-interested responses to incentives is the starting point for economic analysis.

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41
Q

What is the Economic Way of Thinking?

A

A framework to
analyze solutions to economic problems

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42
Q

What is Economic Analysis?

A

Helps you make better decisions
concerning your career, your education, financing your
home or other important matters.

43
Q

Define Needs and Wants

A

Needs: Not definable in economics.

Wants: Goods and services with positive value; unlimited

44
Q

Define Tradeoffs

A

Concept: Engaging in an activity means forgoing alternatives.

45
Q

What is the Production Possibilities Curve?

A

Purpose: Illustrates scarcity, choice, and trade-offs.

At the societal level
At the individual level

46
Q

What are the Production Possibilities Assumptions?

A

– Resources are fully employed.
– Production takes place over a specific time period.
– Resource inputs are fixed for the time period.
– Technology does not change over this time period.

47
Q

What is Technology?

A

Total pool of applied knowledge concerning how goods and services can be produced.

48
Q

Define Efficiency

A

Definition: Maximum output with given resources and technology along the Production Possibilities Curve; when a given item is produced at minimum cost.

49
Q

What is an Inefficient Point?

A

Definition: Below the PPC; not maximizing output.

50
Q

What is the Law of Increasing Additional Cost?

A

Concept: More of a good increases opportunity cost; PPC becomes bowed.

51
Q

What is Comparative Advantage?

A

Lower opportunity cost in producing a good compared to others. Is always a relative concept.

52
Q

What is Absolute Advantage?

A

Producing more of a good with the same resources.

The ability to produce the same quantity of
a good or service using fewer units of labour or resource inputs.

Rational individuals choose their comparative advantage and then specialize.

53
Q

What is Division of Labour?

A

Segregation of tasks to increase efficiency.

54
Q

What are the benefits of International Trade?

A

Specialization and comparative advantage improve efficiency and living standards.

55
Q

Why is Scarcity a problem for everyone?

A

Even affluent individuals face scarcity and must make choices.

56
Q

Why does obtaining increasing increments of any particular good typically entail giving up more and more units of other goods?

A

Resources are specialized.

57
Q

What are Trade-Offs in Production?

A

Concept: More resources in capital goods increase economic growth.

58
Q

What is the Market?

A

All of the arrangements for exchanging goods/services. Automotive market, Labour market, stock market, etc.

59
Q

What is the most important activity in the Markets?

A

The determination of prices.

60
Q

What is Relative Price?

A

Money price of one commodity in terms of another.

61
Q

What is the Money Price?

A

Price observed in today’s dollars. (Absolute or Nominal price).

62
Q

What is the Market Demand?

A

Total demand of all consumers for a particular good/service.

63
Q

What are the Determinants of Demand?

A

Income: Normal and inferior goods.

Tastes and preferences.

Prices of related goods: Substitutes and complements.

Expectations: Future prices, income, product availability.

Market size: Number of buyers.

64
Q

What causes changes in demand of Normal Goods?

A

Demand rises as income rises.

65
Q

What causes changes in demand of Inferior Goods?

A

Demand falls as income rises.

66
Q

What changes the demand of Substitutes?

A

Price change in one causes demand shift in the other.

67
Q

How do you calculate Relative Price?

A

Subtract the smaller price from the larger. The difference is how much one product or service rose relative to the other.
*Must consider time dimension (per year) and constant quality.

Example:
* The average absolute price of food purchased for preparation at home has increased by 16 percent.
* The average absolute price of prepared
food purchased at restaurants increased by 28 percent.
* Thus, the price of prepared food purchased at restaurants rose by 12 percent relative to the price of food purchased for preparation at home.

68
Q

What is the Individual vs Market Demand Curve?

A

Market demand
– The demand of all consumers in the marketplace for a
particular good or service

Individual demand
– Summation at each price of the quantity demanded by
each individual

69
Q

What is Consumption?

A

The use of goods and services for personal satisfaction.

70
Q

What is the difference between Changes in Demand vs Changes in Quantity Demanded?

A

a change in a ceteris paribus condition, causes a
Change in demand:
 The entire demand curve will shift to the right or to the left.
 The only thing that can cause the entire curve to move is a change in a determinant other than the good’s own price.

Changes in quantity demanded:
– A change in a good’s own price leads to a change in quantity demanded (a single point on a demand curve) for any given demand curve:
 This is a movement along the same demand curve.

71
Q

What are Consumer Goods vs Capital Goods?

A

Consumer goods
-Goods produced for personal satisfaction

Capital goods
-Goods used to produce other goods

72
Q

How do Capital Goods stimulate economic growth?

A

An increase in capital goods at present will lead to a higher rate of economic growth in the future.

In the future, the economic system can produce more
consumer goods.

73
Q

Explain Changes in Supply versus Changes in Quantity Supplied.

A

A change in a ceteris paribus condition, produces a change in supply:

– A change in quantity supplied is a movement along the same supply curve.
Caused by change in a good’s price.

– A change in supply is a shift of the whole supply curve.

The entire supply curve shifts to the right or to the left.

a change in a determinant other than the good’s own price causes the entire curve to move is

74
Q

Define Equilibrium (market clearing price)

A

The price that clears the market.

The price at which quantity demanded equals quantity supplied.

The price where the demand curve intersects the supply curve.

This is the price toward which the market price will automatically tend to gravitate.

There is no outcome better than this price for both consumers and producers.

75
Q

Define Equilibrium (market clearing price)

A

A situation in which quantity supplied equals quantity demanded at a particular price

There tends to be no movement of the price or the quantity away from this point unless demand or supply changes.

Equilibrium is a stable point. Any point that is not equilibrium is unstable and will not persist.

76
Q

Define equilibirum price

A

the price toward which the market price will automatically tend to gravitate.

77
Q

Define shortage

A

–A situation in which quantity demanded is greater than quantity supplied
–Shortages exist at any price below the market clearing price
–Shortages and scarcity are not the same thing.

78
Q

Define surplus

A

–A situation in which quantity supplied is greater than quantity demanded
–Surpluses exist at any price above the market clearing price.

79
Q

How does the interaction of demand and supply determines the equilibrium price and quantity?

A

– The demand and supply curves intersect at the market clearing, or equilibrium, price.
– Surpluses exist if the price of the good is greater than the market price.
– Shortages exist when the price of a good is below the market price.

80
Q

How do you calculate the Equilibrium Price and Quantity Using Simple Linear Demand and Supply Equations?

A

– Identify the linear equations for QD
and QS.
– Set QD = QS.
– Solve for equilibrium price (Pe).
– Insert the equilibrium price back into
the QD or QS equation.
– Solve for equilibrium quantity (Qe).

81
Q

Which simple linear equations shows the straight-line relationship between two variables, X and Y?

A

– y = b + mx
– where: y represents the “dependent variable,” which is the variable quantity (Q) in economics;
– b represents the “intercept”;
– m represents the “slope”; and
– x represents the “independent variable,” which is the variable price (P) in economics.

82
Q

Which linear equation shows the quantity demanded as a function of price?

A

The demand linear equation: QD = 12 - 2P

83
Q

What is the the supply linear equation?

A

QS = 0 + 2P or QS = 2P

84
Q

How do we determine the market equilibrium price (Pe)?

A

By setting QD = QS and solving for P.

85
Q

How do we solve for the equilibrium quantity (Qe)?

A

Insert the equilibrium price into either the demand or supply linear equation.

86
Q

What is the price system, or market system?

A

An economic system in which relative prices are constantly changing to reflect changes in supply and demand:
 The prices are signals as to what is relatively scarce and relatively abundant.
 Prices provide information to individuals and businesses.

87
Q

What is voluntary exchange?

A

– An act of trading, done on a mutually agreed upon basis between individuals in the price system
– Makes both parties to the trade subjectively better off

88
Q

What are transaction costs?

A

All the costs associated with exchange, including:
 The informational costs of finding out the price and quality, service record, and durability of a product
 The cost of contracting and enforcing that contract

89
Q

How do transaction costs induce firms to make price changes?

A

Transaction costs induce firms to make price changes about every 9 months in the U.S. This considerable degree of transaction-cost-generated “price stickiness.”

90
Q

What is the role of middlemen?

A

Middlemen (intermediaries) or brokers reduce transaction costs by providing information to buyers and sellers.

91
Q

What are platform firms?

A

Companies whose services link people to other individuals who share their interests or who seek to buy firms’ products, often via networks that the companies operate.

92
Q

What causes disequilibrium?

A

Changes in supply and demand. The market price and quantity adjust to a new equilibrium.

Increases in demand increase equilibrium price and quantity.
Decreases in demand decrease equilibrium price and quantity.

Increases in supply decrease equilibrium price and increase equilibrium quantity.
Decreases in supply increase equilibrium price and decrease equilibrium quantity.

*When both demand and supply change:
–If both the supply and demand curves shift simultaneously, the outcome is indeterminate for either equilibrium price or equilibrium quantity.
–The resulting effect depends upon how much each curve shifts.

*When both demand and supply increase:
–The change in equilibrium price is indeterminate.
–The equilibrium quantity increases unambiguously.

*When both demand and supply decrease:
–The change in equilibrium price is indeterminate.
–The equilibrium quantity decreases unambiguously.

*When supply decreases and demand increases:
–The equilibrium price increases.
–The change in the equilibrium quantity is uncertain without more information.

*When supply increases and demand decreases:
–The equilibrium price decreases.
–The change in the equilibrium quantity is uncertain without more information.

93
Q

How can prices that are quite flexible in some markets be less flexible in other market scenarios?

A

May take the form of subtle adjustments such as hidden payments and quality changes

May not reach equilibrium right away

94
Q

What impacts adjustment speed?

A

–Market characteristics influence adjustment speed.
–Markets may overshoot in the adjustment process.
–Markets are subject to energy shocks, labour strikes, and severe weather.

95
Q

How does a substantial increase in the price of machines used to produce a product affect supply, demand, price, and quantity?

A

Increased cost of producing shifts the supply curve to the left.

Meanwhile if there is an increased demand for the products the market clearing price increases and on net, the equilibrium quantity also increases.

96
Q

What is the rationing function of prices?

A

Synchronization of decisions of buyers and sellers that leads to equilibrium.

97
Q

What are methods of nonprice rationing?

A

– Rationing by queues (waiting in line)
– Rationing by random assignment or
coupons
– Rationing by power
– Rationing by physical force

98
Q

What is the essential role of rationing?

A

– Necessary due to scarcity
– Price versus nonprice rationing mechanism:
 Price rationing leads to the most efficient use of available resources.
 All gains from mutually beneficial trade are captured in a freely rationing price system.

99
Q

What are price controls?

A

– Government-mandated minimum or maximum prices that may be charged for goods and services.

100
Q

What is the price ceiling?

A

– A legal maximum price that may be charged for a particular good or service.

101
Q

What is the price floor?

A

– A legal minimum price below which a good or service may not be sold

102
Q

How does a price ceiling create black markets?

A

– A price ceiling will take effect if it is below the equilibrium price.
– A price ceiling that is set below the market clearing price creates a shortage.

103
Q
A

ECON Chapter 1-4 (1 decks)

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