Econ midterm 1 Flashcards
econ is the study of
scarcity
opportunity cost
cost of what we give up to take an action
societal interest
what is most “valuable” to society
marginal cost
cost of an additional action
marginal benefit
benefit of an additional action
good models should be:
Tractable- simple enough to understand
Predictive- tells something important
assumptions for the sake of tractability
all other things are equal
we change only one variable
types of macroeconomics
monetary
finance
Growth and development
what does the PPC assume
we fully use our resources
what is the relationship between two different input on the PPC
the more different they are the more the PPC bows out
Trade model assumptions
same level of resources
technology differs
constant opportunity cost (straight line PPC)
Absolute advantage
making more from the same level of inputs
comparative advantage
ability to make a good for a lower opportunity cost
specialization
when countries only produce 1 good based on their comparative advantage
pareto improving outcomes
when at least is better off without making anyone worse off
PPC assumptions for growth
resources are fixed
technology is fixed
what does it mean when comparative advantage is over 1
large amount and comparative advantage
does price change demand
NO! changes quantity demanded
shifts for demand
taste or preference
income
population
price of related goods
expectations of future prices
what happens to normal goods when income increases
demand increases and vice versa
what happens when to inferior good when income increases
demand decreases and vice versa
What happens to good B when good A increases in price when they are substitutes
demand increases and vice versa
What happens to good B when good A increases in price when they are compliments
demand decreases and vice versa
equilibrium
where where demand and supply intersect
slope of demand
down
slope of supply
up
shortage
quantity demanded is greater than supply
surplus
quantity supplied is greater than demanded
deadweight losses
benefit no one
surplus and shortage
what does market clearing help with
avoiding deadweight losses
elasticity
how much quantity demanded changes when price changes
a lot of substitutes means the good is
more elastic
determinants of elasticity
availability of close substitutes
more substitutes=more elastic
necessities vs luxuries
necessities are less elastic
as more time passes what happens to elasticity
increases because you have more time to find substitutes
if a good takes up smaller percentage of your income it is
more elastic
perfectly elastic
horizontal line
gas at two gas stations
perfectly inelastic
vertical line
once you cant afford a good demand goes to 0
percent change
(new value-old value)/old value
how to calculate elasticity with percent change
percent change in quantity/percent change in price
midpoint formula
(Q2-Q1/average)/(P2-P1/average)
if percent change in quantity is greater than that of price then
it is elastic
relatively reactive
if percent change in quantity is less than that of price then
it is inelastic
relatively non reactive
if percent change in quantity is equal to that of price then
it is unitary
proportionately reactive
income elasticity of demand
percent change in quantity demanded/percent change in income
no absolute value, sign matters
if income elasticity of demand is positive then
it is a normal good and 0-1 is inelastic and 1+ is elastic
if income elasticity for demand in negative then
it is an inferior good
cross-price elasticity
percent change in Q demanded of good A/percent change in price of good b
sign matters
positive=substitutes
negative=compliments
rule of 70
70/percent growth per year = how long it will take an investment to double
compound growth formula
start value(1+rate)^time=end value
normative
should
positive statement
facts
