econ_101_20150123003412 Flashcards
Scarcity
The problem of unlimited human wants and needs in a world with limited resources.
Economics
Examining how society allocates scarce resources.
Examples of allocation of scarce resources in Canada:
Public health care, education, welfare, infrastructure.
Going to a party the night before a midterm instead of studying is an example of which principle of economics?
People face tradeoffs.
Opportunity Cost
The cost of any item is what we give up to take it.
There is an unlimited number of things you can be doing other than what you are doing. However, the opportunity cost of something is the…
Next best option.
One principle of economics is “the cost of something is what you give up to get it”. Based on this principle, economics states that nothing in life is ___. The payment can be in the form of ___ or ___.
Free. Time, money.
Another principle of economics is that ___ people think at the ___.
Rational, margin.
What does “rational people think at the margin” mean?
People do the best they can given the constraints. Look at incremental changes to see if the benefits outweigh the costs.
When gas prices rise, the sales of SUV’s go down and the sales of small cars go up. This is an example of which principle of economics?
People respond to incentives.
In the principle “people respond to incentives”, the incentive can be ___ or ___.
Positive or negative.
Rather than be self-sufficient, one can specialize and trade for other goods. This illustrates which principle of economics?
Trade can make everyone better off.
What is a market?
A group of buyers and sellers, not necessarily in the same place.
One principle of economics states that “___ are a good way to organize economic activity.”
Markets
Organizing economic activity means knowing:
What to produce, how to produce, how much to produce, and who gets the product.
The invisible hand works through the ___ system.
Price.
The price system is the interaction between ___ and ___.
Buyers and sellers.
The price system reflects the ___/___ of the goods/service.
Cost/value.
In most cases, ___ guide households and firms to make decisions that further society’s well being.
Prices.
Who stated that “impersonal operation of prices bring people together”?
Milton Friedman.
Governments enforcing property rights is an example of which principle of economics?
Governments can sometimes improve market outcomes.
People are less likely to work, produce, invest, or purchase if there is a large risk of…
Their property being stolen.
Examples of what governments are responsible for economically:
Printing money, making sure companies don’t monopolize, taxation, labour laws.
One principle of economics states that “A country’s standard of living depends on its ability to…”
Produce goods and services.
Give examples that demonstrate that there is a huge variation of living standards across countries and over time.
Average income in rich countries is ten times the average income in poor countries. Canada’s standard of living is eight times larger than 100 years ago.
A principle of economics states that “prices rise when the government…”
Prints too much money.
Inflation
Increases the general level of prices.
Inflation is always caused by excessive growth in the quantity of money, thereby…
Decreasing its value.
The faster the government creates money, the greater the ___ ___.
Inflation rate.
In the short run, many economic policies cause inflation and unemployment to move in opposite directions. This demonstrates which economic principle?
Society faces a short-run trade-off between inflation and unemployment.
Economy, in Greek, means…
One who manages a household.
Efficiency
The property of society getting the most it can from its scarce resources.
Equity
The property of distributing economic prosperity fairly among the members of society.
Marginal Changes
Small incremental adjustments to a plan of action.
Incentive
Something that induces a person to act.
Market Economy
An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
Property Rights
The ability of an individual to own and exercise control over scarce resources.
Market Failure
A situation in which a market left on its own fails to allocate resources efficiently.
Externality
The impact of one person’s actions on the well-being of a bystander.
Market Power
The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.
Productivity
The quantity of goods and services produced from each hour of a worker’s time.
Business Cycle
Fluctuations in economic activity, such as employment and production.
What are the roles of an economist?
Scientist and policy adviser.
As a scientist, economists try to…
Explain how the world works.
As a policy adviser, economists try to…
improve the world.
Assumptions
Simplify the real complex world, making it easier to explain issues.
Model
Highly simplified representation of a more complicated reality.
Circular Flow Diagram
A visual model of the economy, which shows how dollars flow through markets among households and firms.
In a Circular Flow Diagram, there are two actors…
Households and firms.
In a Circular Flow Diagram, there are two markets…
Markets for goods and services, and markets for factors of production.
What are factors of production?
Resources used to produce goods and services.
In a Circular Flow Diagram, the role households play is…
They own the factors of production and sell/rent them to firms for income. In turn, they buy and consume goods/services.
In a Circular Flow Diagram, the role firms play is…
They buy or hire factors of production and use them to produce goods/services. In turn, they sell those goods/services.
What are the three factors of production?
Labour, land, and capital.
What is capital?
Buildings, machinery, and equipment.
What is Production Possibilities Frontier?
A graph that shows the combinations of the goods the economy can possibly produce given its available resources and the available technology?
Points on the PPF line are ___ and ___.
Possible and efficient.
Points under the PPF line are ___ and ___.
Possible but inefficient.
Points above the PPF line are ___.
Impossible.
Moving along the PPF line involves shifting ___ like labour from the production of one good to another.
Resources.
Society faces tradeoffs between…
The goods.
The slope of the PPF tells you…
The opportunity cost of one good in terms of the other.
How do you calculate slope?
Rise over run.
When the economy grows, the PPF shifts…
Outwards.
When the economy shifts, the PPF shifts upwards. Does the shift have to be symmetrical?
No.
The shape of the PPF can be…
Linear or bow shaped.
The shape of the PPF line depends on…
What happens to the opportunity cost as the economy shifts resources.
What does PPF stand for?
Production Possibilities Frontier.
A constant opportunity cost is represented by…
A straight PPF line.
An increased opportunity cost is represented by…
A bow shaped PPF line.
PPF is bow shaped when…
Different workers have different skills or different opportunity costs of producing one good in terms of the other. When there is some other resource, or mix of resources with varying opportunity costs (ex. different types of land suited for different uses).
Microeconomics
Examines how households and firms make choices and how they interact with markets.
Macroeconomics
Examines the economy as a whole (ex. inflation, unemployment, and economic growth).
Positive Statements
When economists act as scientists, and attempt to describe the world as it is.
Negative Statements
When economists act as policy advisors, and attempt to prescribe the world as it should be.
In trade, one side benefits and one side suffers. Is this true or false? Explain why.
False. Trade benefits both parties.
Trade is voluntary. Is this true or false?
True. Trade is voluntary most of the time.
In today’s society, you rely on many people from around the world, most of whom you’ve never met, to provide you with the goods and services you use. What does this demonstrate?
Interdependence.
What is the principle of economics that relates to trade?
Trade can make everyone better off.
If Canada has 50 000 hours of labour available for production, 1 computer takes 100 hours to make, and 1 ton of wheat takes 10 hours to produce, what is the result of dividing labour in half?
250 computers and 2500 tons of wheat.
If Japan has 30 000 hours of labour available for production, 1 computer takes 125 hours to make, and 1 ton of wheat takes 25 hours to produce, what is the result of dividing labour in half?
120 computers and 600 tons of wheat.
Exports
When goods and services are produced domestically and sold abroad.
Imports
When goods and services are produced abroad and sold domestically.
When a country gains from trade, a previously ___ amount of goods can be produced, to the point where it is above the ___ line.
Impossible, PPF.
Absolute Advantage
The ability to make goods and services using fewer inputs than another producer.
In the example where it takes Canada 100 hours and 10 hours to produce a computer and wheat respectively, and Japan takes 125 hours and 25 hours to produce the same products, who holds the absolute advantage for each product?
Canada holds the absolute advantage for both the wheat and the computers, as it takes Canada less time to produce the goods.
If each country has an ___ advantage in one good and specializes in that good, then both countries can gain from trade.
Absolute.
Comparative Advantage
Ability to make goods or services at a lower opportunity cost than another producer.
In terms of the wheat and computers example, what is the opportunity cost of the two products?
The opportunity cost of wheat is computers and the opportunity cost of computers is wheat.
For Canada, 1 computer costs 100 hours of labour which equates to 10 tons of wheat. For Japan, 1 computer costs 125 hours of labout which equates to 5 tons of wheat. Who holds the comparative advantage for computers?
Japan holds the comparative advantage for computers, as is costs them less in terms of what they give up (wheat) in order to produce that computer.
Absolute advantage is needed for comparative advantage. True or false?
False. Absolute advantage is not needed for comparative advantage.
Gains from trade happen due to ___ advantages.
Comparative advantages.
Comparative advantages, in essence, are differences in ___ ___.
Opportunity cost.
Specializing in goods that the country possesses a comparative advantage in makes the world’s ___ ___ bigger.
Economic pie.
Market
A group of buyers and sellers.
Competitive Market
A type of market, where there are many buyers and sellers and no one has a significant impact on price.
What are the two conditions necessary to achieve a perfectly competitive market?
- All goods are identical. 2. There are so many buyers and sellers that no one on their own can change the market price.
The quantity demanded describes…
A consumer desire, willingness, and ability to pay a price for a specific good or service.
What are the three consumer aspects crucial to quantity demand?
Desire, willingness, and ability.
What is the Law of Demand?
The quantity of a good or service demanded falls as the price rises (when everything else is equal).
Demand Schedule
A table showing the relationships between price and the quantity demanded for that good.
For the in class example, Helen’s demand for lattes obeyed the…
Law of Demand.
The quantity demanded in the market is the sum of the…
Quantities demanded by all buyers at each price.
The demand curve shows how price impacts quantity demanded, if other things are equal. What are these “other things” that can change demand?
Demand curve shifters.
How can the number of buyers shift the demand curve?
As the number of buyers increases, the quantity demanded at each price increases. Therefore, the demand curve shifts to the right. (Ex. if iPhones sold for $100).
How can income shift the demand curve?
The more wealthy one becomes, the goods and services bought differs drastically.
What is a Normal Good? Define and give an example.
Demand for the good increases as income increases. (Ex. eating out).
What is an Inferior Good? Define and give an example.
Demand for the good decreases as income increases. (Ex. Kraft Dinner).
For Normal Goods, an increase in income shifts the demand curve to the ___.
Right.
What are the five factors that can shift the demand curve?
- Number of buyers. 2. Income. 3. Prices of related goods. 4. Tastes. 5. Expectations.
How can prices of related goods shift the demand curve?
A rise in price for one good can increase demand for a substitute good, or a rise in price of one good causes a decrease the demand for a complement good.
Two goods are substitutes if…
A rise in price of one good causes an increase in demand for the other good.
Give an example of two goods that are substitutes.
Hot dogs and hamburgers.
Two goods are complements if…
A rise in price in one good causes a decrease in demand for the other good.
Give an example of two goods that are complements.
Ketchup and hamburgers.
How can tastes shift the demand curve?
Anything that causes a shift in tastes toward a good will increase demand for the good and shift its demand curve right.
Give an example of tastes shifting the demand curve.
Popularity of gluten-free diet results in increased demand for gluten-free food.
How can expectations shift the demand curve?
If consumers expect their incomes to increase, their demand for expensive goods increases. If consumers expect a recession and worry about losing their jobs, demand for expensive goods decrease.
Price causes a movement ___ the D-curve, but everything else ___ the D-Curve.
Along, shifts.
Supply
The quantity supplied: the amount of some good that sellers are willing and able to sell.
Law of Supply
Quantity supplied of a good rises when the price of the good rises (everything else equal).
Supply Schedule
A table that shows the relationship between the price of a good and the quantity supplied.
Market supply vs. Individual supply states that…
The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price.
What are the 4 supply curve shifters?
- Input prices. 2. Technology. 3. Number of sellers. 4. Expectations.
How do input prices affect the supply curve?
A fall in prices (for wages or prices for raw materials) makes production more profitable at each price, so firms will supply more of the good at each price.
Which way does the supply curve shift for input prices, technology, and number of sellers?
Right.
Which way does the supply curve shift for expectations?
Left.
How does technology affect the supply curve?
Technology determines how much inputs are needed to produce a good. A cost-saving technological improvement has the same impact as the fall of input prices.
How does the number of sellers affect the supply curve?
An increase in the number of sellers increases the quantity supplied at each price for a good.
How do expectations affect the supply curve?
In general, sellers may adjust supply when there is expectations of future price change.
Give an example of how expectations can affect the supply curve.
Events in the Middle East lead to expectations of higher oil prices. Albertan oil companies may save some oil to sell later at higher prices.
Equilibrium Price
The price that equates quantity supplied with quantity demanded.
Equilibrium Quantity
The quantity supplied and quantity demanded at the equilibrium price.
Surplus (excess supply)
When quantity supplied is greater than quantity demanded.
Shortage (excess demand)
When quantity demanded is greater than quantity supplied.
What are the three steps to analyzing changes in equilibrium?
- Decide whether event shifts S curve, D curve, or both. 2. Decide in which direction curve shifts. 3. Use supply-demand diagram to see how the shift changes equilibrium P and Q.
What is elasticity?
A measurement of how one variable responds to changes in another variable.
What is a common example of elasticity.
If prices rise, how much does demand fall?
Give an example of a product that is elastic and a product that is inelastic.
Lattes are elastic and insulin is inelastic.
What does the price elasticity of demand measure?
How much quantity demanded responds to a change in price.
What is the formula for price elasticity of demand?
(% change in Q demanded)/(% change in P)
Along a demand curve, price and quantity move in opposite directions, which would make price elasticity ___.
Negative.
Price elasticizes are reported in ___ numbers.
Positive.
What is wrong with the following formula:% change = ((end value - start value)/(start value))*100
This formula gives different answers depending on where you start.
What is the formula that utilizes the endpoint method?
% change = ((end value - start value)/(midpoint))*100
What is the midpoint?
The number halfway between start and end values (the average).
What are the 4 factors that price elasticity depends on?
- Extent to which close substitutes are available. 2. Whether the good is a necessity or a luxury. 3. How broadly or narrowly the good is defined. 4. The time horizon.
Price elasticity depends on the time horizon. What does this mean?
Elasticity is higher in the long run than the short run.
The slope of the demand curve and price elasticity of demand are ___.
Related.
The flatter the curve, the ___ the elasticity.
Larger.
The steeper the curve, the ___ the elasticity.
Smaller.
What are the 5 types of demand curves?
Perfectly inelastic demand, inelastic demand, unit elastic demand, elastic demand, and perfectly elastic demand.
What is the demand curve for perfectly inelastic demand
A vertical line.
What is the consumer price sensitivity for perfectly inelastic demand?
None.
What is the elasticity for perfectly inelastic demand?
0.
What is the demand curve for inelastic demand?
A steep line.
What is the consumer price sensitivity for inelastic demand?
Relatively low.
What is the elasticity for inelastic demand?
What is the demand curve for unit elastic demand?
Intermediate slope.
What is the consumer price sensitivity for unit elastic demand?
Intermediate.
What is the elasticity for unit elastic demand?
1.
What is the demand curve for elastic demand?
Relatively flat.
What is the consumer price sensitivity for elastic demand?
Relatively high.
What is the elasticity for elastic demand?
> 1.
What is the demand curve for perfectly elastic demand?
Horizontal.
What is the consumer price sensitivity for perfectly elastic demand?
Extreme.
What is the elasticity for perfectly elastic demand?
Infinite.
Revenue is ___*___.
Price, quantity.
Raising your price can influence your revenue in two ways:
- A higher price can lead to more revenue, as you make more money per unit sold. 2. A higher price can lead to fewer units sold due to the law of demand, lowering revenue.
If the loss in revenue from lower quantity sold is greater than the revenue from a higher price, revenue ___. This happens in a case that demand is ___.
Falls. Elastic.
If the loss in revenue from a lower quantity sold is smaller than the increase in revenue from a higher price, revenue ___. This happens in a case that demand is ___.
Rises. Inelastic.
Price elasticity of supply measures how much quantity supplied responds to a change in ___.
Price.
The flatter the supply curve, the ___ the elasticity.
Larger.
The steeper the supply curve, the ___ the elasticity.
Smaller.
What are the 5 different types of supply curves?
Perfectly inelastic, inelastic, unit, elastic, and perfectly elastic.
What is the slope of a perfectly inelastic supply curve?
Vertical.
What is the seller’s price sensitivity of a perfectly inelastic supply curve?
None.
What is the elasticity of a perfectly inelastic supply curve?
0.
What is the slope of an inelastic supply curve?
Steep.
What is the seller’s price sensitivity of an inelastic supply curve?
Relatively low.
What is the elasticity of an inelastic supply curve?
What is an example of inelastic supply?
Car companies.
What is an example of (close to) perfectly inelastic supply curve?
Electricity companies.
What is the slope of unit elastic supply?
Intermediate slope.
What is the seller’s price sensitivity of unit elastic supply?
Intermediate.
What is the elasticity of unit elastic supply?
1.
What is the slope of elastic supply?
Relatively flat.
What is the seller’s price sensitivity of elastic supply?
Relatively high.
What is the elasticity of elastic supply?
> 1.
What is the slope of perfectly elastic supply?
Horizontal.
What is the seller’s price sensitivity of perfectly elastic supply?
Extreme.
What is the elasticity of perfectly elastic supply?
Infinite.
The easier sellers can change the quantity of the good or service they produce, the ___ the price elasticity of supply.
Greater.
Price elasticity of supply is ___ in the long run, because businesses can build new factories or firms to enter the market.
Greater.
What is the formula for income elasticity of demand?
(% Change in Quantity Produced)/(% Change in Income)
Income elasticity is ___ for normal goods. and ___ for inferior goods.
Positive, negative.
What is the formula for cross-price elasticity of demand?
(% Change in Quantity Produced of Good A)/(% Change in Price of Good B)
Cross-price elasticity is ___ for substitutes, and ___ for compliments.
Positive, negative.
Government policies that impact private market outcomes include price controls. What are two types of price controls?
Price ceiling and price floor.
What is the price ceiling?
A maximum price for a good/service.
