Economic Concepts Flashcards
Identify the “X” axis and “Y” axis of a graph.
“X” axis is the horizontal line; “Y” axis is the vertical line. (To help remember, the “Y” has a vertical element to it.)
What are the major types (extremes) of economic systems?
- Command Economic System; 2. Market (Free-enterprise) Economic System.
What is macroeconomics?
The economic activities and outcomes of a group of entities taken together, typically of an entire nation or major sectors of a national economy.
What is a time-series graph?
A graph showing changes in a variable over time. Commonly, time is considered the independent variable and plotted on the horizontal “X” axis.
What are the characteristics of a Command economic system?
Government largely determines the production, distribution and consumption of goods and services (e.g., Communism and Socialism).
What does “ceteris paribus” mean, as used in economics?
Assumption that any influences other than the variable(s) being considered are held constant. Literally, “all else being equal.”
What is the meaning of a graphed plot with a positive slope?
The two variables move in the same direction (i.e., the dependent variable increases as the independent variable increases).
Define “economics”.
Study of the allocation of scarce economic resources among alternative uses.
What is the meaning of a graphed plot with a negative slope?
The two variables move in opposite directions (i.e., the dependent variable decreases as the independent variable increases).
Identify the major divisions of the field of economics.
- Microeconomics; 2. Macroeconomics; 3. International economics.
Identify the “Intercept” on a graph.
The point at which the plotted line intersects the “Y” axis (i.e., at the zero point on the “X” axis).
What are the characteristics of a Market (free-enterprise) economic system?
Distinct entities determine production, distribution and consumption in an open market (e.g., Capitalism).
What is microeconomics?
The economic activities of distinct decision-making entities, including individuals, households and business firms.
What is the role of graphs in economics?
Graphs show the relationship between two variables, usually referred to as the independent and the dependent variables.
What is international economics?
Economic activities that occur between nations and outcomes that result from those activities.
What determines “price”?
The supply of and demand for the commodity being priced.
In an economic context, what makes up compensation?
Payments to individuals as: 1. Wages, salaries and profit sharing for labor; 2. Interest, dividends, rental and lease payments for capital; 3. Rental, lease and royalty payments for natural resources.
List the types of economic resources.
Acquired from individuals as: 1. Labor: human work, skills, and similar human effort; 2. Capital: financial resources (e.g., savings) and man-made resources; 3. Natural Resources: land, minerals, timber, water, etc.
List the characteristics of a free-market economy.
- Interdependent relationship between individuals and business firms; 2. Production depends on preferences of individuals with ability to pay for goods and services; 3. Production depends on availability of economic resources, level of technology, and how business firms choose to use them; 4. Production depends on sale price being at least equal to production cost.
Describe the relationship between economic resources and compensation in a free-market economy.
Business firms acquire economic resources from individuals (labor, capital and natural resources), who receive compensation in return (wages/salaries, rents, interest, dividends, etc.); individuals use this compensation to acquire goods and services produced by businesses.
Define “demand”.
Desire, willingness and ability to acquire a commodity.
Describe the income effect as it applies to individual demand.
A given amount of income buys more units at a lower price.
Define “market demand”.
The quantity of a commodity that will be demanded by all individuals (and other entities) in the market at various prices during a specified time, ceteris paribus.
What are the factors that change market demand?
- Size of market; 2. Income or wealth of market participants; 3. Preferences of market participants; 4. Change in prices of other goods and services.
Describe the substitution effect as it applies to individual demand.
Lower-priced items will be purchased as substitutes for higher-priced items.
Define “individual demand”.
The quantity of a commodity that will be demanded by an individual (or other entity) at various prices during a specified time, ceteris paribus.
Distinguish between a change in quantity demanded and a change in demand.
A change in quantity demanded is movement along a given demand curve as a result of change in price only. A change in demand is a shift in a demand curve as a result of changes in variables other than price.
Distinguish between a change in quantity supplied and a change in supply.
A change in quantity supplied is movement along a given supply curve as a result of change in price only. A change in supply is a shift of a supply curve as a result of changes in variables other than price.
Define “supply”.
Supply is the quantity of a commodity (good or service) that will be provided at alternative prices during a specified time.
Describe the principle of increasing cost.
Production costs increase in the short-run as the quantity produced increases, because new resources are not used as efficiently as the resources used previously .
What are the variables that change aggregate supply?
Changes in: 1. Number of providers; 2. Cost of inputs; 3. Government taxation or subsidization; 4. Technological advances.
Define an “individual supply schedule”.
A schedule that shows the quantity of goods that an individual producer is willing to provide (supply) at various prices during a specified time.
What is the slope of a normal supply curve?
A normal supply curve has a positive slope: at a higher price, a greater the quantity will be supplied.
Define “market supply schedule”.
A schedule that shows the quantity of a commodity that will be supplied by all providers in the market at various prices during a specified time.
Describe the results of a change in market supply (only) on equilibrium.
- Increase in market supply = Supply curve shifts down and to the right; Decrease in market supply = Supply curve shifts up and to the left; 2. Increase in market supply w/no change in demand = Decrease in equilibrium price and increase in equilibrium quantity; 3. Decrease in market supply w/no change in demand = Increase in equilibrium price and a decrease in equilibrium quantity.
Describe the results of a change in market demand (only) on equilibrium.
- Increase in market demand = Demand curve shifts up and to the right; Decrease in market demand = Demand curve shifts down and to the left; 2. Increase in market demand w/no change in supply = Increase in both equilibrium price and equilibrium quantity; 3. Decrease in market demand w/no change in supply = Decrease in both equilibrium price and equilibrium quantity.
What causes a market shortage?
A market shortage is created when actual price (AP) of a commodity is less than the equilibrium price; therefore, quantity supplied is less than quantity demanded at AP (e.g., rent controls).
How can government directly influence market equilibrium?
- Taxation increases the cost and shifts the market supply curve up and to the left; tax decreases have the opposite effects; 2. Subsidization decreases the cost and shifts the market supply curve down and to the right; decreases in subsidization have the opposite effects; 3. Rationing reduces demand, thus shifting the demand curve downward and to the left, thus lowering the equilibrium quantity and price.
What causes a market surplus?
A market surplus is created when actual price (AP) of a commodity is more than the equilibrium price; therefore, quantity supplied is more than quantity demanded (e.g., minimum wage).
Define “market equilibrium price”.
- Price at which the quantity of a commodity supplied is equal to the quantity of that commodity demanded; 2. The intersection of the market demand and supply curves.
Define “elasticity” (as used in economics).
Measures the percentage change in a market factor as a result of a given percentage change in another market factor.
What does “demand is elastic” mean?
If demand is elastic, the percentage change in demand is greater than the percentage change in price, the elasticity coefficient is greater than 1 and total revenue will change in the opposite direction as the change in price.
Define “elasticity of supply”.
The percentage change in the quantity of a commodity supplied as a result of a given percentage change in the price of the commodity.
Identify four measures of elasticity.
- Elasticity of Demand; 2. Elasticity of Supply; 3. Income Elasticity of Demand; 4. Cross Elasticity of Demand.
Define “elasticity of demand”.
The percentage change in quantity of a commodity demanded as a result of a given percentage change in the price of the commodity.
What is represented by an indifference curve?
Various quantities of two commodities that give an individual the same total utility as plotted on a graph.
Define “utility”, as used in economics.
Satisfaction derived from the acquisition or use of a commodity.
Define “utils”, as used in economics.
Hypothetical unit of measure used to measure satisfaction derived from a commodity.
Define the “law of diminishing marginal utility”.
Decreasing utility (satisfaction) is derived from each additional (marginal) unit of a commodity acquired.
Define “marginal utility”.
The utility derived from each (additional) marginal unit (i.e., from the last unit acquired).
Which short-run average cost curves have a “U” shape?
Average variable cost, Average total cost and Marginal cost curves have a “U” shape. Average fixed cost has a continuously downward-sloped curve.
Give three examples of variable cost.
- Raw materials; 2. Most labor; 3. Electricity.
Identify and describe the time periods of analysis used in economics.
- Short-run time period: At least one input to the production process cannot be varied (i.e., and at least one input is fixed.); 2. Long-run time period: Quantity of all inputs to the production process can be varied.
Define the “law of diminishing returns”.
The point at which the quantity of variable inputs begins to overwhelm the fixed factors, resulting in inefficiencies and diminishing return on marginal units of variable inputs.
Give three examples of fixed cost.
- Property taxes; 2. Contracted rent; 3. Insurance.
Identify and describe the kinds (types) of cost that make up total cost.
- Total Fixed Cost (FC): Costs which cannot be changed with changes in the level of output; 2. Total Variable Cost (VC): Costs for variable inputs which will vary directly with changes in the level of output; 3. Total Cost (TC) = FC + VC.
Describe economies of scale (also called increasing return to scale).
The long-run average cost curve is decreasing, reflecting that the quantity of output is increasing in greater proportion than the increase in inputs, largely due to specialization of labor and equipment.
What are the three major kinds (types) of cost used in short-run economic analysis?
- Total Cost = Total Fixed Cost + Total Variable Cost; 2. Average Cost = Cost per-unit of commodity produced; 3. Marginal Cost = Cost of the last acquired unit of an input.
What are the four market structures normally considered in economic analysis?
- Perfect competition; 2. Perfect monopoly; 3. Monopolistic competition; 4. Oligopoly.
Describe the point of short-run profit maximization for a firm in perfect competition.
Short-run profit is maximized where marginal revenue is equal to rising marginal cost; total revenue will exceed total costs by the greatest amount at that point.
List the characteristics of perfect competition
- A large number of independent buyers and sellers, each of which is too small to separately affect the price of a commodity; 2. All firms sell homogeneous products or services; 3. Firms can enter or leave the market easily; 4. Resources are completely mobile; 5. Buyers and sellers have perfect information; 6. Government does not set prices.
What is a “price taker” firm?
The assumption that a firm in a perfectly competitive market must accept (“take”) the price set by the market and can sell any quantity of its commodity at that price. Thus, the demand curve faced by a single firm in perfect competition is a straight horizontal line at the market price.
What is the shape of the demand curve for a firm in perfect competition?
The demand curve faced by a single firm in a perfectly competitive market is a straight horizontal line originating at the price set by the market (of all firms).
How are long-run profits determined for a firm in perfect competition?
There are no long-run profits possible in a perfectly competitive market. If profits are made in the short-run, more firms will enter the market and increase supply, thus decreasing market price until all firms just break even.
What is the shape of the demand curve for a firm in perfect monopoly?
Downward sloping (and, since the firm is the only firm in the industry, it is also the industry demand curve).
In the long-run, how may a monopoly firm increase its profits?
A monopoly firm may increase its profits in two ways: 1. Reduce cost by changing the size if its operations; 2. Increase demand through advertising, promotion, etc.
List the characteristics of a perfect monopoly.
- A single seller 2. A commodity for which there are no close substitutes; 3. Restricted entry into the market.
Describe the point of short-run profit maximization for a firm in perfect monopoly.
Short-run profit is maximized where marginal revenue is equal to rising marginal cost. The price charged at that quantity will depend on the level of the demand curve.
List examples of reasons why monopolies exist.
- Control of raw materials or processes; 2. Government granted franchise (i.e., exclusive right); 3. Increasing return to scale (i.e., natural monopolies).
Under monopolistic competition, what determines whether or not a firm makes a profit?
The relationship between the price (P) that can be charged and the firm’s average total cost (ATC). If ATC P).
How are long-run profits determined for a firm in monopolistic competition?
There are no long-run profits possible in a monopolistic competition. If profits are made in the short-run, more firms will enter the market and lower the demand for each firm until each just breaks even.
Describe the point of short-run profit maximization for a firm in monopolistic competition.
Short-run profit is maximized where marginal revenue is equal to rising marginal cost (provided price > average total cost).
What is the shape of the demand curve for a firm in monopolistic competition?
Downward-sloping and highly elastic (because there are close substitutes for the good or service offered).
List the characteristics of monopolistic competition.
- A large number of sellers; 2. Firms sell a differentiated product or service (similar but not identical), for which there are close substitutes; 3. Firms can enter or leave the market easily.
In what ways do firms in an oligopoly market compete?
Firms in an oligopoly market compete based on quality, service, distinctiveness, etc., but not on price, which might incite a “price war.”
Distinguish between overt collusion and tacit collusion.
- Overt Collusion = Firms conspire to set output, price or profit; illegal in the U.S.; 2. Tacit Collusion = Firms follow price charged by the price leader in the market; not illegal in the U.S.
How are long-run profits determined for a firm in an oligopoly industry?
A firm in an oligopoly industry will make profits in the long-run if average total cost is less than market price, and can continue to do so because entry into the market is restricted.
Describe the point of short-run profit maximization for a firm in an oligopoly industry.
Short-run profit is maximized where marginal revenue is equal to rising marginal cost (provided price > average total cost).
List the characteristics of an oligopoly.
- A few sellers 2. Firms sell either a homogeneous product (standardized oligopoly) or a differentiated product (differentiated oligopoly); 3. Restricted entry into the market.
Describe a market structure that includes only a few providers.
Oligopoly market. In an oligopoly market, there are few providers of goods or services. In a monopoly there is only one provider; in perfect competition or monopolistic competition there are many providers.
In which form of market structure is a “price war” most likely possible?
Oligopoly, because each firm in the industry is aware of the actions of other firms in the industry.
Describe the least likely market structure in the U.S. economy.
Perfect Competition. A market or industry with all of the criteria of perfect competition is virtually nonexistent in the U.S. economy. Monopoly, monopolistic competition and oligopoly markets are common.
