EREC Chapter 3

Question 1

Efficiency

Answer 1

the ability to make the best use of what is available to attain the desired result

Question 2

2 things of efficiency

Answer 2

technical
Economic/Allocative/Paredo

Question 3

Technical efficiency

Answer 3

The highest quantity of outputs produced from the smallest number of inputs

Ex- Employee training may result in a higher technical efficiency, as each worker can
now produce more units of output than before

Question 4

Economic/Allocative/Paredo efficiency

Answer 4

all resources are allocated for their best uses to create the
most utility for everyone; at the point of economic efficiency- this distribution CANNOT be
changed without making AT LEAST ONE person worse off than they were before

Question 5

The Law of Demand:

Answer 5

The QUANTITY DEMANDED of a good is INVERSELY RELATED to its PRICE”

Question 6

As price increases, the quantity demanded decreases due to

Answer 6

opportunity costs
Increased price of good/service reduce the consumer’s REAL INCOME

Question 7

opportunity costs

Answer 7

as a good becomes more expensive, the opportunity cost to
consume it increases. You must give up more money (that can be used for other
things) in order to buy larger quantities of the good

Question 8

What will shift the demand curve?

Answer 8

• Income
• Tastes and preferences
• Price of substitutes
• Price of complements
• Uncertainty
• population

Question 9

Substitution effect:

Answer 9

the change in quantity demanded due to a change in the good’s price, when
in income, tastes and preferences, and other goods prices remain constant

Question 10

Income effect:

Answer 10

The change in quantity demanded due to a change in consumers’ REAL INCOME
resulting from a change in the price of a good, ceteris paribus (all else held constant)

Question 11

REAL income

Answer 11

how much can your money buy you in terms of goods/services?

Question 12

The Law of Supply:

Answer 12

“The QUANTITY SUPPLIED of a good is DIRECTLY RELATED to its own PRICE”

Question 13

What does the supply-side do?

Answer 13

Organizes Inputs > Transforms inputs through technical process (production function) into
output > Sells output as final goods to consumer in the market place

Question 14

what will shift a supply curve?

Answer 14

1. Change in resource (input) costs
2. Change in technology
3. “Supply Shocks”
   a. Ex- drought, good year for harvests

Question 15

Equilibrium:

Answer 15

the “sweet spot” where market forces have driven the QUANTITY SUPPLIED = QUANTITY DEMANDED

Question 16

shift: increase in income causes:

Answer 16

1. The demand curve to shift up
2. The quantity supplied to increase
3. The point of equilibrium to increase
4. The equilibrium price and quantity to increase