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Principles of Microeconomics > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

The study of how society manages its scarce resources.

A

Economics

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2
Q

Society is getting the maximum benefits

from its scarce resources; the size of the economic pie.

A

Efficiency

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3
Q

The property of distributing economic prosperity uniformly among the members of society; how the pie is divided into individual slices.

A

Equality

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4
Q

Whatever must be given up to obtain some item (includes both implicit and explicit costs).

A

Opportunity Cost

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5
Q

People who systematically and purposefully do the best they can to achieve their objectives.

A

Rational People

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6
Q

A small incremental adjustment to a plan of action.

A

Marginal Change

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7
Q

A rational decision maker takes an action if and only if the action’s _______ exceeds its ________ .

A

Marginal Benefit

Marginal Cost

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8
Q

_______ allows countries to specialize in what they do best and to enjoy a greater variety of goods and services.

A

Trade

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9
Q

An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

A

Market Economy

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10
Q

______ are the instrument with which the invisible hand directs economic activity.

A

Prices

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11
Q

Name the 2 rationales for a government to intervene in the economy and change the allocation of resources.

A

To Promote Efficiency

To Promote Equality

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12
Q

A situation in which a market left on its own fails to allocate resources efficiently.

A

Market Failure

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13
Q

The uncompensated impact of one person’s actions on the well-being of a bystander.

A

Externality

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14
Q

The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.

A

Market Power

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15
Q

Name 2 possible causes of market failure.

A

Externality

Market Power

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16
Q

The ability of free markets to reach desirable outcomes, despite the self-interest of market participants.

A

Invisible Hand

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17
Q

Almost all variation in living standards is attributable to differences in countries’ _______ .

A

Productivity

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18
Q

The quantity of goods and services produced from each unit of labor input.

A

Productivity

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19
Q

An increase in the overall level of prices in the economy.

A

Inflation

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20
Q

Fluctuations in economic activity, such as employment and production.

A

Business Cycle

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21
Q

_______ can simplify the complex world and make it easier to understand.

A

Assumptions

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22
Q

_______ simplify reality to improve our understanding of it.

A

Models

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23
Q

Name the 2 markets in the circular flow diagram.

A

Market for Goods and Services

Market for Factors of Production

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24
Q

Name the 2 decision-makers in the circular flow diagram.

A

Firms

Households

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25
Q

In the market for factors of production in the circular flow diagram, _____ sell and _____ buy.

A

Households Sell

Firms Buy

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26
Q

In the market for goods and services in the circular flow diagram, _____ sell and _____ buy.

A

Firms Sell

Households Buy

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27
Q

Name the 3 inputs included in the factors of production market in the circular flow diagram.

A

Labor
Land
Capital (buildings and machines)

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28
Q

The _______ diagram is a visual model that explains how the economy is organized and how participants in the economy interact with one another.

A

Circular Flow

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29
Q

A graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and the available production technology that firms use to turn these factors into output.

A

Production Possibilities Frontier

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30
Q

Points on the production possibilities frontier represent ______ levels of production.

A

Efficient

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31
Q

Points inside the production possibilities frontier represent ______ levels of production.

A

Inefficient

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32
Q

Points outside the production possibilities frontier represent ______ levels of production.

A

Impossible

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33
Q

The study of how households and firms make decisions and how they interact in specific markets.

A

Microeconomics

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34
Q

The study of economy-wide phenomena.

A

Macroeconomics

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35
Q

_____ statements are descriptive.

A

Positive

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36
Q

_____ statements are prescriptive.

A

Normative

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37
Q

The limited nature of society’s resources.

A

Scarcity

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38
Q

True or False

Models are built with assumptions.

A

True

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39
Q

Name the 2 limitations on production of goods in the production possibilities frontier model.

A

Factors of Production

Production Technology

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40
Q

The slope of the production possibilities frontier represents the _______ .

A

Opportunity Cost

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41
Q

What can shift the production possibilities frontier?

A

Technological Advances

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42
Q

True or False

Normative statements can be confirmed or refuted by examining evidence.

A

False

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43
Q

The ability to produce a good using fewer inputs than another producer.

A

Absolute Advantage

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44
Q

When each person specializes in producing the good in which he or she has a ______ , total production in the economy rises

A

Comparative Advantage

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45
Q

The ability to produce a good at a lower opportunity cost than another producer.

A

Comparative Advantage

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46
Q

For both parties to gain from trade, the price at which they trade must…

A

Be between their opportunity costs

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47
Q

In order to be consider a good deal, the price at which a traded good is purchased should be…

A

Lower than the buyer’s opportunity cost to produce the good

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48
Q

Who owns the factors of production in the circular flow diagram?

A

Households

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49
Q

Who produces good and services in the circular flow diagram?

A

Firms

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50
Q

Who gains from specialization and trading?

A

Everyone

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51
Q

True or False

The price of trade occurs between opportunity costs.

A

True

52
Q

Name the 5 variables that shift the demand curve.

A 
Income
Prices of Related Goods
Tastes
Expectations
Number of Buyers
53
Q

A good for which an increase in income leads to an increase in demand.

A

Normal Good

54
Q

A good for which an increase in income leads to a decrease in demand.

A

Inferior Good

55
Q

Goods for which an increase in the price of one leads to an increase in the demand for the other.

A

Substitutes

56
Q

Goods for which an increase in the price of one leads to an decrease in the demand for the other.

A

Complements

57
Q

Other things equal, when the price of a good rises, the quantity demanded of the good falls.

A

Law of Demand

58
Q

Other things equal, when the price of a good rises, the quantity supplied of the good also rises.

A

Law of Supply

59
Q

Name the 4 variables that shift the supply curve.

A

Input Prices
Technology
Expectations
Number of Sellers

60
Q

Name the 4 variables that shift the supply curve.

A

Input Prices
Technology
Expectations
Number of Sellers

61
Q

A scenario in which quantity supplied is greater than quantity demanded.

A

Surplus

62
Q

A scenario in which quantity demanded is greater than quantity supplied.

A

Shortage

63
Q

The price of any good adjusts to bring the quantity supplied and the quantity demanded into balance.

A

Law of Supply and Demand

64
Q

A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants.

A

Elasticity

65
Q

How much the quantity demanded of a good responds to a change in the price of that good

A

Price Elasticity of Demand

66
Q

Name the 4 types of elasticity.

A

Price Elasticity of Demand
Income Elasticity of Demand
Cross-Price Elasticity of Demand
Price Elasticity of Supply

67
Q

Scenario where the quantity demanded responds substantially to changes in price.

A

Elastic Demand

68
Q

Scenario where the quantity demanded responds only slightly to changes in price.

A

Inelastic Demand

69
Q

Name the 4 determinants of price elasticity of demand.

A

Availability of Close Substitutes
Necessities Versus Luxuries
Definition of the Market
Time Horizon

70
Q

True or False

Goods with close substitutes have more inelastic demand.

A

False

71
Q

True or False

Necessities have inelastic demand.

A

True

72
Q

True or False

Luxuries have inelastic demand.

A

False

73
Q

True or False

Narrowly defined market have more inelastic demand.

A

False

74
Q

True or False

Demand is more elastic over longer time horizons.

A

True

75
Q

Percentage change in quantity demanded divided by percentage change in price.

A

Equation for Price Elasticity of Demand

76
Q

[ (Q2 - Q1) / ((Q2 + Q1)/2) ] / [ (P2 - P1) / ((P2 + P1)/2) ]

A

Midpoint Method Equation for Price Elasticity of Demand

77
Q

The flatter the curve, the more elastic / inelastic.

A

Elastic

78
Q

A vertical curve is perfectly elastic / inelastic.

A

Inelastic

79
Q

A horizontal curve is perfectly elastic / inelastic.

A

Elastic

80
Q

If demand is elastic, the price elasticity of demand is :

> 1
< 1
= 1

A

> 1

81
Q

If demand is inelastic, the price elasticity of demand is :

> 1
< 1
= 1

A

< 1

82
Q

If demand has unit elasticity, the price elasticity of demand is :

> 1
< 1
= 1

A

= 1

83
Q

If a 22% increase in price leads to an 11% decrease in quantity demanded, demand is elastic / inelastic / unit elastic.

A

Inelastic

84
Q

If a 22% increase in price leads to an 22% decrease in quantity demanded, demand is elastic / inelastic / unit elastic.

A

Unit Elastic

85
Q

If a 22% increase in price leads to an 67% decrease in quantity demanded, demand is elastic / inelastic / unit elastic.

A

Elastic

86
Q

Total revenue equals ___ x ___ .

A

Price x Quantity

87
Q

The area of the box under the demand curve.

A

Total Revenue

88
Q

The elasticity of a vertical curve is ___ .

A

0

89
Q

The elasticity of a horizontal curve is ___ .

A

Infinity

90
Q

How much the quantity demanded of a good responds to a change in consumer’s income.

A

Income Elasticity of Demand

91
Q

Percentage change in quantity demanded divided by the percentage change in income.

A

Equation for Income Elasticity of Demand

92
Q

Normal goods have positive / negative income elasticities.

A

Positive

93
Q

Inferior goods have positive / negative income elasticities.

A

Negative

94
Q

True or False

Luxuries have lower income elasticities than necessities.

A

False

95
Q

How much the quantity demanded of one good responds to a change in the price of another good.

A

Cross-Price Elasticity of Demand

96
Q

Percentage change in quantity demanded of the first good divided by percentage change in price of the second good.

A

Equation for Cross-Price Elasticity of Demand

97
Q

Substitutes have positive / negative cross-price elasticity.

A

Positive

98
Q

Complements have positive / negative cross-price elasticity.

A

Negative

99
Q

How much the quantity supplied of a good responds to a change in the price of that good.

A

Price Elasticity of Supply

100
Q

Percentage change in quantity supplied divided by percentage change in price.

A

Equation for Price Elasticity of Supply

101
Q

Name the determinant of price elasticity of supply.

A

Time Period

102
Q

Supply is more / less elastic in the long run.

A

More

103
Q

True or False

The elasticities of supply curves behave in the same way as the elasticities of demand curves.

A

True

104
Q

Name the 2 types of price controls.

A

Price Ceilings

Price Floors

105
Q

A legal maximum on the price at which a good can be sold.

A

Price Ceiling

106
Q

A legal minimum on the price at which a good can be sold.

A

Price Floor

107
Q

Name an example of a price ceiling.

A

Rent Control

108
Q

Name an example of a price floor.

A

Minimum Wage

109
Q

A price ceiling set below the equilibrium price is binding / nonbinding.

A

Binding

110
Q

A price floor set below the equilibrium price is binding / nonbinding.

A

Nonbinding

111
Q

A price ceiling set below the equilibrium price creates a shortage / surplus.

A

Shortage

112
Q

A price floor set above the equilibrium price creates a shortage / surplus.

A

Surplus

113
Q

Manner in which the burden of a tax is

shared among participants in a market.

A

Tax Incidence

114
Q

A tax on sellers shifts the supply curve upward / downward by…

A

Upward

Exact size of the tax

115
Q

True or False

A tax on sellers reduces the size of the market.

A

True

116
Q

True or False

A tax on buyers reduces the size of the market.

A

True

117
Q

True or False

Both buyers and sellers share the burden of tax when a tax is levied on sellers.

A

True

118
Q

True or False

Only buyers have the burden of tax when a tax is levied on buyers.

A

False

119
Q

A tax on buyers shifts the demand curve upward / downward by…

A

Downward

Exact size of the tax

120
Q

Describe the burden of tax when supply is very elastic and demand is relatively inelastic.

A

Sellers bear a small burden of tax

Buyers bear most of the burden

121
Q

Describe the burden of tax when demand is very elastic and supply is relatively inelastic.

A

Sellers bear most of the tax burden

Buyers bear a small burden

122
Q

The tax burden falls more heavily on the side of the market that is more / less elastic.

A

Less

123
Q

When demand is inelastic, price and total revenue move in the same / opposite directions.

A

Same

124
Q

When demand is inelastic, price and total revenue:

Move in the same direction
Move in opposite directions

A

Move in the same direction

125
Q

When demand is inelastic, price and total revenue:

Move in the same direction
Move in opposite directions

A

Move in opposite directions

126
Q

When demand is is unit elastic and the price increases, total revenue will:

Increase
Decrease
Remain constant

A

Remain constant

Principles of Microeconomics (3 decks)

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