exam 1 Flashcards
economics
the study of how people individually and collectively, manage resources
microeconomics
the study of how individuals and firms manage resources
macroeconomics
the study of the economy on a regional, national, or international scale
rational behavior
making choices to achieve goals in the most effective way possible
four questions of economics
- what are the wants and constraints of those involved?
- what are the trade-offs?
- How will others respond?
- Why isn’t everyone already doing it?
Scarcity
the condition of wanting more than we can get with available resources
opportunity cost
the value of what you have to give up in order to get something; the value of your next best alternative
marginal decision making
comparison of additional benefits of a choices against the additional costs it would bring without considering realted benefits and costs of past choices
sunk costs
costs that have already been incurred and cannot be recovered or refunded
incentive
something that causes people to to behave in a certain way by changing the trade-offs they face
nonnormal ways the market may be working
- innovation
- market failure
- intervention
- goals other than profit
positive statement
a factual claim about how the world actually works
normative statement
a claim about how the world should be
four characteristics of perfectly competitive markets
- standarized good
- full information
- no transaction costs
- participants are price takers
price taker
a buyer or seller who cannot affect the market price
law of demand
all else equal, quantity demanded rises as prices falls
nonprice determinants of demand
- consumer preferences
- prices of related goods
- incomes
- expectations
- number of buyers
shifts in the demand curve are caused by_____
nonprice determinants of demand
movement along the demand line
increase/decrease in quantity demanded
law of supply
all else held equal, quantity supplied rises as price rises
nonprice determinants of supply
- price of related goods
- technology
- price of inputs
- expectations
- number of sellers
surplus
excess supply
shortage
excess demand
midpoint formula
(((Q2-Q1)/((Q1+Q2)/2)) / (((P2-P1)/((P1+P2)/2))
determinants of price elasticity of demand
- availability of substitutes
- degree of necessity
- cost relative to income
- adjustment time
- scope of the market
perfectly elastic demand curve
horizontal
perfectly inelastic demand curve
vertical
elastic
demand that has an absolute value of elasticity greater than 1
inelastic
demand that has an absolute value of elasticity less than 1
unit-elastic
demand that has an absolute value of elasticity exactly equal to 1
quantity effect
decrease in revenue that results from selling fewer units of the good
price effect
increase in revenue that results from receiving a higher price from each unit sold
total revenue _____ when demand is elastic and price goes up
falls
total revenue _____ when demand is inelastic and price goes up
increases
determinants of price elasticity of supply
- availability of inputs
- flexibility of the production process
- adjustment time
cross-price elasticity of demand
(%change in quantity of A demanded) / (% change in price of B)
income elasticity of demand
(%change in quantity demanded) / (% change in income)
missing market
there is no place for potential buyers and sellers to exchange a particular good or service
three reasons for govt. to intervene in market
- market failure
- changing the distribution of surplus
- encouraging or discouraging consumption
price ceilings are nonbinding if the ceiling is set _____ the equilibrium price
above
price floors are nonbinding if the floor is set ______ the equilibrium price
below
does a tax on sellers affect supply?
yes, supply decreases
does a tax on sellers affect demand
no, demand stays the same
how does a tax on sellers affect the market eq.
eq price rises, quantity demanded falls
does a tax on buyers affect the supply curve
no supply stays the same
does a tax on buyers affect the demand curve
yes, demand decreases
how does a tax on buyers affect market eq.
eq price and quantity demanded both fall
government tax revenue
Tax* quantity post-tax
does a subsidy affect supply curve
yes, supply increases
does a subsidy affect demand curve
no demand stays the same
how does a subsidy affect the market eq
eq price decreases and eq quantity increases
