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Macroeconomics > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

Scarcity

A

The limited nature of society’s resources

Nothing is infinite in nature—not even air and water!

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2
Q

Economics

A

The study of how people allocate their limited resources to satisfy their nearly unlimited wants
The study of how people make decisions

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3
Q

Macroeconomics

A

Looks at the broader economy, including inflation, growth, employment, interest rates, and productivity

What happens to the economy if there is widespread unemployment?

The Federal Reserve decreases interest rates to spur spending and kick start the economy

The study of the broader economy

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4
Q

The Five Foundations of Economics

A

Incentives matter

Life is about trade-offs

Opportunity costs

Marginal thinking

Trade creates value

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5
Q
  1. Incentives Matter
A

Incentives - Factors that motivate you to act or
exert effort

People respond to incentives!

Incentives are everywhere, and
financial gain often plays a prominent role

Positive incentives -
Tax refund, pay raise, employee of the month award, sticker and a smiley face, extra credit

Negative incentives -
Taxes, jail, fees, fines, spankings, getting grounded, getting fired, failing class

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6
Q
  1. Life is About Trade-offs
A

With scarcity, decisions incur costs
Individual examples

Go to theater: do I watch the action movie or the romantic comedy?

Go to food court: do I eat at Sbarro’s or Fuji Garden?

After high school: do I attend Ohio State or Michigan?

Which president do I vote for?

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7
Q
  1. Opportunity Cost
A

Opportunity Cost
The highest-valued alternative that must be sacrificed in order to get something else

Multiple trade-offs, but only one opportunity cost

Not all alternatives, just the next best choice

In economics:
The cost of something is what you give up to get it

Scarcity–> Choice –>Opportunity Cost

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8
Q

Opportunity Cost

A

go to the mall or the pool?

Opportunity cost of going to the mall:
Lost opportunity to go to the pool
Opportunity cost of going to the pool:
Lost opportunity to go to the mall
Decision-making key:
Minimize opportunity cost by selecting the option that has the largest benefit. Go to whichever you enjoy more, the pool or mall.
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9
Q
  1. Marginal Thinking
A

Evaluate whether the benefit of one more unit of something is greater than the cost

Margin examples: one more unit (slice of pizza), one more hour of activity (studying, sleeping)

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10
Q
  1. Trade Creates Value
A

Markets
Bring buyers and sellers together to exchange goods and services

Trade
The voluntary exchange of goods and services between two or more parties

Key word = voluntary

You don’t engage in trade if it makes you worse off; therefore, trade only occurs if both parties feel they gain from the trade!

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11
Q

Comparative Advantage

A

The situation in which an individual, business, or country can produce at a lower opportunity cost than a competitor

Allows gains from trade to occur

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12
Q

Trade Specialization

A

You go to Starbucks to get coffee.

You go to the doctor when you’re sick.

You don’t have to do everything yourself: people specialize in what they’re best at (lowest opportunity cost) and you can trade with them.

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13
Q

What can be said about scarcity?

A

Scarcity forces us to make choices.
Scarcity doesn’t affect the super-wealthy.
Scarcity only affects commodities such as oil.
Scarcity generally doesn’t affect our day-to-day living.

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14
Q

Positive statement

A

A claim that can be tested to be true or false

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15
Q

Normative statement

A

Statement of opinion; cannot be tested to be true or false

What “ought to be” or “should be”

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16
Q

Why is the PPF downward-sloping?

A

Must give up one good to increase production of another

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17
Q

Why are we unable to produce certain combinations for the PPF?

A

Scarcity and limited resources

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18
Q

Efficient points for the PPF

A

Points ON the PPF (A, B, C, and D)

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19
Q

Inefficient points for the PPF

A

Points INSIDE the PPF (F)

Workers goofing off, unused buildings

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20
Q

Unattainable (for now) points for the PPF

A

Points OUTSIDE the PPF (E)

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21
Q

Law of increasing relative cost

A

Refers to the increasing opportunity cost of production that occurs as you move along the production

As we produce more of good A, we have to give up increasingly larger amounts of good B.

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22
Q

The PPF could shift graphically in two ways

A

New resources or technology could be introduced that either… Affect the production of one good, or Affect the production of both goods.

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23
Q

Absolute advantage

A

One person can perform each task more effectively than the other person.

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24
Q

Consumer goods

A

Goods produced for current consumption

Food, housing, clothing, entertainment

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25
Q

Capital goods

A

Goods that help produce other valuable goods

Buildings, factories, roads, machinery, computers

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26
Q

Investment

A

Using resources to make new capital

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27
Q

Elasticity

A

Responsiveness of buyers and sellers to changes in market conditions.

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28
Q

Why is Elasticity Important

A

Prices or other demand and supply determinants could change.

Understanding elasticity will help us improve the predictive power of our basic economic model.

Instead of just knowing the direction of a variable change, we can study the size of the change

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29
Q

Price elasticity of demand

A

A measure of the responsiveness of quantity demanded to a change in price

This gives us the sensitivity of the relationship between these two variables.

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30
Q

Demand is elastic if

A

Quantity demanded changes significantly as the result of the price change

Elastic = “sensitive” or “responsive”

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31
Q

The Determinants of the Price Elasticity of Demand

A

Existence of substitutes

Share of the budget spent on the good (expensive items)

Time adjustment process

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32
Q

Existence of substitutes

A

Goods with lots of substitutes

Canned vegetables, breakfast cereals, many types of products with multiple brands

More elastic

Goods with no good substitutes

Broadway theatre, rare coins, autographs, drinking water, electricity, Super Bowl tickets, medication.

More inelastic

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33
Q

Share of the budget spent on the good

A

Demand is more elastic for “big ticket” items that make up a large portion of income.

Demand is more inelastic for inexpensive items.

Which would you react to more?
20% sale on a new vehicle you want
20% sale on candy bar

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34
Q

Time and adjustment process

A

Generally, demand for goods tends to become more elastic over time.

Over time, consumers are
More able to find substitutes

More able to adjust for price changes in other ways

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35
Q

Market economy

A

Resources are allocated among households and firms with little or no government interference.

The “main” economic structure of the United States

Prices are determined by the forces of supply and demand.

Buying and selling is voluntary.

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36
Q

Characteristics of a competitive market

A

Many buyers and sellers

No one individual has any influence over the price.

The price is determined by the entire market

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37
Q

Quantity demanded

A

The amount of a good purchased at a given price

38
Q

Law of demand

A

All other things equal, there is an inverse relationship between price and quantity demanded

Inverse: two variables move in opposite directions

Income, diminishing marginal utility, and the substitution effect dictate the law of demand

39
Q

Income effect

A

as prices go up, income stays relatively steady so if the price goes above someone’s income, they are out of the market

40
Q

Diminishing marginal utility

A

The satisfaction of doing something goes down every time that you use it

41
Q

Substitution effect

A

when something gets too expensive, we look for an alternative

42
Q

Market demand

A

Horizontal sum of all individual quantities demanded by each buyer in the market at each price

43
Q

Movement along a demand curve

A

Caused by a change in the price of the good

Inverse relationship between price and quantity demanded

44
Q

Shift in demand

A

Caused by changes in non-price factors
Events that change the
entire market
Entire demand curve will shift to the left or right

45
Q

Demand Shifters

A
  1. Changes in income
  2. Price of related goods
  3. Changes in Tastes and Preferences
  4. Future expectations
  5. Number of buyers
46
Q
  1. Changes in income
A

Normal good -
Good in which we buy more of when we get more income

Off brand items to name brand items

As income goes up, the demand for higher quality goods goes up

Direct relationship between income and demand

Inferior good -
Good in which we buy less of when we get more income

Name brand goods to off brand goods

As income goes down, demand for less quality goods goes up

Inverse relationship between income and demand

47
Q
  1. Price of related goods
A

Complements -
Two goods used together

If the price of ski’s go down, the demand for ski boots would go up because people who bought the ski’s now need boots

Inverse relationship between the price of good X and demand for good Y

Substitutes -
Goods that can be used in place of each other

If the price of Coke goes down, the demand for Pepsi would go down

Direct relationship between the price of good X and demand for good Y

48
Q
  1. Changes in Tastes and Preferences
A

A good may become more fashionable or may come into season.

New style becomes popular
Demand increases (shifts right) as a result

A good may go out of style or out of season.

Demand decreases (shifts left)

Lower demand for frozen pizza in summer

New information about a good

Can change tastes for better or worse

Taking an asprin a day will help reduce the risk of heart attack

49
Q
  1. Future expectations
A

Our consumption today may depend on what we think the price may be tomorrow.

50
Q
  1. Number of buyers
A

Recall the market demand curve

More individual buyers means more market demand.

Aging, immigration, war, and birth rates can affect the number of buyers for various goods.

51
Q

Assume you like Pepsi, and your income increases.

What happens to the demand/quantity demanded

A

The demand for Pepsi increases.

52
Q

Assume the price of Pepsi decreases.

What happens to the demand/quantity demanded

A

The quantity demanded for Pepsi increases.

53
Q

Assume the price of Coke decreases.

What happens to the demand/quantity demanded

A

The demand for Pepsi decreases.

54
Q

Factors that shift the Demand Curve to the left

A

Income falls (Demand for a normal good)

Income Rises (Demand for an inferior good)

The price of a substitute falls

The price of a complementary good rises

The good falls out of style

There is a belief that the future price of this good will decline

The number of buyers in the market falls

55
Q

Factors that shift the Demand Curve to the right

A

Income rises (Demand for a normal good

Income Falls (Demand for an inferior good)

The price of a substitute good rises

The price of a complementary good falls

The good is currently in style

There is a belief that the future price of the good will rise

The number of buyers in the market increases

56
Q

Which of the following would increase the demand for drinks the most?

A

Reduction in the price of a complementary good such as an appetizer and the
Reduction in the price of drinks

57
Q

Law of supply

A

All other things equal, there is a direct relationship between price and quantity supplied.

Direct: two variables move in the same direction

58
Q

Market supply

A

Horizontal sum of all individual quantities supplied by each seller in the market at each price

59
Q

Movement along a supply curve

A

Caused by a change in the price of the good

Direct relationship between price and quantity supplied

60
Q

Shift in supply

A

Caused by non-price factors

Entire supply curve will shift to the left or right

61
Q

Supply Shifters

A
  1. The cost of inputs
  2. Changes in technology
  3. Taxes and subsidies
  4. Number of sellers
  5. Price expectations
62
Q
  1. The cost of inputs
A

Inputs -
Resources used in the production process

Direct relationship between input costs and supply curve

If per unit cost of production goes up, the amount of units available to the market will go down

63
Q
  1. Changes in technology
A

Knowledge that producers have about how to produce a product

Direct relationship between level of technology and supply

64
Q
  1. Taxes and subsidies
A

Tax paid by producer –> added cost of production

Inverse relationship
between taxes and supply

As taxes go down, production cost goes down so production goes up

Subsidy
“Opposite” of a tax; government pays sellers to produce goods.

Direct relationship between subsidies and supply

As subsidies go up, production also goes up

65
Q
  1. Number of sellers
A

Recall the market supply curve

More individual sellers means more market supply.

66
Q
  1. Price expectations
A

Higher price expected tomorrow? If so, delay sales until future, if possible.

Inverse relationship between tomorrow’s expected price and today’s supply

67
Q

Assume the price of cheese decreases. What will happen in the pizza market?

A

The supply of pizza increases. – because it didn’t say that the price of pizza changed

68
Q

Which of the following will cause the supply curve for oranges to shift to the left?

A

Ice storm strikes Florida

69
Q

In general, why would the
government enact tougher
pollution standards or tax a
polluting firm?

A

Pollution is bad!

Political reasons

Encourage the firm to invest in cleaner production methods

70
Q

How is the price of a good determined?

A

The market forces of supply AND demand work simultaneously to determine the price.

71
Q

The law of supply and demand

A

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

72
Q

Equilibrium point

A

Graphically, the intersection of supply and demand

73
Q

Equilibrium price

A

The price that causes quantity supplied to equal quantity demanded.

The price that “clears the market”

74
Q

Equilibrium quantity

A

The numerical quantity (supplied and demanded) at the equilibrium price

75
Q

Shortage

A

QD > QS

Occurs at any price below equilibrium

Price will rise over time toward equilibrium

76
Q

Why does price rise over time with a shortage?

A

Consumers who value the product will “outbid” other consumers or otherwise show a higher willingness to pay.

Suppliers will see that the price can be raised without a decrease in sales.

77
Q

Surplus

A

QS > QD

Occurs at any price above equilibrium

Price will fall over time toward equilibrium.

78
Q

Why does price fall over time with a surplus?

A

Firms will have to eventually get rid of mounting inventories of goods.

To do this, they must lower their prices.

79
Q

PPC Shifters

A

Change in resource quality/quantity

Change in technology

Change in trade

80
Q

What is the difference between a change in Qd and a change in demand itself?

A

Change in demand is caused by non-price factors while a change in Qd comes from a change in price

81
Q

Demand related to substitutes (linear/inverse)

A

Linear (as price for A goes up, demand for B goes up)

82
Q

Demand related to complements (linear/inverse)

A

Inverse (as price for A goes up, demand for B goes down)

83
Q

Demand related to normal goods (linear/inverse)

A

Linear (as income for A goes up, demand for B goes up)

84
Q

Demand related to inferior goods (linear/inverse)

A

Inverse (as income for A goes up, demand for B goes down)

85
Q

Price Ceiling

A

Maximum legal price a seller can charge for a product.

Goal: Make affordable by keeping price from reaching Eq.

86
Q

Price Floor

A

Minimum legal price a seller can sell a product.

Goal: Keep price high by keeping price from falling to Eq.

87
Q

Subsidies

A

The government just gives producers money.

The goal is for them to make more of the goods that the government thinks are important.

88
Q

Double Shift Rule

A

If TWO curves shift at the same time, EITHER price or quantity will be indeterminate (ambiguous).

89
Q

Consumer surplus graphically:

A

The height of the demand curve is our maximum willingness to pay for that unit of the good.

Consumer surplus is the area below the demand curve and above the price, for all units purchased.

90
Q

Producer surplus graphically:

A

The height of the supply curve is the firm’s lowest price it is willing to accept to sell that unit of the good.

Producer surplus is the area above the supply curve and below the price, for all units sold.

Macroeconomics (7 decks)

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