Exam 1 Flashcards
Scarcity:
Limited resources within a society and therefor cannot produce all the goods and services people wish to have
Economics:
The study of how society manages its scarce resources
Principle #1: People face trade offs
We must decide on what to do with our limited time. Studying for an hour means that we cannot work for an hour. Choices must be made
Efficiency:
Society is getting the most it can from its scarce resources
Equity:
The benefits that come from resources are distributed fairly among society’s members
Principle #2: The cost of something is what you give up to get it
In order to pursue something it may keep you from doing something else. What you are no longer able to do is the cost of pursuing your course
Opportunity Cost:
Whatever you give up to get an item
Rational People:
people that systematically and purposefully do the best they can to achieve their objectives, given the opportunities they have.
Marginal Changes:
Small incremental adjustments to an exiting plan of action
Principle #4: People respond to Incentives
Incentives motivate people to change the way they evaluate marginal costs
Incentive:
something that induces a person to act
Principle #5: Trade can make everyone better off
Trade allows all parties to prosper. Countries can focus on what they do best and enjoy goods from other countries
Principle #5: Trade can make everyone better off
Trade allows all parties to prosper. Countries can focus on what they do best and enjoy goods from other countries
Principle #6: Markets are usually a good way to organize economic activity
Socialism bad
Market Economy:
Economic decisions are made by millions of firms and households
Principle #7: Governments can sometimes improve market outcomes
Sometimes the intervention of the government become necessary to regulate the market
Property rights
The ability for an individual to own and control a scarce resource
Market Failure:
A situation in which the market on its own fails to produce an efficient allocation of resources
Externality:
The impact of one persons actions on the well being of a bystander
Market Power:
The ability of a single person or group to unduly influence market prices.
Principle #8: A country’s standard of living depends on its ability to produce goods and services
A country that is able to produce things that people are willing to pay for are going to make more money
Productivity:
The amount of goods and services produced from each hour of a workers time
Inflation
An increase in the overall level of prices in the economy
Principle #10: Society faces a short-run tradeoff between inflation and unemployment
-Increasing the amount of money stimulates the overall level of spending and thus the demand for goods and services -Higher demand may, over time, cause firms to raise their prices, but in the meantime, it also encourages them to increase the quantity of goods and services they produce and to hire more workers to produce those goods and services. -More hiring means lower unemployment
Business Cycle
The irregular and largely unpredictable fluctuations in economic activity, as measured by the production of goods and services or the number of people employed
Business Cycle
The irregular and largely unpredictable fluctuations in economic activity, as measured by the production of goods and services or the number of people employed
Production possibilities frontier
A graph that shows the combinations of output that the economy can possibly produce given the available facts of production and the available production technology
Microeconomics:
The study of how households and firms make decisions and how they interact in specific markets
Macroeconomics:
The study of economy-wide phenomena
Positive Statements:
Descriptive statements. They make claims about how the world is.
Normative Statements:
Prescriptive statements. They make claims about how the world should be.
Absolute Advantage:
Comparison of the productivity of one person, firm or nation to that of another
Comparative Advantage:
Description of the opportunity cost of two producers
Comparative Advantage:
Description of the opportunity cost of two producers
Market:
A group of buyers and sellers of a particular good or sevice
Competitive Market:
A market in which there are so many buyers and so many sellers that each has a negligible impact on the market price
Quantity Demanded:
The amount of the good that buyers are willing and able to purchase
Law of Demand:
All other things being equal, when the price of a good rises, the quantity demanded of the good falls and when the price falls, the quantity demanded rises.
Demand Schedule:
A table that shows the relationship between the price of a good and the quantity demanded
Normal Good:
A good that when income falls, demand falls
Inferior Good:
A good that when income falls, demand increases
Substitues:
Two goods for which an increase in the price of one leads to an increase in the demand for the other
Complements:
Two goods for which an increase in the price of one leads to a decrease in the demand for the other
Curve Shifts
A curve shifts when there is a change in a relevant variable that is not measured on either axis. Because price is on the vertical axis, a change in price represents a movement ALONG the demand curve. By contrast, income, the prices of related goods, tastes, expectations, and the number of buyers are not measure on either axis, so a change in one of these variables shifts the demand curve.
Quantity Supplied:
Any good or service that sellers are willing and able to sell.
Law of Supply:
All other things being equal, when the price of a good rises, the quantity supplied of the good also rises, and when the price falls, the quantity supplied falls as well
Supply Schedule:
A table that shows the relationship between the price of a good and the quantity supplied
Equilibrium:
The point at which the supply and demand curves intersect
Equilibrium Price:
The price at the equilibrium
Equilibrium Quantity:
The quantity at the equilibrium
Surplus:
A situation in which quantity supplied is greater than quantity demanded
Shortage:
A situation in which quantity demanded is greater than quantity supplied
The Law of Supply and Demand:
The price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance
Elasticity:
A measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants
Price Elasticity of Demand:
A measure of how much the quantity demanded of a good responds to a change in the price of that good.
Computed:
Price Elasticity of D = % ^ in QD
% ^ in P
Demand is Elastic when the elasticity is…..
Demand is Inelastic when the elasticity is…..
Demand is Elastic when the elasticity is greater than 1
Demand is Inelastic when the elasticity is less than 1
Total Surplus:
The total surplus of a market is the net gain to consumers and producers trading in the market. It is the sum of producer surplus and consumer surplus (or the size of the economic pie).
Consumer Surplus:
The net gain to buyers. It is the difference between the buyer’s willingness to pay (Demand curve) and the price paid for it (Price), summed over the quantity consumed (Quantity).
Producer Surplus:
The net gain to sellers. It is the difference between the price received (Price) and the sellers’ cost (Supply curve), summed over the quantity produced (Quantity).
Deadweight Loss:
The decrease in total surplus that results from an inefficient underproduction or overproduction. The extra cost in the form of inefficiency because (government involvement) discourages mutually beneficial transactions.
Price Elasticity of Demand Determinants
Time Horizon
Availability of Substitutes
Necessity vs Luxuries
Definition of the Market
Price Elasticity of Demand
Time Horizon
Goods tend to have more elastic demand of longer time horizons
Short time = Inelastic
Long time = Elastic
Price Elasticity of Demand
Availibility of Substitutes
Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others.
W/ Substitutes = Elastic
W/out = Inelastic
Price Elasticity of Demand
Necessity vs Luxury
Necessity = Inelastic
Luxury = Elastic
Price Elasticity of Demand
Definition of the Market
Narrow defined market = Elastic
Broadly defined market = Inelastic
Narrowly defined markets are more elastic because it is easier to find substitutes for a good. ie Food is broad and there isnt a sub. for food. Ice Cream is narrow, there are many subs for ice cream.
Total revenue equation:
Price x Quantity Sold
Income Elasticity of Demand
A measure of how the quantity demanded changes as consumer income changes.
Calculated:
Income elasticity of demand = % ^ QD
% ^ Income
IRT: Income elasticity of demand
Normal Goods:
Normal goods have positive income elasticities.
IRT: Income elasticity of demand
Inferior Goods:
Inferior Goods have negative income elasticity
Cross-Price Elasticit of Demand
A measure of how the quantity demanded of one good changes as the price of another good changes.
Calculated:
Cross-Price elasticity of demand = % ^ in QD of Good 1
% ^ in P of Good 2
What does Cross-Price Elasticy of Demand tell us
Whether two goods are substitutes of complements.
Substitutes have positive cross-price elasticity
Complements have negative cross-price elasticity
Price Elasticity of Supply
A measure of how much the quantity supplied responds to changes in price.
Computed:
Price elasticity of Supply = % ^ QS
% ^ P
Price Elasticity of Supply Determinants
Time - More time = Elastic. Suppliers can make factories to increase the QS. Responds substantially to price changes.
Short run = Inelastic. Suppliers cannot increase the factories making goods overnight. Does not respond to price changes very much
