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Economics 101 > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

What is allocation?

A

What we choose to use resources for

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2
Q

What is scarcity?

A

When there are more wants than availability

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3
Q

What are resources?

A

Land, labor, capital, time

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4
Q

What is a model?

A

A simplified representation of a real situation that is used to better understand real-life situations

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5
Q

What is ceteris paribus?

A

Holding all other things constant

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6
Q

What are the 5 postulates of human behavior?

A
  1. People have preferences
  2. Preferences can and do differ across individuals
  3. More is preferred to less
  4. People are willing to substitute one good for another
  5. The more we have of a good, the less we value of an additional unit of that good
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7
Q

Explanation of: People have preferences

A

Given a choice between goods, consumers can make a decision about which is preferred

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8
Q

Explanation of: Preferences can and do differ across individuals

A

Allows for trades to occur

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9
Q

What is the demand schedule?

A

Table showing how much of a good or service consumers will want to buy at different prices

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10
Q

What is the demand curve?

A

A curve which graphically represents the quantity of a particular good a consumer is willing to buy at each price level; graphical representation of the demand schedule

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11
Q

What is the Law of Demand?

A

The quantity demanded of a good is inversely related to price of that good, holding other factors constant

As price falls, quantity demanded increases

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12
Q

What is value?

A

The amount of other goods an individual is willing to give up in order to obtain some good

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13
Q

What is Total Value (TV)?

A

Amount of other goods an individual would be willing to give up in order to consume all units presently consumed instead of none at all

Sum of all marginal values of all units of good consumed

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14
Q

What is Marginal Value (MV)?

A

Amount of other goods an individual would be willing to give up in order to consume an incremental unit of good

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15
Q

What is the Law of Diminishing Marginal Value?

A

The Marginal Value of a good decreases as more units are consumed (Reason why individual demand curves are downward sloping)

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16
Q

What is Total Expenditure (TE)?

A

Total amount actually spent to purchase a given quantity of a good

TE = price x quantity

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17
Q

What is Consumer Surplus (CS)?

A

Net benefits to the consumer. The difference between what a consumer would be willing to pay for the units purchased (TV) and what the consumer actually pays (TE)

CS = TV - TE

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18
Q

What does how much the individual consumer consumes depend upon?

A

Price and marginal value

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19
Q

What is price?

A

How much the consumer must give up for each additional unit consumed

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20
Q

What is marginal value?

A

How much the consumer is willing to give up for each additional unit consumed

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21
Q

When do consumers stop consuming a good?

A

When price > marginal value

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22
Q

How is the marginal value represented on the demand curve?

A

The height of the demand curve at a given quantity

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23
Q

How is total value represented on the demand curve?

A

It is the area under the demand curve for all consumers in the market?

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24
Q

How is the consumer surplus represented on the demand curve?

A

Area between the demand curve and price

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25
Q

Quantity Demanded vs Demand?

A

Quantity Demanded: The actual amount of a good consumers are willing to buy at some specific price

Demand: Shows the amount of a good consumers are willing to buy at every price

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26
Q

How is change in quantity demanded represented graphically?

A

Movement from one point on a demand curve to another point on a demand curve

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27
Q

How is change in demand represented graphically?

A

Shift in the entire demand curve

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28
Q

Rightward shift in demand curve?

A

Increase in demand

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29
Q

Leftward shift in demand curve?

A

Decrease in demand

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30
Q

What 5 factors cause entire demand curves to shift?

A
  1. Change in the price of related goods
  2. Changes in Income
  3. Change in the Number of Consumers
    4, Change in Information about the Uses of a Good
  4. Change in Expectations about Future Prices
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31
Q

What are complements?

A

Two good used jointly in consumption

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32
Q

What does the increase in price of a complement lead to?

A

Leftward shift in demand curve

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33
Q

What does the decrease in price of a complement lead to?

A

Rightward shift in demand curve

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34
Q

What are substitutes?

A

Two goods that satisfy similar wants or desires

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35
Q

What does increase in price of a substitute lead to?

A

Rightward shift in demand curve

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36
Q

What does decrease in price of a substitute lead to?

A

Leftward shift in demand curve

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37
Q

What are normal goods?

A

A good which demand increases when income increases

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38
Q

For normal goods, an increase in income leads to

A

A rightward shift in demand curve

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39
Q

For normal goods, a decrease in income leads to

A

A leftward shift in demand curve

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40
Q

What are inferior goods?

A

A good for which demand decreases when income increases

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41
Q

For inferior goods, an increase in income leads to

A

A leftward shift in demand curve

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42
Q

For inferior goods, a decrease in income leads to

A

A rightward shift in demand curve

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43
Q

Increase in the number of consumers leads to

A

A rightward shift in demand curve

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44
Q

Decrease in the number of consumers lead to

A

A leftward shift in demand curve

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45
Q

If expect future price to be higher

A

Leads to rightward shift in demand curve today

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46
Q

If expect future price to be lower

A

Leads to leftward shift in demand curve today

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47
Q

What is the supply schedule?

A

A table showing how much of a good or service suppliers will want to sell at different prices

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48
Q

What is the supply curve?

A

A curve which graphically represents the quantity of a particular good a supplier is willing to sell at each price level

Summarizes the relationship between quantity supplied of a good and the price of that good, holding all other factors constant

Graphical representation of the supply schedule

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49
Q

The Law of Supply?

A

The quantity of a good is typically positively related to the price of that good, holding other factors constant

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50
Q

What is Total Cost (TC)?

A

Cost of all units of output currently produced

Sum of all marginal costs

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51
Q

What is Marginal Cost (MC)?

A

Cost of producing an additional unit of output

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52
Q

What is Total Revenue (TR)?

A

The sum of receipts a firm receives from the sale of output

TR = Price x Quantity Sold

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53
Q

What is producer surplus (PS)?

A

The difference between the price sellers receive for a good and the marginal cost of producing the good

Net benefits to the supplier

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54
Q

What do supply decisions depend upon?

A

Price and Marginal Cost

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55
Q

What is Marginal Cost?

A

The cost of producing an additional unit of a good

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56
Q

When will suppliers stop producing a good?

A

When Marginal Cost > Price

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57
Q

Quantity Supplied vs Supply?

A

Quantity Supplied: The actual amount of a good suppliers are willing to sell at some specific prive

Supply: The amount of a good suppliers are willing to sell at every price

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58
Q

How is change in quantity supplied represented graphically?

A

Movement along the same supply curve in response to change in price

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59
Q

How is change in supply represented graphically?

A

Change in supply is a shift in entire supply curve

60
Q

Left shift of the supply curve?

A

Decrease in supply

61
Q

Right shift of the supply curve?

A

Increase in supply

62
Q

What 4 factors cause the entire supply curve to shift?

A
  1. Change in the price of inputs
  2. Changes in technology
  3. Change in the number of suppliers
  4. Change in expectations about future prices
63
Q

Increase in price of an input results in?

A

Leftward shift in supply curve

64
Q

Decrease in price of an input results in?

A

Rightward shift in supply curve

65
Q

If technology change reduces the cost of productions?

A

Rightward shift in supply curve

66
Q

If technology change increases the cost of productions?

A

Leftward shift in supply curve

67
Q

Increase in the number of suppliers leads to

A

Rightward shift in supply curve

68
Q

Decrease in the number of suppliers leads to

A

Leftward shift in supply curve

69
Q

How does the expectation of future prices to be higher change supply?

A

Leftward shift in supply curve today

70
Q

How does the expectation of future prices to be lower change supply?

A

Rightward shift in supply curve today

71
Q

What are the benefits of exchange?

A

Voluntary exchange based on mutual benefits

If agree to trade then both parties must perceive net benefits, or else would not engage in voluntary trade

72
Q

How long will beneficial trades continue?

A

Until marginal value equals marginal cost

All gains from trade are exhausted

73
Q

What is economic efficiency?

A

When all mutual benefits from trade are exhausted

Net benefits to society are maximized

74
Q

What is market clearing price?

A

Price at which the market is in equilibrium

Quantity Demanded = Quantity Supplied

Equilibrium price

75
Q

What happens when price is higher than market clearing price?

A

An excess supply (surplus)

In order to rid themselves of these excess, unwanted inventories sellers will being to lower price until market clearing price is reached

76
Q

What happens when price is lower than market clearing price?

A

An excess demand (shortage)

Suppliers find that they cannot keep items in stock and can charge a higher price

Some consumers value this good more highly than others, so will offer a higher price for the good

Price of the good gets “bid” up to the market clearing price

77
Q

How does increase in demand effect equilibrium?

A

Equilibrium price rises, equilibrium quantity rises

78
Q

How does decreased in demand effect equilibrium?

A

Equilibrium price falls, equilibrium quantity falls

79
Q

How does increase in supply effect equilibrium?

A

Equilibrium price falls, equilibrium quantity rises

80
Q

How does decrease in supply effect equilibrium?

A

Equilibrium price rises, equilibrium quantity falls-

81
Q

What is elasticity?

A

Measure of responsiveness of one variable to changes in another variable

82
Q

What is price elasticity of demand?

A

Measure of responsiveness of quantity demanded to changes in price

83
Q

What is income elasticity of demand?

A

Measure of responsiveness of quantity demanded to changes in income

84
Q

What is cross price elasticity of demand?

A

Measure of responsiveness of quantity demanded to changes in the price of related goods

85
Q

What is price elasticity of supply?

A

Measure of responsiveness of quantity supplied to change in price

86
Q

Equation for price elasticity of demand?

A

% change in quantity demanded / % change in price

87
Q

Midpoint Method Equation?

A

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

88
Q

Why must price elasticity of demand?

A

Must be negative

89
Q

Elastic Demand range in values?

A
  • infinity ≤ Ed < -1
90
Q

Unit Elastic Demand range in values?

A

Ed = -1

91
Q

Inelastic Demand range in values?

A

-1 < Ed ≤ 0

92
Q

What does an inelastic demand look like graphically?

A

Relatively “large” price changes associated with “small” quantity changes

Quantity demanded is relatively less responsive to changes in price

93
Q

What does an elastic demand look like graphically?

A

Relatively “small” price changes associated with “large” quantity changes

Quantity demanded is relatively more responsiveness to changes in price

94
Q

What are 3 determinants of price elasticity of demand?

A
  1. Availability of substitutes
  2. Time
  3. How narrowly defined
95
Q

How does the availability of substitutes effect the price elasticity of demand?

A

More substitutes = more opportunity to alter behavior in response to price changes

More substitutes = more elastic

96
Q

How does time effect the price elasticity of demand?

A

More time that passes since price change, more opportunity to adjust behavior in response to price changes

97
Q

How does how narrowly defined effect the price elasticity of demand

A

More narrowly defined, more substitutes = More elastic

Food (inelastic), Apples (elastic)

98
Q

What is a price effect?

A

After a price increase, each unit sold sells at a higher price, which tends to raise revenue?

99
Q

What is a quantity effect?

A

After a price increase, fewer units are sold, which tends to lower revenue

100
Q

Quantity/Price Effect when demand for a good is elastic?

A

Quantity effect is stronger than price effect

An increase in price reduces total revenue

101
Q

Quantity/Price Effect when demand for a good is inelastic?

A

Price effect is stronger than quantity effect

An increase in price increases total revenue

102
Q

Quantity/Price Effect when demand for a good is unit-elastic?

A

Quantity effect and the price effect exactly offset each other

103
Q

What is income elasticity of demand?

A

% change in quantity demanded / % change in income

104
Q

When income elasticity of demand is positive, then the good is

A

a normal good

105
Q

When income elasticity of demand is negative, then the good is

A

an inferior good

106
Q

What is cross price elasticity of demand between Goods A and B?

A

% change in quantity of A demanded / % change in price of B

107
Q

What type of goods have a positive cross-price elasticity of demand

A

Substitutes

108
Q

What type of goods have a negative cross-price elasticity of demand

A

Complements

109
Q

What is price elasticity of supply?

A

% change in quantity supplied / % change in price

110
Q

What is deadweight loss?

A

Lost benefits to society that occur whenever output differs from the efficient quantity?

111
Q

What is price control?

A

Legal restriction on how high or low a market price may go

Enacted by governments

112
Q

What is price ceiling?

A

A maximum price sellers are allowed to charge for a good

Only binding if below market clearing price

113
Q

What is price floor?

A

A minimum price buyers are required to pay for a good

Only binding if above market clearing price

114
Q

What are price ceiling outcomes?

A

Persistent shortage

Redistribution of economic welfare
• Winners: consumers able to buy the good
• Losers: Suppliers and consumers unable to buy the good

Non-Price rationing to determine who gets the available units

Normally price would rise to ration, but not allowed to do so in this case

115
Q

What are price floor outcomes?

A

Persistent surplus

Redistribution of economic welfare

116
Q

What is tax incidence?

A

Who pays the tax

117
Q

What is statutory incidence?

A

Who is legally responsible for paying the tax to the government

118
Q

What is economic incidence?

A

Who actually bears economic burden of the tax
• Consumers: measured by higher price paid for good
• Producers: measured by lower prices received for the good

119
Q

What effect does a per unit tax have?

A

Increases the “cost of production” by the amount of the tax

Causes the supply curve to shift up by the amount of the tax

120
Q

Per unit tax impact on prices?

A

New price consumers pay (Pc) is higher than the equilibrium price (P*)

New price suppliers receive (Ps) is lower than the equilibrium price (P*)

Ps = Pc - tax
Pc = Ps + tax
121
Q

Per unit tax impact on quantity and economic welfare?

A

Quantity transacted (Qt) falls below the efficient quantity

CS is reduced
PS is reduced

Deadweight loss now exists

Taxes distort incentives to engage in mutually beneficial transactions

122
Q

Who pays the tax?

A

Side of market more able to adjust their behavior will avoid paying more of the tax

If demand is relatively more inelastic: will more of tax

If demand is relatively more elastic: will pay less of the tax

123
Q

Revenue from an excise tax?

A

Tax revenue = excise tax rate x quantity transacted

124
Q

Will an increase in tax rate increase tax revenue?

A

Amount of revenue depends on tax rate and tax base

Raising tax rate has two effects:
• Increases tax revenue per unit of good taxed
• Reduces tax base by discouraging consumption

If inelastic, more likely will increase revenue (quantity sold will not change much)

125
Q

What affects deadweight loss?

A

Elasticity

Elastic demand - larger deadweight loss

Inelastic demand - smaller deadweight loss

126
Q

How to minimize inefficiency with taxes?

A

Tax goods that are inelastic?

127
Q

What is market failure?

A

The failure of a market to reach an efficient outcome where all goods from trade are exhausted

Occurs when the quantity transacted differs from the effect quantity

Results in deadweight loss

128
Q

What is externality?

A

When the activity of one entity (individual or firm) directly impacts the welfare of another in a way that is not reflected in the price

“External” to the market

Unintended impacts not taken into account by the individual decision makers

129
Q

What is negative externality?

A

An action that imposes net costs on others without their being compensated

The individual decision maker does not have to pay these costs, so does not take them into account when making decisions

130
Q

What is private cost?

A

Cost incurred by the individual decision maker only

131
Q

What is marginal private cost (MPC)?

A

Incremental costs to private owner

132
Q

What is marginal external cost (MEC)?

A

Uncompensated marginal costs imposed on others as a result of actions taken by individual decision maker

133
Q

What is social cost?

A

Total costs incurred by society

134
Q

What is marginal social cost (MSC)?

A

Total marginal costs to society

MSC = MPC + MEC

135
Q

What is positive externality?

A

An action that provides net benefits to others without their having to pay for it

The individual decision maker does not receive compensation for these benefits, so does not take into account when making decisions

136
Q

What is private benefit?

A

Benefits enjoyed by the individual decision maker only

137
Q

What is marginal private benefit (MPB)?

A

Incremental benefits to private owner

Individual marginal willingness to pay

138
Q

What is marginal external benefit (MEB)?

A

Uncompensated marginal benefits provided to others as a result of actions taken by individual decision maker

139
Q

What is social benefit?

A

Total benefits enjoyed by society

140
Q

What is marginal social benefit (MSB)?

A

Total marginal benefits to society

MSB = MPB + MEB

141
Q

Private solution to externality problem?

A

If property rights are clearly defined and transaction costs are low then can get an efficient outcome through bargaining regardless of who owns the property rights

142
Q

Will the more elastic or inelastic side end up paying more of a tax?

A

Inelastic

143
Q

Inelastic Curve = ___ Curve

A

Steep

144
Q

Elastic Curve = ____ Curve

A

Flat

145
Q

How is the Diamond-Water Paradox resolved?

A

Recognizing that the price of a product reflects its marginal value for the last unit consumed, not it’s total value to consumers

Economics 101 (3 decks)

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