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Economics 101 > Exam 2 > Flashcards

Exam 2 Flashcards

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1
Q

What is opportunity cost?

A

What must be given up in order to consume or produce more of a good

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2
Q

What is marginal cost?

A

The (opportunity) cost of producing an additional (incremental) unit of a good

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3
Q

What is absolute advantage

A

When one producer can produce more of a good than another producer in a certain period of time

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4
Q

What is comparative advantage?

A

When one producer can produce a good at a lower opportunity cost than another producer

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5
Q

What is specialization?

A

Concentrating one’s efforts in a specific activity or field

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6
Q

What is Production Possibility Frontier (PPF)?

A

Represents the possible combinations of goods that an economy or individual can produce in a certain period of time

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7
Q

How is it possible to combine for more goods than was possible when acting alone?

A

Specialization and engaging in trade

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8
Q

What is the key to specialization?

A

Each side producing according to their comparative advantage

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9
Q

What are the 3 Limitations on Specialization?

A
  1. Requires sufficient ability to produce enough to meet demand
  2. Transportation costs must be low enough to make specialization worthwhile
  3. Specialization limited by extent of the market
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10
Q

Where is specialization the greatest?

A

Big Cities > Rural Areas

The larger variety of goods and services become available

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11
Q

What does the Production Possibility Frontier represent graphically?

A

All possible combinations of two goods that can be produced when a given amount of resources and technology

Shows the maximum quantity of one good that can be produced for any given amount of production of the other good

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12
Q

What does movement along the Production Possibility Frontier (PPF)?

A

It shows the trade-offs that exist in production

Diverting resources from production of one good to another

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13
Q

What are the three key concepts illustrated by PPF?

A
  1. Efficiency
  2. Opportunity Cost
  3. Economic Growth
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14
Q

What is efficiency in production?

A

No way to produce more of one good without producing less of another good

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15
Q

What is the efficiency of all points on PPF?

A

Efficient in production

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16
Q

What is the efficiency of points inside PPF?

A

Feasible but not efficient

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17
Q

What is the efficiency of points outside PPF?

A

Not feasible

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18
Q

How is opportunity cost represented graphically?

A

Slope of the PPF is the opportunity cost of producing the good on the horizontal axis measured in terms of the good on the vertical axis

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19
Q

How is constant opportunity cost represented graphically?

A

PPF is a straight line

Opportunity cost of production does not change as production increases

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20
Q

How is increasing opportunity cost represented graphically?

A

PPF bowed outward

Opportunity cost rises as production increases

As more is produced, less suitable resources are being used in production

Resources are not easily transferable between production of goods

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21
Q

What is economic growth?

A

Growing ability of economy to produce goods and services

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22
Q

How does economic growth affect PPF?

A

Causes an outward shift in PPF

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23
Q

What causes an outward shift in PPF?

A

Increases in factors of production

Changes in technology

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24
Q

What are imports?

A

Goods and services purchased from other countries

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25
Q

What are exports?

A

Goods and services sold to other countries

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26
Q

When does a country have a comparative advantage over another?

A

If the opportunity cost of producing the good or service is lower for that country than for other countries

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27
Q

What are 4 main sources of comparative advantage between countries?

A
  1. Differences in Climate
  2. Differences in Factor Endowments
  3. Differences in education level of workers
  4. Differences in Technology
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28
Q

What is the Domestic Demand Curve?

A

Shows the quantity demanded by domestic consumers depends on the price of that good

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29
Q

What is the Domestic Supply Curve?

A

Shows how the quantity supplied of a good by domestic producers depends on the price of that good

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30
Q

What is world price?

A

Price at which the good can be bought or sold abroad

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31
Q

What price will market go to when open to trade?

A

Competition among importers or exporters drives the domestic price to equality with the world price

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32
Q

If world price < domestic price?

A

Trade leads to imports and a fall in the domestic price towards the world price

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33
Q

What are effects of imports?

A

Net benefits increase for importing country: There are overall gains from trade because consumer gains exceed the producer losses

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34
Q

Who are the winners of imports?

A

Price to domestic consumers falls

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35
Q

Who are the losers of imports?

A

Price received by domestic suppliers falls

Demand for workers in domestic industry drops, reduces wages to domestic workers in those industries

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36
Q

If world price > domestic price?

A

Trade leads to exports and a rise in the domestic price

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37
Q

What are the effects of exports?

A

Net benefits increase for exporting country: There are overall gains from trade because producer gains exceed the consumer losses

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38
Q

Who are the winners from export

A

Price received by domestic suppliers increases

Demand for workers in domestic industry increases, increases wage to domestic workers in those industries

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39
Q

Who are the losers from export

A

Price paid by domestic consumers increases

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40
Q

What is free trade?

A

When the government does not attempt either to reduce or to increase the levels of exports and imports that occur naturally as a result of supply and demand

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41
Q

What is a tariff?

A

A tax levied on imports

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42
Q

How do tariffs affect price?

A

They raise the domestic price above the world price, leading to a fall in trade and total consumption and a rise in domestic production

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43
Q

Who are the winners from a tariff?

A

Domestic producers and the government gain, but consumer losses more than offset this gain, leading to deadweight loss

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44
Q

What is a firm?

A

An entity that converts inputs into outputs

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45
Q

What are inputs?

A

Land, labor, capital

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46
Q

What is capital?

A

Durable goods used in production of other goods

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47
Q

What are outputs?

A

Goods or services sold to consumers

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48
Q

What is the profit maximization assumption

A

Firms attempt to maximize profits

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49
Q

What is profit?

A

Profit = Total Revenue (TR) - Total Cost (TC)

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50
Q

What is total revenue?

A

Price x Quantity

51
Q

How does total cost depend on quantity?

A

Total cost is a function of quantity

52
Q

How must a firm maximize profits?

A

Produce a given quantity as efficiently as possible

53
Q

What is the production function?

A

Describes the relationship between the quantities of inputs used and the maximum quantity of output that can be produced with those inputs

54
Q

What are examples of factors of production?

A

Labor and capital are inputs into production

55
Q

What is Total Product (TP)?

A

Total amount of product that factors of production create

56
Q

What is the relationship between total product and amount of factors used?

A

Total product increases with increases in amount of factors used

57
Q

What is Average Product (AP)?

A

Ratio of total output to number inputs used to produce that output

58
Q

What is AP(Labor)?

A

Quantity/Units of Labor

Q/L

59
Q

What is AP(Capital)?

A

Quantity/Units of Capital

Q/K

60
Q

What is Marginal Product (MP)?

A

The change in output that occurs when an incremental unit of an input is added

61
Q

What is Marginal Product of Labor?

A

Change in quantity of output / Change in quantity of labor

∆Q/∆L

62
Q

What is Marginal Product of Capital?

A

Change in quantity of output / Change in quantity of capital

∆Q/∆K

63
Q

What are Short-Run Time Horizons?

A

Periods of time short enough such that at least one factor of production is fixed (cannot be changed)

Whether capital or labor is fixed in the short-run depends on the industry

64
Q

What are Long-Run Time Horizons

A

Periods of time long enough that all factors of production can be varied

65
Q

What is the Law of Diminishing Marginal Product?

A

As additional units of the variable input are added to fixed inputs, eventually the marginal product of the variable input will decline

Holds only if other factors are held fixed

66
Q

What is the Total Product Curve?

A

A graphical representation of how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input (holding quantity of the fixed input constant)

67
Q

What is an explicit cost?

A

A cost that involves actually laying out money

Direct, out-of-pocket payments for inputs into the production process

Accounting costs

68
Q

What is an implicit cost?

A

A cost that does not require an outlay of money; it is measured by the value, in dollar terms, of the benefits that are forgone

69
Q

What is sunk cost?

A

Costs incurred in the past that cannot be recovered regardless of current decision making

Sunk costs should be ignored when making decisions about future actions

70
Q

How do sunk costs relate to future actions?

A

Sunk costs should be ignored when making decisions about future actions

No matter what choice is made today, sunk costs are lost either way

71
Q

What does a firm’s cost structure depend on?

A
  1. Technology available

2. Prices paid for factors of production

72
Q

What is Fixed Cost (FC)?

A

Cost that does not depend on the quantity of output produced

Does not change with output

Expenditures on factors that are fixed in the short-run

73
Q

What is Variable Cost (VC)?

A

Cost that does depend on the quantity of output produced

Increases with increased output

Expenditures on factors that are variable in the short-run

74
Q

What is Total Cost (TC)?

A

The total cost of producing a given quantity

Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC)

75
Q

What is Marginal Factor Cost (MFC)?

A

The additional cost to a firm from hiring one more unit of a factor

Labor = Wage
Capital = Rental rate of capital
76
Q

What is the equation for Marginal Cost (MC)?

A

Change in total cost / Change in quantity of output

∆TC/∆Q

77
Q

What is Average Fixed Cost (AFC)?

A

Fixed costs per unit of output

Falls as output rises because fixed cost is spread over more units (spreading effect)

AFC = FC/Q

78
Q

Why does Average Fixed Cost (AFC) decrease as more units are produced?

A

Because fixed cost is spread over more units

79
Q

What is Average Variable Cost (AVC)?

A

Variable cost per unit of output

Shape determined by Marginal Cost

AVC = VC/Q

80
Q

What is the equation for Average Fixed Cost (AFC)?

A

Fixed Cost / Quantity of Output

FC/Q

81
Q

What is the equation for Average Variable Cost (AVC)?

A

Variable Cost / Quantity of Output

VC/Q

82
Q

What is Average Total Cost (ATC)?

A

Average Cost
Total cost per unit of output

ATC = TC/Q = AFC + AVC

83
Q

What is the equation for Average Total Cost (ATC)?

A 
ATC = Total Cost / Quantity of Output
ATC = TC / Q = (FC + VC) / Q = AFC + AVC
84
Q

What are the four cost curves?

A
  1. Marginal cost
  2. Average Variable Cost
  3. Average Fixed Cost
  4. Average Total Cost
85
Q

Describe the slope of the marginal cost curve

A

Eventually upward sloping due to diminishing returns

Increasing specialization leads to lower marginal cost, but diminishing returns set in once benefits from specialization are exhausted and marginal cost rises

86
Q

Describe the slope of the average variable cost curve

A

Shape determined by marginal cost

Flatter than marginal cost curve

87
Q

Describe the slope of the average fixed cost curve

A

Always downward sloping due to spreading effect

88
Q

Describe the slope of the average total cost curve

A

Tends to be U-shaped (AFC + AVC)

89
Q

How does the spreading effect change the average fixed cost curve

A

Fixed costs are spread over more units, and AFC drops

90
Q

How does the diminishing returns effect change the marginal cost and average variable cost curves

A

As output increases, eventually diminishing marginal product sets in

As marginal product falls, marginal cost rises, pulling up AVC

91
Q

How does the average fixed cost (AFC) curve behave at low outputs?

A

AFC is dropping rapidly

92
Q

How does the average variable cost (AVC) curve behave at low outputs?

A

AVC may also be dropping

May fall initially if production function has increasing marginal product initially

93
Q

How does the average total cost (ATC) curve behave at low outputs?

A

ATC dropping

94
Q

How does the average fixed cost (AFC) curve behave at high outputs?

A

AFC still falling, but having smaller impact on ATC (flatter)

95
Q

How does the average variable cost (AVC) curve behave at high outputs?

A

AVC rising due to diminishing marginal product

96
Q

How does the average total cost (ATC) curve behave at high outputs?

A

ATC rising

97
Q

Can fixed input be changed in short run?

A

No

98
Q

Can fixed input be changed in long run?

A

Yes, no factors are fixed in the long run

99
Q

What are Constant Returns to Scale?

A

Proportional increase in all input levels leads to output growth of the same proportion

Ex: Doubling all inputs results to doubling the output

100
Q

What are Increasing Returns to Scale?

A

Proportional increase in all input levels leads to greater than proportional output growth

Ex: Doubling all inputs results in more than doubling the output

101
Q

What are reasons for Increasing Returns to Scale?

A

Greater specialization

Learning by doing

102
Q

What are reasons for Decreasing Returns to Scale?

A

Organizational Difficulties

103
Q

What are Decreasing Returns to Scale?

A

Proportional increase in all inputs leads to less than proportional increase in outputs

104
Q

How does average cost of production change for increasing returns to scale

A

average cost of production falls

Total costs are increasing, but output is increasing at a faster rate

105
Q

How does average cost of production change for constant returns to scale

A

Average cost of production stays constant

Flat AC curve

106
Q

How does average cost of production change for decreasing returns to scale

A

Average cost of production increases

Total costs are increasing and output is increasing at a slower rate

Known as diseconomies of scale

107
Q

What are the effects of a tariff?

A

Domestic Price Increases
Domestic Production Increases
Trade Decreases
Total Consumption Decreases

Winners: domestic producers, government
Losers: consumers

108
Q

Are markets better or worse off with trade?

A

Both domestic and international markets are better off with trade

109
Q

According to the theory of diminishing marginal product, as additional units of the variable input are added to fixed inputs, what will happen to marginal product?

A

Marginal product of the variable input will decline (adding so much it causes organizational difficulties)

110
Q

What is diseconomies of scale?

A

Rising average total cost (of production) when quantity increases

111
Q

What is economies of scale?

A

Falling average total cost (of production) when quantity increases

112
Q

What is the equation for accounting profit?

A

Total Revenue minus Explicit Cost

TR - EC

113
Q

What is equation for economic profit?

A

Total Revenue minus Explicit Cost minus Implicit Cost

TR - (EC + IC)

114
Q

What do imports do to domestic price?

A

Decrease in price

115
Q

What do imports do to domestic production/employment?

A

Decrease in domestic production/employment

116
Q

What do tariffs do to domestic producers?

A

Benefits them (more production due to tariff)

117
Q

Do tariffs benefit domestic society?

A

Overall, they do not

118
Q

What effects to tariffs have on producer surplus?

A

Increase in producer surplus

119
Q

Slope of the X-Y graph of two goods is the marginal cost of which good?

A

The one on the X-axis (MCx = #Y’s)

120
Q

How does exporting goods affect the domestic producer surplus?

A

It would increase

121
Q

How do tariffs affect domestic consumer surplus?

A

Reduction in DCS

122
Q

Simple look at supply and demand for importing

A

Producing Less (others from other countries are making more)

Demanding more (lower prices)

123
Q

Simple look at supply and demand for exporting

A

Producing more (making some overseas now)

Demanding less (higher prices)

Economics 101 (3 decks)

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