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AP Econ > FINALS REVIEW > Flashcards

FINALS REVIEW Flashcards

0
Q

What is the economic perspective?

A

A view point that envisions individuals and institutions making ration decisions by comparing marginal costs and benefits associated with their actions

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1
Q

What is the definition of economics?

A

The social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity

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2
Q

How does the PPC illustrate scarcity?

A

Scarcity is illustrated by the unattainable points outside of the curve

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3
Q

How does the PPC illustrate choice?

A

The PPC illustrates choice by the variety of different combinations on the curve

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4
Q

How does the PPC illustrate cost?

A

Cost is illustrated by the downward slope of the curve

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5
Q

What are the determinants of the PPC?

A

Technology, quantity, capital stock, and international trade

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6
Q

What are the five fundamental questions?

A

1) What goods and services will be produced?
2) How will they be produced?
3) Who will receive the goods and services?
4) How will the system accommodate change?
5) How will the system promote progress?

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7
Q

What is consumer sovereignty?

A

The role consumers play in deciding what is produces through their “dollar votes”

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8
Q

Why is specialization between nations good?

A

It makes use of difference in ability, fosters learning by doing, and saves time, overall achieving efficiency.

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9
Q

Positive economics

A

Analysis of facts or data to establish scientific generalizations (what is)

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10
Q

Normative economics

A

Value judgements on what the economy SHOULD be like (policy economics)

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11
Q

Factors of production/resources

A

Land, labor, capital, entrepreneurship

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12
Q

Productive efficiency

A

Production at the least cost possible, found at the minimum ATC

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13
Q

Allocative efficiency

A

Production of goods most wanted by society, MB=MC, and surplus is at a maximum

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14
Q

Market system

A

Market system relies on private property, freedom of enterprise (ensures people can obtain resources) and freedom of choice
Market system results in competition and incentives
A market brings together buyers and sellers

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15
Q

Command System

A

Heavily government run and is called socialism or communism

Two insurmountable problems of a command economy are coordination and incentive

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16
Q

Laissez Faire Economy

A

Little government and no one has ever attempted this, otherwise referred to as “pure capitalism”

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17
Q

Law of increasing opportunity costs

A

As the production of one good increases, so does the opportunity cost of the other

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18
Q

Law of diminishing marginal returns

A

As more workers are added, there is less benefit to each additional unit

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19
Q

Absolute advantage

A

A situation where one person can produce more of a good than another nation

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20
Q

Comparative advantage

A

A situation where one nation can produce a good at a lower opportunity cost than the other

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21
Q

“invisible hand”

A

Firms, while acting in their own self interest, will end up also acting in society’s best interest, creating unity between private and social interests

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22
Q

Individual’s economizing problem

A

Finite amount of income but infinite amount of wants. Solution to this is a budget line, a PPC

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23
Q

Society’s economizing problem

A

Where do we donate our resources?

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24
Q

Why is the PPC bowed out?

A

Law of increasing opportunity costs

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25
Q

Demand

A

Amount of a product that consumers are willings and able to purchase at a series of prices

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26
Q

Supply

A

Various amounts of product that producers are willing and able to produce at a series of prices

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27
Q

Determinants of demand

A

1) change in consumer taste
2) change in the number of buyers in the market
3) consumer’s income
4) price of related goods
5) consumer expectations

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28
Q

Determinants of supply

A

1) resource prices
2) technology
3) taxes and subsidies
4) prices of other goods
5) producer expectations
6) number of sellers in the market

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29
Q

Why is the demand curve down sloping?

A

Because of the law of demand, as the price decreases people buy more of the product

  • Diminishing marginal utility
  • Substitution effect
  • Income effect
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30
Q

Why is the supply up sloping?

A

The law of supply, as the price of a product increases producers are willing to produce more of a product

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31
Q

Why is equilibrium important in a market economy?

A

It is where the intentions of buyers and sellers meet

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32
Q

Formula of the price elasticity of demand

A

The ratio of the percent change in quantity demanded to the percent change in its price

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33
Q

Determinants of elasticity of demand

A

Substitutability, proportion of income, luxuries vs. necessity, and time

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34
Q

What is the total revenue test?

A

TR=P*Q
If TR changes in the opposite direction of price then demand is elastic, if TR changes in the same direction of price then demand is inelastic

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35
Q

What are the administrative costs of price ceilings and floors?

A

Shortages and surpluses, resources are misallocated, and produce negative side effects

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36
Q

Normal good

A

A good that when income increases, consumption increases and when income decreases consumption decreases (price constant)
Ei=+

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37
Q

Inferior good

A

Consumption declines when income rises (price constant)

Ei=-

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38
Q

Rationing function of prices

A

The ability of market forces in a competitive market to equalize quantity demanded and supplies and to eliminate shortages and surplus via price changes

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39
Q

Price ceiling

A

Price producers cannot surpass, intended to help consumers but ends up in a shortage

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40
Q

Price floor

A

Intended to help producers but ends up in a surplus

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41
Q

Short run

A

The time in which producers can change some of the resources they employ but not all, some resources are fixed some are variable

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42
Q

Long run

A

Producers are able to change all the resources they employ

43
Q

Cross elasticity

A

Measures how a change in X affects Y, positive means substitutes negative means complements, 0 means unrelated

44
Q

Utility

A

The want satisfying power of a good or service

45
Q

Law of diminishing marginal utility

A

As a consumer consumes each additional good, utility shrinks

46
Q

Utility maximizing rule

A

MUx/Px=MUy/Py

47
Q

Determinants of elasticity of supply

A

TIME

immediate run=inelastic and long period=elastic

48
Q

Substitution Effect

A

The reduction in the quantity demanded of one resource due to the price of its substitute falling causing firms that employ both resources to switch to using more of the lower price resource and less of the higher price resource

49
Q

Income effect

A

A change in the quantity demanded of a product due to a change in real income (purchasing power) caused by a change in price of the product

50
Q

Explicit costs

A

the monetary payments

51
Q

Implicit costs

A

the monetary income a firm sacrifices to use the resource rather than selling it

52
Q

Normal profit

A

the payment made by a firm to obtain and retain entrepreneurial ability, also equal to zero economic profit

53
Q

Economic profit

A

Total revenue-all costs

54
Q

Economies of scale

A

the situation where the firm’s ATC decreases in the long run as the firm increases the plant size

55
Q

Diseconomies of scale

A

the situation where the firm’s ATC increases in the long run as the firm increases plant size

56
Q

Natural monopoly

A

an industry in which economies of scale are so great that a single firm can produce the industry’s product at a lower ATC than would be possible if more than one firm produced

57
Q

Imperfect competition structures

A

Monopoly, oligopoly, monopolistic competition

58
Q

Profit maximizing

A

MR=MC

59
Q

X-inefficiency

A

the production of output at a higher average (and total) cost than is necessary

60
Q

Rent-seeking behavior

A

the action of persons, firms, or unions to gain special benefits from the government at the taxpayer’s or someone else’s cost

61
Q

Concentration ratio

A

the percentage of total sales of an industry made by the four (or some other number) largest sellers

62
Q

Product differentiation

A

a strategy in which one firm’s product is distinguished from competing products by means of design, related services, location, or any other attributes besides price

63
Q

Dominant strategy

A

the strategy in which no matter which the other person chooses, you will be better off

64
Q

NASH equilibrium

A

the outcome in which neither person could make themselves better off

65
Q

Price leadership

A

an informal method that firms in an oligopoly may use to set prices, one producer starts by changing the price and the others soon follow

66
Q

What is the difference between economic and accounting profits?

A

economic profit is the revenue-explicit-implicit costs and if you make $0, then economist would say no profit and accounting would say profit because you broke even!

67
Q

Why does the MC curve intersect ATC and AVC curves at their lowest point?

A

because once the cost is above the average, the average will increase too

68
Q

Why is MR=Price for a perfectly competitive firm?

A

MR=change in TR as you sell more goods
If a PC firm sees a demand curve that is perfectly elastic (price never changes), the additional revenue they get is always the same
MRDARP

69
Q

What are the challenges in regulation natural monopolies?

A

T]the regulation leads to too much of a loss for the monopoly so instead they do a fair return price where demand intersects minimum ATC

70
Q

What are the potential benefits and drawbacks of nonprice competition?

A

benefits are increased quality of good, and more differentiation. drawbacks are unnecessary advertising costs

71
Q

How does a firm determine the optimal amount of R&D expenditures?

A

when mb=mc

72
Q

What does the inverted U theory tell us about the likelihood of R&D expenditures in different industries?

A

Monopolistic competition and oligopoly will spend more than monopoly and perfect competition. PC has incentive but no ability and monopoly has ability and no incentive

73
Q

How does technological advance enhance economic efficiency?

A

Improve productive efficiency by increasing productivity of inputs and reducing average costs, improves allocative efficiency by giving society a more preferred mix of good and services

74
Q

To price discriminate a firm must have:

A

monopoly power, ability to separate people into groups, and no resale

75
Q

In perfect price discrimination,

A

mr=d and everyone pays what they are willing to pay this also means mr=mc which means profit

76
Q

Regulation of a typical monopoly

A

regulation leads to less monopoly profit but socially optimal

77
Q

Determinants of resource demand

A

Productivity, prices of other resources, product demand, and occupational employment trends

78
Q

Least-cost rule

A

MPl/Pl=MPc/Pc

79
Q

Profit-maximizing rule

A

MRPl/Pl=MRPc/Pc=1

80
Q

Nominal wage

A

not adjusted for inflation

81
Q

Real wage

A

adjusted for inflation which attracts productivity

82
Q

How does a firm determine how many workers to hire and what to pay them in a purely competitive labor market?

A

individual firms and workers are wage takers since neither can exert any control over the market wage rate. the intersection of supply and demand determines wage rate and level of employment. the supply of labor is perfectly elastic and mrc is constant

83
Q

Three different types of unions

A

1) demand enhancement model: increases demand which increases mrp and employment
2) craft: decreases supply through regulations on who can work
3) inclusive union: teachers union puts pressure on the government

84
Q

Wage differentials

A

Differences in wages due to differences in productivity (mrp), amounts of human capital, nonmonetary aspects of the job and market imperfections

85
Q

What are the determinants of supply and demand in the loanable funds market?

A

Supply:
Demand:

86
Q

Supply curve on a loanable funds graph

A

At higher interest rates households will save more, making more funds available for lending

87
Q

Demand curve on a loanable funds graph

A

Businesses will borrow more at lower interest rates

88
Q

Profit and profit expectations affect the..

A

levels of investment, total spending, and domestic output

89
Q

MRC formula

A

change in TC/change in quantity of resources employed

90
Q

MPP

A

the additional output produced when one additional worker is employed
change in TP/change in quantity of resource employed

91
Q

To maximize or minimize losses, a firm should produce where

A

MRC=MRP

92
Q

Output effect

A

after the substitution effect has been taken into account: when the lower price of resource A so greatly lowers the total cost of production that the quantity demanded of both resource A and B is raised because of the total production in the end

93
Q

Marginal productivity theory of income distribution

A

all resources are paid according to their marginal contribution to output

94
Q

Monopsony

A
  • one buyer of a specific type of labor and workers have few other options
  • firm is a wage maker
  • employs fewer workers and pays less than purely competitive
95
Q

Economic rent

A

the price paid for use of resources that are perfectly inelastic (land)

96
Q

Profit

A

return earned by entrepreneurial ability

97
Q

What kind of profit do entrepreneurs receive?

A

Accounting profit unless their accounting profit exceeds the normal profit that could have been earned elsewhere

98
Q

Economic profit sources

A
  • bearing of uninsurable risk
  • uncertainty of innovation
  • monopoly power
99
Q

In the resource market the buyer is the

A

firm

100
Q

In the resource market the demand is

A

derived

101
Q

What happens if workers become more productive in the resource market?

A

the mrp goes up causing the demand curve to shift out and more workers to be hired

102
Q

In the resource market the demand=

A

MRP

103
Q

MRC=

A

change in total resource cost/ unit change in resource quantity

104
Q

Interest factors

A

-risk, maturity (length), size (bigger loans have smaller taxes), taxability

105
Q

Four reasons resource pricing is significant

A
  • money-income determination
  • cost minimization (resource price=cost for firms and profit maximizing is mr=mc)
  • resource allocation (technology and productivity change can change where we put our resources)
  • policy issues (minimum wage and labor union restrictions)
106
Q

What happens when MR=0 on a monopoly or monopolistic competition graph?

A

Unit elastic and maximized total revenue

AP Econ (15 decks)

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