First Midterm Flashcards
What is economics?
The study of the choices people make in the face of scarcity.
What is microeconomics?
The study of the choices and actions of individual economic units.
What is macroeconomics?
The study of the entire economy.
What is allocative efficiency?
Present when societies resources are so organized that the present value of net benefits are maximized.
What is positive economics?
Involves “what is.”
Can be tested through observation.
What is normative economics?
Involves “what ought’ to be.”
Based on values and beliefs.
What is a correlation fallacy?
The incorrect belief that correlation implies causation.
What is the post hoc fallacy?
The error in reasoning that assumes an event that precedes another event caused that event because it came first.
What is the fallacy of composition?
Incorrect belief that what is true for the individual is also true for the group.
What is the production possibilities frontier?
A graph that shows the combinations of goods that can be produced when the factors of production are utilized to their full potential.
What is a market?
A place of interaction between sellers and buyers.
What is the rationality assumption?
Individuals do not intentionally make decisions that will leave them worse off.
What are the three groups that act in a market?
Households, firms, and governments
What are the for institutions that govern a market economy?
Property rights, social institutions of trust, infrastructure, and money as a medium of exchange.
What is the Law of Demand?
As a product’s price increases, the quantity demanded decreases. As a product’s price decreases, the quantity demanded increases. Ceteris Paribus.
What are the variables that influence demand?
Prices of substitutes, prices of complements, population, expectations, preferences, and income.
What are normal goods?
As income increases, demand increases.
What are inferior goods?
As income increases, demand decreases.
What is the Law of Supply?
As a product’s price increases, the quantity supplied increases. As a product’s price decreases, the quantity decreases. Ceteris Paribus.
What are the variables that influence supply?
The number of firms, prices of inputs, taxes, technology, expectations, prices of substitutes in production, prices of complements in production, and changes in nature.
When is equilibrium reached?
Occurs, when the quantity supplied, is equal to the quantity demanded.
What is a price floor?
Occurs when the government sets a minimum price for a product.
What is a price ceiling?
Occurs when the government sets a maximum price for a product.
What are quotas?
Restrictions or limits on the quantity of product supplied.
What is Income elasticity of demand?
% Change in quantity over % Change in income.
If income elasticity of demand is greater than 0, it is a normal good.
If income elasticity of demand is less than 0, it is an inferior good.
What is cross price elasticity?
% change in the quantity of good A over % change in the price of good B.
If cross price elasticity is greater than 0, then goods A and B are substitutes.
If cross price elasticity is less than 0, then goods A and B are complements.
What are the three assumptions made about consumer behaviour?
Completeness (good, bad, or indifferent), transitivity, and nonsatiation (more is better).
What is utility?
The satisfaction received by consumers from the goods and services they consume.
What is marginal utility?
The change in utility that results from an incremental change in consumption of a good or service.
