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Bus302 > Micro Economics Concepts > Flashcards

Micro Economics Concepts Flashcards

1
Q

Scarcity

A

Limited resources

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2
Q

Opportunity Cost

A

What you must give up when you make a choice. Include explicit and implicit costs

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3
Q

Explicit costs

A

Costs that require money payment

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4
Q

Implicit Costs

A

Costs that do not require money payment

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5
Q

What is the difference between Economic profit and Accounting profit?

A

Economic profit is total revenue minus opportunity cost

Accounting profit is total revenue minus explicit cost

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6
Q

Which profit is higher, Accounting or Economic? Why?

A

Accounting because it does not take into account what was lost in an investment.

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7
Q

What is opportunity cost and explain why accounting profit and economic profit are not the same.

A

Opportunity cost of any decision is what is given up as a result of that decision. It includes both explicit and implicit costs. The major difference between accounting and economic costs is that accounting cost does not include implicit costs and economic does.

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8
Q

How do you know when someone or a country has absolute advantage?

A

The person or country that produces a good with a smaller quantity of inputs or that produces more output per unit of input

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9
Q

What is comparative advantage?

A

It is when the person or country has the smaller opportunity cost of producing a good.

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10
Q

What is the result of comparative advantage?

A

Comparative advantage determines which person or country will specialize in what product.

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11
Q

How do you determine if one person has absolute advantage over another?

A

Between the two persons, whoever produces the most within the same out of time has the absolute advantage.

Ex: Martha can make 10 drinks in 3 mins and Sheldon can make 15 drinks in 3 mins. Sheldon has the absolute advantage because he can make 5 more drinks than Martha in 3 mins.

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12
Q

What is the formula of Opportunity Cost?

A

(# of units produced for good X)/ (# of units produced for good Y)

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13
Q

How do you determine if one person has comparative advantage over another?

A

Between two persons, the person who has the smallest opportunity cost has the absolute advantage.

Ex: Martha has an opportunity cost of 0.25 for good A and Sheldon has an opportunity cost of 0.05 for good A. Sheldon has the comparative advantage because 0.05

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14
Q

How does specialization make people better off?

A

If two people specialize in the goods they have the comparative advantage in, they will produce more. Since they produce more they can engage in trade and make each other better off.

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15
Q

What is the purpose of the supply and demand model?

A

It is used to have a better understanding of how the prices and quantities are determined in a market system.

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16
Q

What is the definition of Demand?

A

It is the relationship between the price of a good and the quantity of the good that consumers are willing and able to buy.

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17
Q

What is Quantity Demanded?

A

The total amount of a good that buyers would choose to purchase under given conditions.

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18
Q

What are the determinants of Demand?

A
  • Income and wealth
  • Prices of substitutes and compliments
  • Population
  • Preferences
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19
Q

What is the Law of Demand?

A

It states that when the price of a good rises, and everything else remains the same, the quantity of the good demanded will fall.

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20
Q

How does a substitute of a good shift the demand curve? What direction?

A

As the price of a substitute good decreases, the demand for the superior good falls. The demand curve will shift to the left.
As the price of a substitute good increases, the demand for the superior good will increase. The curve will shift to the right.

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21
Q

How does a compliment of a good shift the demand curve? What direction?

A

As the price of a compliment good falls, the demand for the superior good increases. The curve will shift to the right.

As the price of the compliment good increases, the demand for the superior good decreases. The curve will shift to the left.

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22
Q

How does income shift the demand curve? What direction?

A

As income increases, the demand for the good will increase. The curve will shift to the right.

As income decreases, the demand for the good will decrease. The curve will shift to the left.

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23
Q

How does preferences change the demand curve? What direction does the curve move?

A

As more people like the good, the demand of the good will increase. The curve will shift to the right.

As more people dislike the good, the demand of the good will decrease. The curve will shift to the left.

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24
Q

What is the definition of Supply?

A

It is the relationship between the price of a good and the quantity of the good that firms are wiling and able to produce and sell.

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25
Q

What is Quantity Supplied?

A

The total amount of a good that sellers would choose to produce and sell under given conditions.

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26
Q

What are the determinants of Supply?

A
  • Price of inputs (labor, capital, etc.)
  • Technology
  • Number of firms in the industry
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27
Q

What is the Law of Supply?

A

It states that when the price of a good rises, and everything else remains the same, the quantity of the good supplied will also rise.

28
Q

How does price of an input change the Supply curve? What direction?

A

As the price of input rises, supply decrease. The supply curve will shift to the left.

As the price of input falls, supply increases. The supply curve will shift to the right.

29
Q

How does improvement in technology change the Supply curve? What direction?

A

As the improvement of technology rises, the supply increases. The supply curve will shift to the right.

30
Q

How does number of producers change the Supply curve? What direction?

A

As the number of producers increases, supply increases. The supply curve will shift to the right.

As the number of producers decrease, the supply decreases. The supply curve will shift to the left.

31
Q

What is a shortage?

A

It is also known as an excess in demand. It is when Quantity Demanded is greater than Quantity Supplied.

Consumers want to buy more than firms want to sell.

32
Q

What is a surplus?

A

It is also known as an excess in supply. It is when Quantity Supplied is greater than Quantity Demanded.

Firms want to sell more than consumers want to buy.

33
Q

What is the result of a shortage?

A

The competition between buyers will drive the price upward towards the equilibrium price.

34
Q

What is the result of a surplus?

A

The competition between sellers will drive the price downward toward the equilibrium price.

35
Q

Explain this situation. As a cities grow in size, the land surrounding cities is converted from farmland to residential and commercial uses. How does this occur?

A

The increased demand for houses leads to higher housing prices, which in turn induces greater production of housing. As the producers of houses are willing to pay more for the land than its value as farmland, more land is converted into use for housing.

36
Q

Explain why an increase in the demand for computer programmers will lead to higher wages being offered by software firms.

A

As salaries increase, more young people will go into the study of computer programming, having fewer workers for jobs in other industries.

37
Q

How do prices affect the allocation of resources?

A

Changes in relative prices move resources to where they are more highly valued. When resources are taken away from other uses, they are taken from the least valued uses first.

38
Q

How do changes in prices of markets coordinate a decentralized Economic System?

A

Firms and individuals respond naturally respond to changes in relative prices without having to know what caused the price changes. A market economy allows people to use information without actually knowing the information.

39
Q

What is Elasticity in general?

A

It measures the percent change in one economic variable when there is a 1% change in a different economic variable.

40
Q

What does the price Elasticity of Demand measure?

A

It measures how consumers respond to a price change. It is the percentage change in quantity demanded of a good divided by the percentage change in the price of that same good.

41
Q

What is the formula of Price Elasticity of Demand?

A

ed = I (%change in Quantity demanded/ % change in price) I

42
Q

What is the equation for the midpoint/arc method?

A

Absolute Value of Change in Quantity / Midpoint of Q1 + Q2 divided by 2 Over Change in Price / Midpoint of P1 + P2 divided by 2

43
Q

When is demand elastic?

A

When elasticity of demand is greater than 1. As this occurs consumers are more flexible to price changes.

44
Q

When is demand unit elastic?

A

When elasticity of demand is equal to 1.

45
Q

When is demand inelastic?

A

When elasticity of demand is less than 1. As this occurs consumers are inflexible to price changes.

46
Q

What is the relationship between elasticity of demand and revenue?

A

When demand is elastic, sellers lower prices to increase revenue.

When demand is unit elastic, revenue will remain the same.

When demand is inelastic, sellers increase prices to increase revenue.

47
Q

What are the determinants of Price Elasticity of Demand?

A
  1. The existence of substitutes
  2. Necessities Vs Luxuries
  3. Definition of the market
  4. Time period under consideration
48
Q

What does Elasticity of Supply measure?

A

It measures how firms react to a price change. It is the percentage change in quantity supplied divided by the percentage change in price.

49
Q

When is Supply elastic?

A

When elasticity of supply is greater than 1.

50
Q

When is elasticity of supply unit elastic?

A

When elasticity of supply equals 1.

51
Q

When is elasticity of supply inelastic?

A

When elasticity of supply is less than 1.

52
Q

What is the difference between short run and long run?

A

Short run is a period of time during which one or more of a firm’s inputs cannot be changed.

Long run is a period of time during which all input can be changed.

53
Q

What is a fixed cost?

A

The production costs that do not change with the quantity of output produced.

54
Q

What is a variable cost?

A

Production cost that change with the quantity of output produced.

55
Q

What is total cost?

A

Total cost is the sum of fixed costs and variable costs.

56
Q

How do you calculate Average Total Cost?

A

It is the total cost divided by the quantity.

57
Q

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

A

FC/Q

58
Q

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

A

VC/Q

59
Q

What is the equation of Average Total Cost?

A

AFC + AVC

60
Q

What is Marginal Cost (MC)?

A

The additional cost per additional unit of output.

61
Q

What is the equation of MC?

A

MC = change in TC / Change in Q

62
Q

What are the conditions of a Perfect Competition market?

A
  1. Numerous small firms and customers
  2. Homogeneity of product
  3. Freedom of entry and exit.
63
Q

What is Total Revenue?

A

The total amount of money the firms receives from sales of its products.

TR = P X Q

64
Q

What are the rules for finding the profit maximizing level of output?

A

If MR> MC, the profit can be raised by increasing the quantity of the output.

If MR

65
Q

What are the rules for finding the profit maximizing level of output under a perfect competition?

A

If P>MC, then profit can be raised by increasing the quantity of the output

If P

66
Q

Graphically, how do you calculate profit?

A

Profit = (P - ATC) X Q

Loses = (ATC - P) X Q

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