Micro Midterm Flashcards
If the price in a market is above the equilibrium price, this creates ___________.
surplus
What does it mean for a nation to have an absolute advantage in the production of a good?
It can produce the goods more efficiently than another nation.
What is Economics?
The study of allocating scarce resources efficiently
What are the factors of production?
land, labour, capital, entrepreneurship (and institutions)
What is capital?
Instruments, machines, buildings
Capital earns interest
Positive vs normative statement
Positive statement: what is
Normative statement: what should be (ex. Inflation should be 1%)
What is an economic model?
a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand
what is a rational choice?
weighing the costs and benefits, if costs outweigh benefits, it’s an irrational choice. Want to seek the greatest benefits that outweigh the choice
How to calculate opportunity cost?
The slope! (y2-y1)/(x2-x1)
What is the production possibilities frontier?
the boundary between those combinations of goods and services that can be produced and those that cannot
a downward slope
Marginal cost
the opportunity cost of producing one more unit of it
calculation: the magnitude of the slope of the PPF -first calculate OC of PPF, then find OC of producing each additional good/service
Marginal benefit
benefit from consuming one more - depends on preferences, unrelated to PPF
Comparative advantage
can perform the activity at a lower OC than anyone else or any other country
compares opportunity costs
Absolute advantage
can outperform all/almost all activities than anyone else
compares output per hour
What is economic growth influenced by?
technological change and capital accumulation
Law of demand
Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; the lower the price of a good, the greater is the quantity demanded.
Substitution Effect
when a price of a good rises and others remain the same, the first goods relative price rises. Each good has substitutes, and as opportunity cost rises, the incentive to switch to a substitute increases.
Income effect
when price rises, the price rises relative to income. With a higher price but unchanged income, people cannot afford to buy things they previously bought.
What does the demand curve show
the relationship between the quantity demanded of a good and the price, everything else held constant
Willingness and ability to pay
Measures marginal benefit
What is change in demand influenced by? (5)
the prices of relative goods
Expected future prices: If we expect price to go up, we’ll buy more now
Income: Increase in income will increase demand for normal goods
Expected future income and credit
If you think you’re getting a raise, maybe you’ll start spending like you already have it
Population
Preferences: trends
Normal vs Inferior Good
Normal: a good for which demand increases as income increases
Inferior: a good for which demand decreases as income increases
Law of Supply
Other things remaining the same, the higher the price of a good, the greater is the quantity supplied; the lower the price of a good, the smaller is the quantity supplied.
How is marginal cost calculated?
Total cost/Quantity
What is change in supply influenced by?(6)
The prices of factors of production: If the price of a factor rises, supply decreases
Price of related goods produced: If the price of substitute goes up, supply increases, if the price of a compliment goes up, supply decreases
Expected future prices: If the expected future price of a good rises, the return from selling the good in the future increases and is higher than it is today. So supply decreases today and increases in the future
Number of suppliers: If new firms enter an industry, the supply in that industry increases.
Technology: Advancements in technology can lower costs of production
State of nature: The state of nature includes all the natural forces that influence production. It includes the state of the weather and, more broadly, the natural environment. Good weather can increase the supply of many agricultural products and bad weather can decrease their supply.
Endogenous vs exogenous variables
Endogenous: variables whose values that are determined within the model
Effect of changes
Price and quantity (vertical vs. horizontal axis)
Exogenous: variables whose values are determined outside the model
Cause of changes
The shifting of a curve
Price elasticity of demand
a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same.
Is equal to the percentage change in quantity demanded/percentage change in price of the same good
How to read the result of price elasticity of demand
If the numerator is greater than denominator: elastic
If the numerator is lesser than denominator: inelastic
If it equals 1: unit-elastic
Perfectly inelastic demand
If the quantity demanded remains constant when the price changes, then the price elasticity of demand is zero and perfectly inelastic
Ex. insulin
Equals 0
Unit Elastic Demand
if % change in Q = % change in P
Equals 1
Numerator = denominator
Inelastic Demand
if the % change in quantity demanded is less than % change in the price
Ex. food and housing
Less than 1, greater than 0
Perfectly Elastic Demand
if the quantity demanded changes by a very large percentage in response to a tiny price change
Ex. soft drinks machines on campus right beside eachother - perfect substitutes
Elasticity is infinite
infinite
Elastic Demand
the % change in the quantity demanded exceeds the percentage change in price
Streamed movies
Greater than 1
How does time effect demand?
as time goes on, the more elastic demand
What is Total Revenue and how is it affected by price elasticity of demand?
Price * Quantity
When demand is elastic, a price cut increases total revenue
When demand is inelastic, a price cut decreases total revenue
Price increase doesn’t always increase revenue, depends on elasticity of demand
If demand is unit elastic, a change in quantity does not effect expenditure
Income elasticity of demand
a measure of responsiveness of demand to a change in income
% change in quantity demanded/% change in income
How to read the results of Income elasticity of demand? (normal vs inferior good)
Normal good, income elastic: positive and greater than 1
Normal good, income inelastic: positive and less than 1
Inferior good: negative
Factors that influence price elasticity of demand
Closeness of Substitutes
Proportion of income spent on the good: the larger amount of income you spend on a good, the larger the elasticity of demand
Time elapsed since price change: the longer a good can be stored without losing its value, the more elasti is the demand for the good
The more time you have to find an alternative, the more elastic
Impact of Income elasticity on demand
If the demand of a good is income elastic, as income increases, the percentage of income spent on that good increase
If the demand of a good is income inelastic, as income increase, the percentage spent on that good decreases
If the good is inferior, as income increases demand decreases
Cross Elasticity of Demand
the influence of a change in the price of a substitute or complement
How to read results of Cross elasticity of Demand
If the cross elasticity is positive, the two goods are substitutes
If the cross elasticity is negative, the two goods are complements
% change in quantity demande/ % change in price of substitute/complement
Elasticity of supply
the responsiveness of the quantity supplied to a change in the price of a good when all other influences on selling plans remain the same.
% change in quantity supplied/ % change of price
How to read results of price elasticity of supply
If the elasticity of supply is greater than 1: Elastic
If the elasticity of supply is less than 1: inelastic
Momentary supply
When the price of a good changes, the immediate response of the quantity supplied is determined by the momentary supply of that good
Ex. fruits and vegetables are perfectly inelastic momentary supply
Short run supply
The response of the quantity sup-plied to a price change when only some of the possible adjustments to production can be made is determined by short-run supply.
to increase output in the short run, firms must work their labour force overtime and perhaps hire additional workers. To decrease their output in the short run, firms either lay off workers or reduce their hours of work.
1.5 years
Long run Supply
The response of the quantity supplied to a price change after all the technologically possible ways of adjusting supply have been exploited is determined by long-run supply.
In some cases, the long-run adjustment occurs only after a completely new production plant has been built and workers have been trained to oper-ate it—typically a process that might take several years
4 years
n a world characterized by scarcity
people must make choices among alternatives
The problem of scarcity exists
in all economies
What is financial capital?
money, stocks, and bonds
Which factor of production earns the most income?
labour
What is the best statement about economic models?
An economic model will be discarded if its predictions are often in conflict with the facts.
What is not demonstrated by PPF?
marginal benefit
What shifts the demand curve for grape jelly to the right?
an increase in income if grape jelly is a normal good
The price of good A rises, and the demand curve for good B shifts leftward. We can conclude
that
A and B are complements.
A decrease in quantity demanded is represented by a…?
movement upward and to the left along the demand curve.
The law of supply tells us that other things remain the same, as the price of chocolate falls..
the quantity of chocolate supplied decreases.
What happens in the market for laptops if the expected future price of a laptop rises?
A movement up along the supply curve of laptops occurs.
The price of a good will rise if
supply of the good decreases
When the price elasticity of demand is 2 and the price increases by 10 percent, the quantity
demanded
decreases by 20 percent
If a large percentage drop in the price level results in a small percentage increase in the
quantity demanded
demand is inelastic
Demand will be more inelastic the….
fewer substitutes for the good that are available
Total revenue from the sale of a good decreases if price rises and…
the good is elastic
If the income elasticity of demand for chocolate chip cookies is 1.5, then chocolate chip
cookies are
a normal good and income elastic
If the cross elasticity of demand between goods A and B is positive, then
A and B are substitutes.
If a large percentage fall in the price of good A results in a small percentage decrease in the
quantity supplied, then
supply is inelastic.
A sudden, end-of-summer heat wave increases the demand for air conditioners and catches
suppliers with no reserve inventories. The momentary supply for air conditioners is
perfectly inelastic.
Goods that can be produced using rare productive resources have a ________ elasticity of
supply. The greater the amount of time available after a price change, the ________ is the
elasticity of supply
low; greater
What are resource allocation methods? (8)
market price, command system, , majority rule, contest, first-come first-served, lottery, personal characteristics, and force
Individual demand vs market demand
P & Q relationship for one person verse for all buyers
What is consumer surplus?
the excess of the benefit received from a good over the amount paid for it
Marginal benefit - price * quantity/2
the excess of the benefit received from a good over the amount paid for it.
What is marginal cost?
the cost of producing one more good or service
The minimum price that producers must receive
What is producer surplus?
the excess of the amount received from the sale of a good or service over the cost of producing it.
Price received - Marginal cost * quantity/2
What is total surplus?
Sum of producer and consumer surplus
What is dead-weight loss?
The decrease in total surplus that results from an inefficient level of production.
What is utilitarianism?
is a principle that states that we should strive to achieve “the greatest happiness for the greatest number.”
When a market price allocates a scarce resource…
only those who are willing and able to pay get the resource
In a command system, resources are allocated by…
the order of someone in authority
a marginal cost curve is the…
supply curve!
A negative externality results in..?
A positive externality results in…?
- overproduction
- underproduction (buyer isn’t receiving all the benefit of the good)
One big problem with the utilitarian ideal is that it..?
ignores the costs of making income transfers.
According to the “big tradeoff”…
income transfers reduce efficiency
According to John Rawls’ modified utilitarianism, income should be redistributed until…
the poorest person is as well off as possible, after incorporating the costs of income transfers
The existence of increasing opportunity cost means..
explains the bowed-out shape of the production possibilities frontier.
If goods X and Y are substitutes in production, then a rise in the price of good X
decreases the supply of good Y
Suppose the price of a television set rises by 10 percent. Which one of the following would we
expect to be the most elastic following such a price change?
the long-run supply of television sets
What are the different types of fairness?
Utilitarian: if the results aren’t fair, it isn’t fair
Symmetry principle: if the rules aren’t fair, it isn’t fair
