Microeconomics Flashcards
In an economic context, what makes up compensation?
Payments to individuals as:
- Wages, salaries, and profit sharing for labor;
- Interest, dividends, rental and lease payments for capital;
- Rental, lease and royalty payments for natural resources.
List the types of economic resources:
Acquire from individuals as:
- Labor: human work, skills, and similar human effort;
- Capital: financial resources (savings) and man-made resources;
- Natural Resources: land, minerals, timber, water, etc.
Describe the relationship between economic resources and compensation in a free-market economy
Business firms acquire economic resources from individuals (labor, capital, and natural resources), who receive compensation in return (wages/salaries, rents, interest, dividend); individuals use this compensation to acquire goods and services produced by businesses.
What determines “price”?
The supply of and demand for the commodity being priced.
List the characteristics of a free-market economy
- Interdependent relationship between individuals and business firms;
- Production depends on preferences of individuals with ability to pay for goods and services;
- Production depends on availability of economic resources, level of technology, and how business firms choose to use them;
- Production depends on sale price being at least equal to production cost.
Define “demand”
Desire, willingness, and ability to acquire a commodity.
Define “individual demand”
The quantity of a commodity that will be demanded by an individual (or other entity) at various prices during a specified time, ceteris paribus.
Define “market demand”
The quantity of a commodity that will be demanded by all individuals (and other entities) in the market at various prices during a specified time, ceteris paribus.
Describe the income effect as it applies to individual demand
A given amount of income buys more units at a lower price.
Describe the substitution effect as it applies to individual demand
Lower-priced items will be purchased as substitutes for higher-priced items.
What are the factors that change market demand?
- Size of market
- Income or wealth of participants
- Preferences of market participants
- Change in prices of other goods and services
Distinguish between a change in quantity demanded and a change in demand
A change in quantity demanded is movement along a given demand curve as a result of change in price only. A change in demand is a shift in a demand curve as a result of changes in variables other than price.
The demand curve for a product reflects:
The impact that price has on the amount of product purchased.
Define an “individual supply schedule”
A schedule that shows the quantity of goods that an individual producer is willing to provide (supply) at various prices during a specified time.
Distinguish between a change in quantity supplied and a change in supply
A change in quantity supplied is movement along a given supply curve as a result of change in price only. A change in supply is a shift of a supply curve as a result of changes in variables other than price.
What are the variables that change aggregate supply?
Changes in:
- Number of providers
- Cost of inputs
- Government taxation or subsidization
- Technological advances
Describe the principle of increasing cost
Production costs increase in the short-run as the quantity produced increases, because new resources are not used as efficiently as the resources used previously.
What is the slope of a normal supply curve?
Positive slope: at a higher price, a greater the quantity will be supplied
Define “market supply schedule”
A schedule that shows the quantity of a commodity that will be supplied by all the providers in the market at various prices during a specified time.
Define “supply”
Supply is the quantity of a commodity (good or service) that will be provided at alternative prices during a specified time.
If a change in market variables causes a supply curve to shift inward, what will occur?
In order for the same quantity to be provided after the shift as was provided before the shift, price will have to increase.
How can government directly influence market equilibrium?
- Taxation increases the cost and shifts the market supply curve up and to the left; tax decreases have the opposite effect.
- Subsidization decreases the cost and shifts the market supply curve down and to the right; decreases in subsidization have the opposite effect.
- Rationing reduces demand, thus shifting the demand curve downward and to the left, thus lowering the equilibrium quantity and price.
Describe the results of a change in market supply (only) on equilibrium.
- Increase in market supply = supply curve shifts down and to the right; decrease in market supply = supply curve shift up and to the right.
- Increase in market supply w no change in in demand = decrease in EP and increase in EQ;
- Decrease in market supply w no change in demand = increase in EP decrease in EQ.
Describe the results of a change in market demand (only) on equilibrium. DIRECT EFFECT
- Increase in market demand = demand curve shifts up and to the right; decrease in market demand = demand curve shift down and to the left.
- Increase in market demand w no change in supply = increase in both EP and EQ.
- Decrease in market demand w no change in supply = decrease in both EP and EQ.