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econ 101 > midterm 1 > Flashcards

midterm 1 Flashcards

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1
Q

opportunity costs

A

the true cost of something is the next best alternative you have to give up to get it

consequence of choice in relation to next best alternative

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1
Q

scarcity

A

resources are limited and any resource spent on pursuing one activity leaves fewer resources for another

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1
Q

economic surplus

A

total benefits-total cost

assesses how much a decision has improved well being

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1
Q

cost benefit principle

A

costs and benefits are the incentives that shape decisions.

before making a decision you should evaluate all costs and benefits and pursue only if benefits are greater than costs

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2
Q

willingness to pay

A

quantifies costs and benefits, “what is the most I am willing to pay for this”

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3
Q

sunk cost

A

cost that has been incurred and cannot be reversed

good decisions ignore sunk costs. they occur with every choice

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4
Q

ppf

A

illustrates alternative outputs

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5
Q

marginal principle

A

decisions about quantities are best made incrementally.

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6
Q

rational rule

A

if something is worth doing keep doing it until marginal benefits equal marginal cost. maximizes economic surplus

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7
Q

interdependence principle

A

best choice depends on other choices, choices others make, developments in other markets, and future expectations. when these change the best choice may change

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8
Q

4 types of interdependence

A

dependencies between individual choices

dependencies between people/business in the same market

between markets

through time

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9
Q

gains from trade

A

extra output from rearranging according to comparative advantage

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10
Q

absolute advantage

A

ability to do a task using fewer inputs

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11
Q

who should do a task

A

person with lowest opportunity cost

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12
Q

comparative advantage

A

ability to do a task at lower opportunity cost

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13
Q

how to determine who has comparative advantage

A

determine how long the task would take each person

convert to opportunity cost (calculate how much of an alternative good you could produce

evaluate who can produce each good at lowest OC

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14
Q

specialization

A

focusing on task that you have lowest opportunity cost in

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15
Q

internal market

A

markets within a company to buy/sell scarce resources

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16
Q

knowledge problem

A

knowledge needed to make a good decision is not available to decision maker

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17
Q

individual demand curve

A

plots the quantity of an item that someone plans to buy at each price

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18
Q

quantity demanded is higher when

A

price is lower

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19
Q

market demand curve

A

total quantity of a good demanded by the market across all potential buyers at each price

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20
Q

market demand

A

sum of quantity demanded by each person

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21
Q

4 steps to finding market demand curve

A

1) survey customers asking the quantity they will buy at each price
2) for each price, add up total quantity demanded by each individual at that price
3) scale up that quantities demanded by survey respondents so that they represent the whole market
4) plot total quantity of goods demanded by market at each price

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22
Q

a change in price only causes

A

movement along the demand curve

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23
Q

the demand curve is also which curve

A

marginal benefit curve

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24
Q

right shift =

A

increase in demand

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25
Q

left shift =

A

decrease in demand

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26
Q

6 factors that shift the demand curve

A

1) income
2) preferences
3) prices of related goods
4) expectations
5) congestion, network events
6) the type and number of buyers

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27
Q

normal good

A

demand increases when income is higher

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28
Q

inferior good

A

demand decreases when income is higher

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29
Q

complementary goods

A

goods that go together

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30
Q

when the price of a complementary good rises, demand

A

decreases

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31
Q

substitute goods

A

goods that replace each other

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32
Q

what does demand for a good do if price of a substitute good rises

A

increases

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33
Q

network effect

A

when a good becomes more useful other people use it

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34
Q

congestion effect

A

good becomes less valuable because other people use it

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35
Q

individual supply curve

A

plots quantity of item business plans to sell at each price

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36
Q

law of supply

A

tendency for quantity supplied to be higher when price is higher

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37
Q

perfect competition

A

markets in which all firms in an industry sell an identical good

and

there are many buyers and sellers, each of whom is small relative to size of market

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38
Q

price taker

A

someone who charges prevailing price and whose actions do not affect prevailing price

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39
Q

variable cost

A

vary with amount of output produced

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40
Q

fixed costs

A

do not vary when output changes

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41
Q

rational rule for sellers

A

keep selling until price equals marginal cost

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42
Q

marginal product

A

increase in output that arises from additional unit of input

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43
Q

diminishing marginal product

A

marginal product declines as you use more of that input

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44
Q

raised input = raised marginal

A

cost

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45
Q

market supply curve

A

plots total quantity of an item supplied by entire market at each price. sum of quantity supplied by each seller

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46
Q

rise in price = what in quantity supplied

A

increase

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47
Q

supply curve is also

A

marginal cost curve

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48
Q

5 factors that cause supply curve to shift

A

1) input prices
2) productivity and tech
3) prices of related outputs
4) expectations
5) type and number of sellers

4 and 5 only shift market supply curve

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49
Q

substitutes in production

A

alternative use of resources

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50
Q

what does supply of good do if price of substitute in production rises

A

decreases

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51
Q

complements in production

A

produced together

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52
Q

what will supply do if price of substitutes in production falls OR price of complements in production rise

A

increase

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53
Q

always use what when graphing ppf

A

x and y intercept

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54
Q

numerator of OC

A

task that is neglected

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55
Q

planned economy

A

centralized decisions are made about what and how goods and services are produced and allocated

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56
Q

market economy

A

each individual makes their own production and consumption needs, buying and selling in markets

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57
Q

market

A

a setting that brings together potential buyers and sellers

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58
Q

equilibrium

A

point at which there is no tendency for change

a market is in equilibrium when quantity demanded = quantity supplied

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59
Q

equilibrium quantity

A

quantity demanded and supplied are at equilibrium

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60
Q

shortages cause price to

A

rise

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61
Q

shortage

A

quantity demanded exceeds quantity supplied

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62
Q

surplus causes price to

A

fall

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63
Q

surplus

A

quantity demanded is less than quantity supplied

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64
Q

price above equilibrium

A

causes a surplus

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65
Q

price below equilibrium

A

causes a shortage

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66
Q

3 symptoms of a market at a shortage

A

1) queuing
2) bundling extras
3) a secondary market

if there is a surplus the same things will occur in reverse

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67
Q

demand shifts cause price and quantity

A

to move in the same direction

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68
Q

shift in supply causes price and quantity to move in

A

opposite directions

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69
Q

price elasticity of demand

A

measures how responsive buyers are to price changes

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70
Q

p.e. of demand formula

A

percent change in quantity demanded/ percent change in price

use absolute value with final answer to determine elasticity, but remember this should always be negative numbers wise

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71
Q

elastic

A

absolute value of price elasticity is greater than 1

responsive

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72
Q

inelastic

A

absolute value of price elasticity is less than 1

buyers are unresponsive to price change

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73
Q

unit elastic

A

elasticity is exactly 1 or negative 1

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74
Q

elastic demand curves are …… than inelastic demand curves

A

flatter

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75
Q

perfectly elastic

A

change in price leads to infinite change in quantity

horizontal demand line

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76
Q

perfectly inelastic

A

quantity does not respond to a change in price

vertical demand line

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77
Q

if you have good substitutes demand is more

A

elastic

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78
Q

elasticity reflects the availability of a

A

substitute

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79
Q

price elasticity of demand reflects availability of substitutes and is larger when

A

1) there are more competing products
2) for specific brands
3) for things that are not nessecities
4) when consumers search more
5) when there is more time to adjust

80
Q

total revenue

A

price*quantity

81
Q

if demand is elastic a higher price produces

A

less revenue

82
Q

if demand is inelastic a higher price produces

A

more revenue

83
Q

if demand is currently inelastic for your product, you should

A

raise prices

84
Q

cross price elasticity of demand

A

measures how responsive prices quantity demanded of one good is to price changes of another

85
Q

cross price elasticity of demand formula

A

percent change in quantity demanded/ percent change in price of other good

86
Q

cross price elasticity is positive for

A

subsitutes

87
Q

cross price elasticity is negative for

A

complements

88
Q

cross price elasticity is zero for

A

independent goods

89
Q

income elasticity of demand

A

change in quantity demanded in response to a change in income

90
Q

income elasticity of normal goods is

A

positive

91
Q

income elasticity of inferior goods is

A

negative

92
Q

price elasticity of supply

A

responsiveness of sellers to price changes

will always be positive

93
Q

quantity is unresponsive when supply is

A

inelastic

94
Q

quantity is responsive when supply is

A

elastic

95
Q

price elasticity of supply is increased when

A

1) firms store inventory
2) inputs are easily available
3) firms have extra capacity
4) when firms can enter or exit
5) more time to adjust

96
Q

if supply and demand both shift there can be more than one possible outcome which means that either price or quantity will be

A

ambiguous

97
Q

positive analysis

A

descibes what will happen

98
Q

normative analysis

A

describes what should happen

99
Q

the most effeciant outcome is the outcome that yields

A

the most surplus

100
Q

economic surplus

A

total benefits - total cost

measures how much a decision improves your well being

101
Q

equity

A

a measure of fairness

a more fair distribution of economic resources

102
Q

consumer surplus

A

marginal benefit - price

triange closer to the top of the graph

surplus from buying

103
Q

effecient production

A

producing a given quantity of output at the lowest possible costs

104
Q

effecient quantity

A

quantity that produces largest amount of economic surplus

105
Q

rational rule for markets

A

produce more of an item if the marginal benefit of the item is greater than or equal to its marginal cost

106
Q

market failure

A

forces of supply and demand lead to an ineffecient outcome

107
Q

5 market failures

A

1) market undermines competitive pressure
2) externalities create side effects
3) information problems undermine trust
4) irrationality leads to bad decisions
5) government can impede market forces

108
Q

deadweight loss

A

how far economic surplus falls below effecient outcome

109
Q

DWL=

A

surplus at effecient quantity - actual economic surplus

110
Q

deadweight loss is always pointed at the

A

effecient quantity

111
Q

3 critiques on effeciency

A

1) distribution matters. we should account for equity
2) willingness to pay affects ability to pay, not just. MB
3) the means matter, not just the ends

112
Q

MC of the last unit produced will be the same for

A

all firms because each firm will produce up to the point where MC= price

113
Q

if less than the effecient quantity is consumed

A

mutually beneficial exchanges will not occur

114
Q

if more than the effecient quantity is consumed

A

some goods will go unsold

115
Q

what is the market failure in the used car market

A

private information

116
Q

more narrow market =

A

more elastic demand

117
Q

a demand line shows the exact

A

marginal benefit

118
Q

a demand line shows

A

max you would pay for each unit of a good

119
Q

what does a tax on sellers cause

A

1) a shift in the supply curve
2) decline in quantity sold
3) increases price buyers pay
4) decreases price sellers recieve

120
Q

who bears the incidence of a tax on sellers

A

both buyers and sellers

121
Q

what does a tax on buyers cause

A

1) shift in the demand curve
2) decline in the quantity sold
3) increases what buyers pay
4) decreases what sellers recieve

122
Q

who bears the incidence of a tax on sellers

A

both buyers and sellers

123
Q

statutory burden

A

it doesnt matter if tax is on the seller or buyer, the result is the same

124
Q

tax incidence

A

depends on price elasticity of demand and supply

refers to the distribution of the economic burden of a tax between buyers and sellers. It analyzes who ultimately bears the cost of a tax, regardless of who is legally responsible for paying it to the government.

125
Q

sellers bear a smaller share of the tax incidence when

A

supply is relatively elastic

126
Q

buyers bear a smaller share of the tax incidence when

A

demand is relatively elastic

127
Q

the factor (supply/demand) that is more elastic will have a ……. share of economic burden

A

smaller

128
Q

how to evaluate a tax or subsidy

A

1) determine which curve is shifting
2) consider if it is an increase or decrease in taxes
3) compare pre and post tax equilibrium
4) see if supply or demand is more elastic in order to assess who bears greater burden of the tax

129
Q

subsidy

A

payment made by government to theose who make a specific choice

130
Q

price celing

A

max price to be legally charged

131
Q

price floor

A

min price that sellers can legally charge

132
Q

binding price celing

A

price celing that prevents market from reaching market equilibirum price

133
Q

price celings lower prices but they cause

A

shortages

134
Q

binding price floor

A

prevents the market from reaching equilibrium price

135
Q

quantity regulation

A

max or min quantity that can be sold

136
Q

quota

A

limit on max quantity of a good that can be bought or sold

137
Q

mandate

A

requirement to buy or sell a min amount of a good

138
Q

what do quotas do to prices

A

raise them

139
Q

when a competitive market is at equilibrium total surplus is

A

as large as it can be

140
Q

statutory burden

A

burden of being assigned by government to pay tax

141
Q

economic burden

A

actual burden created by changes in price due to a tax

142
Q

tax incidence

A

division of burden between buyers and sellers

143
Q

negative externality

A

effects harm bystanders

144
Q

externality

A

side effect of an activity that affects bystanders whose interests are not taken into account

145
Q

positive externalities

A

side effects benefit bystanders

146
Q

price change is not a

A

externality

147
Q

negative externalities create

A

external costs

148
Q

marginal price cost

A

cost paid by the seller from one extra unit

149
Q

marginal external cost

A

cost imposed on bystanders

150
Q

marginal social cost

A

sum of marginal private costs and marginal external costs

151
Q

marginal external benefit

A

extra benefit enjoyed by bystanders

152
Q

marginal social benefit

A

sum of marginal benefit accruing to buyer and marginal external benefit accrued to bystanders

153
Q

social optimal quantity

A

quantity thats the most effecient for society as a whole

occurs where marginal social benefit =marginal social cost

154
Q

negative externalities lead to

A

overproduction

155
Q

positive externalities lead to

A

underproduction

156
Q

coase theorum

A

if bargaining is priceless and property rights are enforced, externality problems can be solved by private bargains

157
Q

corrective taxes can solve

A

negative externalities

158
Q

set corrective tax on negative externaility equal to

A

the marginal external cost

159
Q

corrective subsidy can solve

A

positive externaities

160
Q

you can cap a negative externality using

A

quantity regulation

161
Q

cap and trade is like a

A

corrective tax

162
Q

lawsuits, norms, social sanctions are like a

A

corrective tax

163
Q

warm glow, social recognition are like a

A

corrective subsidy

164
Q

laws rules and regulations can solve

A

externalities

165
Q

non excludable goods

A

people cannot be easily excluded from using it

166
Q

non rival goods

A

one persons use does not subtract from anothers

167
Q

free rider problem

A

someone can enjoy benefits of a good without paying the costs

168
Q

with nonrival goods, free rides enjoy a

A

positive externality

169
Q

rival goods

A

use of good comes at the expense of someone else

170
Q

public good

A

non rival good that is non excludable and therefore subject to free rider problem

171
Q

markets ……….produce public goods

A

under

172
Q

club good

A

excludable but nonrival in consumption

173
Q

common resource

A

rival and non excludable

174
Q

tradgedy of the commons

A

tendency to overconsume common resources

175
Q

how to solve tradgedy of the commons

A

assign ownership rights

176
Q

what type of goods create externality problems

A

non excludable

177
Q

6 solutions to externality problems

A

1) private bargaining
2) fix the price through a tax or subsidy
3) fix the quantity through cap and trade
4) laws, rules, regulations
5) government provisions of public goods
6) assign ownership rights to common resources

178
Q

what are the 3 consquences of a tax

A

1) tax raises revenue for governments
2) taxes reduce producer and consumer surplus
3) taxes create deadweight loss

179
Q

subsidies are opposite of taxes in the way that whichever is less elastic gets to keep

A

more of the surplus

180
Q

consequences of a price floor

A

1) choosy buyers because there is more demand
2) suppliers will try to sell on a black market
3) suppliers keep producing excess, government keeps having to step in to buy the surplus

181
Q

4 unintended consequences of price celings

A

1) excess demand means that supplies do not need to worry about losing customers, makes quality decrease
2)suppliers find other ways to profit
3) black markets may emerge
4) suppliers will pivot into differeny industries

182
Q

binding quota

A

quota is below equilibrium quantity

183
Q

DWL triangle is located inbetween

A

what society is doing and what it should be doing

184
Q

if the market is functioning properly social optimum is

A

the equilibrium point

185
Q

supply curve slopes up to reflect increasing ……. demand curve slopes down to reflect decreasing ……

A

MC….. MB

186
Q

what shift happens: negative externaility

A

supply shifts left

187
Q

what shift happens: positive externality

A

demand shifts right

188
Q

when the price of a good takes up a higher share of income, it is more

A

elastic

189
Q

the more vertical a slope is

A

the less elastic it is

190
Q

new tech causes production to be cheaper which in turn lowers …… and therefore increases ……

A

MC, supply

191
Q

more elastic (demand/supply) = ……. loss from tax

A

smaller

191
Q

where are these located on the ppf: effecient, ineffecient, infeasible

A

effecient: on the ppf line
ineffecient: below the ppf line
infeasible: above ppf line

192
Q

OC of y =

A

x/y x (units)

193
Q

positive externalities shift the …… to the ……

A

demand curve (social), right

194
Q

negative externalities shift the …… to the ……..

A

supply curve (social), left

195
Q

how does a tax levied on sellers affect supply and demand curves

A

supply shifts left, demand remains unchanged

196
Q

how does a tax levied on buyers affect supply and demand curves

A

demand shifts left, supply is unchanged

197
Q

when given a supply and demand function, where do you put the tax (on buyers) when you integrate the equations?

ex) S(p) = 2p
D(p) = 100-p

tax is $10

A

you would add the tax to the demand function

ex) S(p)= 2p
D(p) = 100-(p+10)

therefore D(p) (tax) =90-p

198
Q

when given a supply and demand function, where do you put the tax (on sellers) when you integrate the equations?

ex) S(p) = 2p
D(p) = 100-p

tax is $10

A

you would subtract the tax from the supply function

ex) S(p) = 2 (p-10)
D(p) = 100-p

therefore S(p) = 2p-20

199
Q

how do you factor a positive externality into supply and demand functions?

ex) s(p) =2p
d(p) = 10-p

positive externality of $2

A

adjust the demand function by adding externality

ex) d(p) (social) = 12-p

200
Q

how do you factor a negative externality into supply and demand functions?

ex) s=2p
d=10-p

A

adjust the supply curve by adding the cost

s (social) = 2 (p+2), therefore

s (social) = 2p+4

econ 101 (3 decks)

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