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Hon 202 > Midterm 1 > Flashcards

Midterm 1 Flashcards

1
Q

what is economics?

A

study of how agents make choices among scarce resources and how those choices affect society

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2
Q

What are the two subsets of economics

A

Micro and macro

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3
Q

two big economic questions

A
  1. How do choices end up determining what, how, and for whom goods and services get produced?
  2. When do choices made in the pursuit of self-interest also promote the social interest?
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4
Q

Factors of Production

A
  1. Land -> “gifts of nature” used to produce goods and services
  2. Labor -> work time and work effort that people devote to producing goods and services
  3. Capital -> knowledge and skill from education, training, and experience
  4. Entrepreneurship
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5
Q

Production Possibilities Frontier (PPF)

A

Boundary between combos of goods and services that can be produced and those that can’t

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6
Q

Production Efficiency

A

can’t produce more of one good without producing less of other goods.

It is inefficient if something isn’t put to use (unemployed or misallocated resources)

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7
Q

Marginal Cost

A

opportunity cost of producing one more unit of it

  • as we move along PPF, opportunity cost increases
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8
Q

Comparative Advantage

A

doing an activity at a lower cost than everyone else

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9
Q

Absolute advantage

A

more productive (ex. can make more pizzas than everyone else)

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10
Q

Technological change

A

development of new goods and better production

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11
Q

capital accumulation

A

growth of capital resources, including human capital

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12
Q

marginal benefit

A

benefit received from consuming more of a good or unit

measured by amount that a person is willing to pay

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13
Q

preferences

A

description of person’s likes and dislikes

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14
Q

If you demand something…

A
  1. you want it
  2. you can afford it
  3. you’ve made a definite plan to buy it
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15
Q

quantity demanded

A

amount that consumers plan to buy during specific time at specific price

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16
Q

law of demand

A

the higher the price of a good, the smaller the quantity demanded

lower the price, higher quantity demanded

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17
Q

substitution effect

A

when price rises, people seek substitutes

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18
Q

demand curve

A

relationship between quantity demanded of a good and its price when all other influences on planned purchases stay the same

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19
Q

which way does the graph shift when there is an increase in demand

A

right

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20
Q

which way does the graph shift when there is a decrease in demand

A

left

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21
Q

Factors that Change Demand

A
  1. substitute
  2. complement
  3. expected future prices
  4. income
  5. expected future income and credit
  6. population
  7. preferences
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22
Q

substitute

A

good that can be used in place of another good

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23
Q

complement

A

good used in conjunction with another good

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24
Q

how do expected future prices change demand curve

A

current demand for good increases and demand curve shifts rightward

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25
Q

how does income change demand curve

A

as income increases, consumes buy more of most goods and demand curve shifts rightward

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26
Q

normal good

A

demand increases as income increases

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27
Q

inferior good

A

demand decreases as income increases (ikea furniture, TV dinners)

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28
Q

giffen good

A

non luxury good, demand increases as price increases (demand abnormality)

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29
Q

veblen good

A

luxury good, demand increases as price increases (demand abnormality)

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30
Q

how does expected future income and credit change demand

A

demand might increase now

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31
Q

how does population change demand

A

the larger the population, the greater demand is for all goods

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32
Q

how do preferences change demand

A

people with same income have different demand if they have different preferences

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33
Q

if firm supplies good or service, the firm…

A
  1. has resources and technology to make it
  2. can profit from producing it
  3. has made definite plan to produce and sell it
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34
Q

quantity supplied

A

amount producers plan to sell at specific time period at a particular price

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35
Q

law of supply

A

higher the price, greater quantity supplied

lower the price, smaller quantity supplied

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36
Q

minimum supply price

A

lowest price at which someone is willing to sell an additional unit

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37
Q

which way does curve shift when supply increases

A

right

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38
Q

which way does curve shift when supply decreases

A

left

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39
Q

factors that change supply

A
  1. prices of factors of production
  2. prices of related goods produced
  3. expected future prices
  4. number of suppliers
  5. technology
  6. state of nature
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40
Q

how does the prices of factors of production change supply

A

price rises -> minimum price willing to sell for rises -> decreasing supply

curve shifts left

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41
Q

how does prices of related goods produced change supply

A

supply of good increases if price of substitute in production falls

supply of good increases if price of complement in production rises

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42
Q

how does expected future prices change supply

A

if price expected to rise in future, supply today decreases

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43
Q

how does number of suppliers change supply

A

larger number of suppliers -> greater supply of good

shifts curve right

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44
Q

how does technology change supply

A

advances creates new products and lowers cost of existing products

shifts curve right

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45
Q

how does state of nature change supply

A

natural disaster can decrease supply

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46
Q

equilibrium

A

when price balances plans of buyers and sellers

quantity demanded = quantity supplied

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47
Q

surplus

A

price is above equilibrium

forces prices down

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48
Q

shortage

A

price is below equilibrium

forces prices up

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49
Q

How to solve for equilibrium without diagram

A
  1. set supply and demand equal to each other
  2. Change Qd and Qs to Q*
  3. solve for Q*
  4. plug Q* into either demand or supply to find equilibrium price
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50
Q

Elasticity

A

responsiveness of quantity demanded of a good to a change in its price

51
Q

Price elasticity of demand

A

measure of responsiveness of quantity demanded of a good to change in its price

52
Q

Perfectly Inelastic Demand

A

if quantity demanded doesn’t change when price changes
ex. epipen, insulin

vertical demand curve
elasticity = 0

53
Q

unit elastic demand

A

quantity demanded = % change in price

elasticity = 1

54
Q

perfectly elastic demand

A

% change in quantity demanded is infinitely large when price barely changes

horizontal demand curve
elasticity = infinity
ex. very close substitutes

55
Q

% change in quantity demanded < % change in price

A

price elasticity < 1
inelastic

56
Q

% change in quantity demanded > % change in price

A

price elasticity > 1
elastic

57
Q

how do substitutes influence elasticity

A

the closer the substitute, the more elastic

more inelastic = less replaceable
more elastic = more replaceable

58
Q

how does proportion of income spent on good influence elasticity

A

greater proportion of income consumers spend on a good -> larger elasticity of demand

59
Q

how does time elapsed since price change influence elasticity

A

more time consumers have to adjust to price change or the longer a good can be stored without losing its value -> more elasticity of demand

60
Q

where on the demand curve is the demand unit elastic, elastic, and inelastic

A

at mid point: unit elastic
above midpoint: elastic
below midpoint: inelastic

61
Q

Price Elasticity Formula

A

(△Q/Qavg)/(△P/Pavg)

or

(△Q * Pavg)/(△P * Qavg)

62
Q

Income Elasticity formula

A

(△Q/Qavg) / (△I/Iavg)

63
Q

Cross-Price Elasticity Formula

A

(△Q/Qavg) / (△P other good/ Pavg other good)

64
Q

area of a triangle

A

A = 1/2(b)(h)

65
Q

Total revenue

A

price of good * quantity sold

66
Q

what happens to total revenue when demand is elastic vs inelastic

A

if demand is elastic -> total revenue increases
if demand is inelastic -> total revenue decreases

67
Q

Income Elasticity

A

% change in QD/ % change in income

if > 1, demand if income elastic and good is normal

if 0> <1, demand is income inelastic and good is normal

if <0, good is inferior

68
Q

Cross Elasticity

A

% change in QD/ % change in price of substitute or complement

if positive -> substitute
if negative -> complement

69
Q

Supply elasticity

A

% change in quantity supplied/ % change in price

should always be positive

70
Q

Perfectly inelastic supply

A

vertical curve
elasticity = 0

71
Q

unit elastic supply

A

passes through origin
elasticity = 1

72
Q

perfectly elastic supply

A

horizontal curve
elasticity = infinity

73
Q

how does resource substitution possibilities influence supply elasticity

A

easier to substitute = greater elasticity

74
Q

how does time frame for supply decision influence supply elasticity

A

more time that passes after price change = greater elasticity

75
Q

momentary supply

A

perfectly inelastic

76
Q

short run supply

A

somewhat elastic

77
Q

long run supply

A

mostly elastic

78
Q

Resource allocation method -> market price

A

people who are willing to pay get the resource

79
Q

Resource allocation method -> command system

A

order of someone in authority

  • works well in organizations with clear lines of authority but bad in entire economy
80
Q

Resource allocation method -> majority rule

A

majority of voters choose

  • works well when decision affects lots of people and self interest must be suppressed to use resources efficiently
81
Q

Resource allocation method -> contest

A

allocates resources to a winner

  • works well when efforts of “players’ are hard to monitor and reward directly
82
Q

Resource allocation method -> first come, first served

A

those who are first in line

  • works well when scarce resources can serve just one person at a time in sequence
83
Q

Resource allocation method -> Lottery

A
  • works well when no effective way to distinguish among potential users of scarce resources
84
Q

Resource allocation method -> Personal Characteristics

A
  • mostly just for individuals like choosing marriage partners
85
Q

Resource allocation method -> force

A

effective, transfer wealth from rich to poor and establish legal framework in which voluntary exchange can take place in markets

86
Q

Value

A

what we get

87
Q

price

A

what we pay

88
Q

marginal benefit

A

value of one more unit of good or service

89
Q

how do we measure value

A

max price person is willing to pay

90
Q

Consumer Surplus

A

excess benefit received from good over amount paid for it

area of triangle above market price

91
Q

Producer Surplus

A

excess amount received from sale of good over cost of producing it

area of triangle below market price

92
Q

When production is less than equilibrium quantity

A

Marginal Social Benefit > Marginal Social Cost

93
Q

When production is greater than equilibrium quantity

A

Marginal Social Benefit < Marginal Social Cost

94
Q

When production is equal to equilibrium quantity

A

Marginal Social Benefit = Marginal Social Cost

95
Q

Market Failure

A

market delivers inefficient outcome

underproduction
overproduction

96
Q

Deadweight Loss

A

decrease in total surplus

97
Q

Price Regulations

A

put block on price adjustments
-> underproduction

98
Q

Subsidies

A

lower prices paid by buyers and increase prices received by sellers -> overproduction

99
Q

Externality

A

cost or benefit that affects someone other than seller or buyer -> can result in overproduction when not considered

100
Q

quantity regulations

A

limit amount firm is permitted to produce -> underproduction

101
Q

Taxes

A

increase price paid by buyers and lower prices received by sellers -> underproduction

102
Q

public good

A

benefits everyone, no one can be excluded -> underproduction bc no one wants to pay for substitute

103
Q

Common resource

A

owned by no one but can be used by everyone -> leads to overproduction

104
Q

Monopoly

A

firm that is sole provider of good or service -> underproduction bc they maximize its profit, so set price to achieve this self interest

105
Q

transaction costs

A

opportunity cost of making trades in a market -> underproduction bc too expensive

106
Q

utilitarianism

A

idea that only equality brings efficiency

greatest amount of happiness for most amount of people

107
Q

symmetry principle

A

requirement that people in similar situations can be treated similarly

Equality of opportunity

108
Q

Rent ceiling

A

price ceiling applied to housing market

109
Q

price ceiling

A

regulation that makes it illegal to charge price higher than specified level

110
Q

what happens if rent ceiling is below equilibrium rent

A

housing shortage
increased search activity
black market

111
Q

search activity

A

time spent looking for someone with whom to do business

costly

112
Q

black market

A

illegal market operating alongside legal market with restriction in place

113
Q

rent control

A

limit rate of increase of rent

pretty much only tenants benefit

114
Q

price floor

A

makes it illegal to trade at price lower than specified level

minimum wage when applied to labor market

115
Q

tax incidence

A

division of burden of tax between buyer and seller

116
Q

imports

A

goods and services bought from people in other countries

117
Q

exports

A

goods and services we sell to people in other countries

118
Q

tariffs

A

tax on good imposed by importing country

119
Q

effects of tariffs

A
  • consumer surplus shrinks
  • producer surplus expands
  • more DWL
120
Q

Import quotas

A

restriction that limits max quantity of good that may be imported in each period

121
Q

effects of import quotas

A
  • consumer surplus shrinks
  • producer surplus expands
  • private sector benefits
122
Q

dumping

A

foreign firms sells its exports at lower price than cost of production

123
Q

pros of protectionism

A
  • job creation
  • allows us to compete with cheap foreign labor
  • can help infant industries
124
Q

cons of protectionism

A
  • increased prices for consumers
  • limited choices for consumers

Hon 202 (2 decks)

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