Midterm 1 Flashcards
1
Q
what is economics?
A
study of how agents make choices among scarce resources and how those choices affect society
2
Q
What are the two subsets of economics
A
Micro and macro
3
Q
two big economic questions
A
- How do choices end up determining what, how, and for whom goods and services get produced?
- When do choices made in the pursuit of self-interest also promote the social interest?
4
Q
Factors of Production
A
- Land -> “gifts of nature” used to produce goods and services
- Labor -> work time and work effort that people devote to producing goods and services
- Capital -> knowledge and skill from education, training, and experience
- Entrepreneurship
5
Q
Production Possibilities Frontier (PPF)
A
Boundary between combos of goods and services that can be produced and those that can’t
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)
7
Q
Marginal Cost
A
opportunity cost of producing one more unit of it
- as we move along PPF, opportunity cost increases
8
Q
Comparative Advantage
A
doing an activity at a lower cost than everyone else
9
Q
Absolute advantage
A
more productive (ex. can make more pizzas than everyone else)
10
Q
Technological change
A
development of new goods and better production
11
Q
capital accumulation
A
growth of capital resources, including human capital
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
13
Q
preferences
A
description of person’s likes and dislikes
14
Q
If you demand something…
A
- you want it
- you can afford it
- you’ve made a definite plan to buy it
15
Q
quantity demanded
A
amount that consumers plan to buy during specific time at specific price
16
Q
law of demand
A
the higher the price of a good, the smaller the quantity demanded
lower the price, higher quantity demanded
17
Q
substitution effect
A
when price rises, people seek substitutes
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
19
Q
which way does the graph shift when there is an increase in demand
A
right
20
Q
which way does the graph shift when there is a decrease in demand
A
left
21
Q
Factors that Change Demand
A
- substitute
- complement
- expected future prices
- income
- expected future income and credit
- population
- preferences
22
Q
substitute
A
good that can be used in place of another good
23
Q
complement
A
good used in conjunction with another good
24
Q
how do expected future prices change demand curve
A
current demand for good increases and demand curve shifts rightward
25
how does income change demand curve
as income increases, consumes buy more of most goods and demand curve shifts rightward
26
normal good
demand increases as income increases
27
inferior good
demand decreases as income increases (ikea furniture, TV dinners)
28
giffen good
non luxury good, demand increases as price increases (demand abnormality)
29
veblen good
luxury good, demand increases as price increases (demand abnormality)
30
how does expected future income and credit change demand
demand might increase now
31
how does population change demand
the larger the population, the greater demand is for all goods
32
how do preferences change demand
people with same income have different demand if they have different preferences
33
if firm supplies good or service, the firm...
1. has resources and technology to make it
2. can profit from producing it
3. has made definite plan to produce and sell it
34
quantity supplied
amount producers plan to sell at specific time period at a particular price
35
law of supply
higher the price, greater quantity supplied
lower the price, smaller quantity supplied
36
minimum supply price
lowest price at which someone is willing to sell an additional unit
37
which way does curve shift when supply increases
right
38
which way does curve shift when supply decreases
left
39
factors that change supply
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
40
how does the prices of factors of production change supply
price rises -> minimum price willing to sell for rises -> decreasing supply
curve shifts left
41
how does prices of related goods produced change supply
supply of good increases if price of substitute in production falls
supply of good increases if price of complement in production rises
42
how does expected future prices change supply
if price expected to rise in future, supply today decreases
43
how does number of suppliers change supply
larger number of suppliers -> greater supply of good
shifts curve right
44
how does technology change supply
advances creates new products and lowers cost of existing products
shifts curve right
45
how does state of nature change supply
natural disaster can decrease supply
46
equilibrium
when price balances plans of buyers and sellers
quantity demanded = quantity supplied
47
surplus
price is above equilibrium
forces prices down
48
shortage
price is below equilibrium
forces prices up
49
How to solve for equilibrium without diagram
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
50
Elasticity
responsiveness of quantity demanded of a good to a change in its price
51
Price elasticity of demand
measure of responsiveness of quantity demanded of a good to change in its price
52
Perfectly Inelastic Demand
if quantity demanded doesn't change when price changes
ex. epipen, insulin
vertical demand curve
elasticity = 0
53
unit elastic demand
quantity demanded = % change in price
elasticity = 1
54
perfectly elastic demand
% change in quantity demanded is infinitely large when price barely changes
horizontal demand curve
elasticity = infinity
ex. very close substitutes
55
% change in quantity demanded < % change in price
price elasticity < 1
inelastic
56
% change in quantity demanded > % change in price
price elasticity > 1
elastic
57
how do substitutes influence elasticity
the closer the substitute, the more elastic
more inelastic = less replaceable
more elastic = more replaceable
58
how does proportion of income spent on good influence elasticity
greater proportion of income consumers spend on a good -> larger elasticity of demand
59
how does time elapsed since price change influence elasticity
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
where on the demand curve is the demand unit elastic, elastic, and inelastic
at mid point: unit elastic
above midpoint: elastic
below midpoint: inelastic
61
Price Elasticity Formula
(△Q/Qavg)/(△P/Pavg)
or
(△Q * Pavg)/(△P * Qavg)
62
Income Elasticity formula
(△Q/Qavg) / (△I/Iavg)
63
Cross-Price Elasticity Formula
(△Q/Qavg) / (△P other good/ Pavg other good)
64
area of a triangle
A = 1/2(b)(h)
65
Total revenue
price of good * quantity sold
66
what happens to total revenue when demand is elastic vs inelastic
if demand is elastic -> total revenue increases
if demand is inelastic -> total revenue decreases
67
Income Elasticity
% 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
Cross Elasticity
% change in QD/ % change in price of substitute or complement
if positive -> substitute
if negative -> complement
69
Supply elasticity
% change in quantity supplied/ % change in price
should always be positive
70
Perfectly inelastic supply
vertical curve
elasticity = 0
71
unit elastic supply
passes through origin
elasticity = 1
72
perfectly elastic supply
horizontal curve
elasticity = infinity
73
how does resource substitution possibilities influence supply elasticity
easier to substitute = greater elasticity
74
how does time frame for supply decision influence supply elasticity
more time that passes after price change = greater elasticity
75
momentary supply
perfectly inelastic
76
short run supply
somewhat elastic
77
long run supply
mostly elastic
78
Resource allocation method -> market price
people who are willing to pay get the resource
79
Resource allocation method -> command system
order of someone in authority
- works well in organizations with clear lines of authority but bad in entire economy
80
Resource allocation method -> majority rule
majority of voters choose
- works well when decision affects lots of people and self interest must be suppressed to use resources efficiently
81
Resource allocation method -> contest
allocates resources to a winner
- works well when efforts of "players' are hard to monitor and reward directly
82
Resource allocation method -> first come, first served
those who are first in line
- works well when scarce resources can serve just one person at a time in sequence
83
Resource allocation method -> Lottery
- works well when no effective way to distinguish among potential users of scarce resources
84
Resource allocation method -> Personal Characteristics
- mostly just for individuals like choosing marriage partners
85
Resource allocation method -> force
effective, transfer wealth from rich to poor and establish legal framework in which voluntary exchange can take place in markets
86
Value
what we get
87
price
what we pay
88
marginal benefit
value of one more unit of good or service
89
how do we measure value
max price person is willing to pay
90
Consumer Surplus
excess benefit received from good over amount paid for it
area of triangle above market price
91
Producer Surplus
excess amount received from sale of good over cost of producing it
area of triangle below market price
92
When production is less than equilibrium quantity
Marginal Social Benefit > Marginal Social Cost
93
When production is greater than equilibrium quantity
Marginal Social Benefit < Marginal Social Cost
94
When production is equal to equilibrium quantity
Marginal Social Benefit = Marginal Social Cost
95
Market Failure
market delivers inefficient outcome
underproduction
overproduction
96
Deadweight Loss
decrease in total surplus
97
Price Regulations
put block on price adjustments
-> underproduction
98
Subsidies
lower prices paid by buyers and increase prices received by sellers -> overproduction
99
Externality
cost or benefit that affects someone other than seller or buyer -> can result in overproduction when not considered
100
quantity regulations
limit amount firm is permitted to produce -> underproduction
101
Taxes
increase price paid by buyers and lower prices received by sellers -> underproduction
102
public good
benefits everyone, no one can be excluded -> underproduction bc no one wants to pay for substitute
103
Common resource
owned by no one but can be used by everyone -> leads to overproduction
104
Monopoly
firm that is sole provider of good or service -> underproduction bc they maximize its profit, so set price to achieve this self interest
105
transaction costs
opportunity cost of making trades in a market -> underproduction bc too expensive
106
utilitarianism
idea that only equality brings efficiency
greatest amount of happiness for most amount of people
107
symmetry principle
requirement that people in similar situations can be treated similarly
Equality of opportunity
108
Rent ceiling
price ceiling applied to housing market
109
price ceiling
regulation that makes it illegal to charge price higher than specified level
110
what happens if rent ceiling is below equilibrium rent
housing shortage
increased search activity
black market
111
search activity
time spent looking for someone with whom to do business
costly
112
black market
illegal market operating alongside legal market with restriction in place
113
rent control
limit rate of increase of rent
pretty much only tenants benefit
114
price floor
makes it illegal to trade at price lower than specified level
minimum wage when applied to labor market
115
tax incidence
division of burden of tax between buyer and seller
116
imports
goods and services bought from people in other countries
117
exports
goods and services we sell to people in other countries
118
tariffs
tax on good imposed by importing country
119
effects of tariffs
- consumer surplus shrinks
- producer surplus expands
- more DWL
120
Import quotas
restriction that limits max quantity of good that may be imported in each period
121
effects of import quotas
- consumer surplus shrinks
- producer surplus expands
- private sector benefits
122
dumping
foreign firms sells its exports at lower price than cost of production
123
pros of protectionism
- job creation
- allows us to compete with cheap foreign labor
- can help infant industries
124
cons of protectionism
- increased prices for consumers
- limited choices for consumers
