Midterm 1 Flashcards
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1
Q
What is scarcity in economics?
A
refers to the limited availability of resources (land, labor, capital)
2
Q
Define trade-offs in the context of economics.
A
giving up one thing to obtain another due to limited resources
3
Q
What is opportunity cost?
A
the value of the best alternative that you give up when you decide to choose one thing over another
4
Q
What components make up total opportunity cost?
A
explicit costs and implicit costs.
5
Q
What does microeconomics focus on?
A
individual households and firms,
6
Q
What are some examples of microeconomic analysis?
A
- Firms deciding how much to produce based on costs and consumer demand.
*
7
Q
What does macroeconomics consider?
A
the economy as a whole, including overall output, employment, inflation, and growth.
8
Q
What four topics fall under macroeconomics?
A
- Unemployment
- Inflation rates
- Interest rates for all borrowers
- Government policies (monetary, fiscal)
9
Q
What is the purpose of economic models?
A
simplified representations of reality that help predict relationships and test hypotheses
10
Q
What does the circular flow diagram illustrate?
A
The circular flow diagram illustrates interactions between households and firms in the goods & services market and the labor market.
11
Q
What is behavioral economics?
A
examines how people make decisions
12
Q
What is a function in economic terms?
A
a relationship, how changes in one variable affect another
13
Q
How is percentage change calculated?
A
final-initial/initial * 100
14
Q
What is the Production Possibilities Frontier (PPF)?
A
all possible combinations of two goods/services an economy can produce given its resources
15
Q
What does the slope of the PPF represent?
A
the opportunity cost between two goods (how much y is given up to produce 1 more unit of x)
16
Q
What is the law of increasing opportunity costs?
A
as production of one good increases, the opportunity cost of producing additional units rises
(also explains why PPF is bowed out)
17
Q
What are economies of scale?
A
as a business produces more, the cost per unit decreases because resources are used more efficiently
18
Q
What defines absolute advantage?
A
producing more with fewer resources
19
Q
Define comparative advantage.
A
lower opportunity cost
20
Q
What is the significance of trade?
A
Trade allows consumption beyond a country’s PPF by focusing on what each party does relatively best
21
Q
What are the key components of a competitive market?
A
many buyers and sellers of the same good or service
22
Q
Define demand in economics.
A
relationship between prices and the quantities that consumers are willing and able to buy
23
Q
What does the demand curve typically look like?
A
downward-sloping, a negative relationship between price and quantity demanded.
24
Q
What are the important macroeconomic goals?
A
- GDP growth
- Low unemployment
- Low inflation
25
What are 2 the policy tools used in macroeconomics?
* Monetary policy (interest rates, bank lending, money supply)
* Fiscal policy (government spending, taxation)
26
Fill in the blank: __________ & __________ drive all economic choices.
[Scarcity] & [Opportunity Cost]
27
Fill in the blank: __________ deals with individual decisions; __________ deals with aggregate outcomes.
[Micro] deals with individual decisions; [Macro] deals with aggregate outcomes.
28
Fill in the blank: __________ & __________ generate efficiency gains because of comparative advantage.
[Specialization] & [Trade]
29
Fill in the blank: __________ explains price/quantity movements in competitive markets.
[Supply & Demand]
30
Fill in the blank: __________ goals focus on growth, employment, and price stability.
[Macroeconomic]
31
What is a budget constraint?
all possible combinations of goods someone can afford given the price and their income.
32
What does a budget constraint diagram represent?
the combination of goods you can buy with your budget
33
What determines the slope of a budget constraint?
relative price of each of the variables (of things u want to buy)
34
Define sunk costs.
costs that are made in the past and cannot be recovered
35
What is the lesson regarding sunk costs?
forget about the money and time gone and focus on the costs and benefits of future options
36
What is the budget constraint equation?
Budget = P1Q1 + P2Q2 + ... + PnQn.
37
What does a steeper slope in a budget constraint indicate?
greater opportunity cost of the y variable
38
What is a Production Possibilities Frontier (PPF)?
A model showing all possible combinations of goods a society can produce given available resources
39
What does it mean when an economy is at the PPF?
The economy is using all of its resources efficiently
40
How does scarcity affect choices?
Scarcity forces people to choose, and when people choose, there’s an opportunity cost
41
What is the law of increasing opportunity cost?
If you increase the production of one good, the opportunity cost to produce the additional good will increase
42
Define productive efficiency.
It’s impossible to produce more of one good without decreasing the quantity of another good
43
What indicates allocative efficiency?
mix of goods a society produces represents the combination society most desires
44
What is rational decision-making in economics?
The assumption that humans act in predictable ways to avoid cost and maximize benefits
45
What does marginal analysis involve?
Comparing the benefits and costs of doing a bit more or a bit less
46
What is the difference between positive and normative reasoning?
Positive reasoning is based on theories and evidence, while normative reasoning is based on values.
47
What is intra-industry trade?
International trade of goods within the same industry
48
What are economies of scale?
As the scale of output goes up, average costs of production decline
49
What is the Grubel Lloyd Index used for?
To measure interindustry trade in some industry.
50
What does equilibrium price refer to?
The price at which the quantity of a good buyers want to buy equals the quantity sellers want to sell
51
At the world price with free trade, if quantity demanded is greater than quantity supplied, the country will _____.
import
52
What are gains from trade represented by?
(basically the benefits trade provides expanding beyond the PPF
53
Fill in the blank: Opportunity Cost of Producing Product A (when given workers) = _____
Workers per Unit of A / Workers per Unit of B.
54
Fill in the blank: Marginal cost is the additional cost of _____
one more item produced.
55
Fill in the blank: In trade, you shouldn’t trade all of the resource you specialize in; rather just enough where you still have some but both can maximize in both resources and push beyond your _____
individual PPFs
56
What happens when quantity demanded is greater than quantity supplied?
The country must import the difference.
57
What occurs when quantity supplied exceeds quantity demanded?
The country must export that difference
58
How is the mathematical formula for gains from trade expressed?
Gains from Trade = 1/2(Price Difference)(Import quantity)
price difference: equilibirum price w/o trade - new world price
import quantity: new quantity demanded - new quantity supplied
59
What does the price difference refer to in the context of gains from trade?
The difference between the equilibrium price without trade and the new world price
60
What is the import quantity in the gains from trade calculation?
The difference between new quantity demanded and new quantity supplied
61
Define consumer’s willingness to pay for a good
is the maximum price at which they’re willing to buy that good.
62
What is individual consumer surplus?
net gain to an individual buyer from the purchase of a good,
the difference between the buyer’s willingness to pay and the price paid.
63
What is total consumer surplus?
The sum of the individual consumer surpluses of all the buyers of a good in a market.
64
How can a demand curve be interpreted?
There are two ways: horizontally (quantity demanded at a price) and vertically (buyer’s willingness to pay for a specific quantity).
65
Define individual producer surplus.
Net gain to an individual seller from selling a good, equal to the difference between the price received and seller’s cost.
66
What is total producer surplus?
The sum of individual producer surpluses of all sellers of a good in a market.
67
What is total surplus (or social surplus/economic surplus)?
The sum of surplus going to buyers and surplus going to sellers.
68
What is a market economy?
Decisions about prices and goods are determined through interaction of supply and demand
69
Define 'market'.
Any situation that brings buyers and sellers of goods or services together
70
What characterizes a competitive market?
Large number of buyers and sellers with no one controlling the market price
71
What is a free market economy?
An economy where the government does not intervene or influence market prices
72
List examples of free market economies.
* Hong Kong
* Singapore
* New Zealand
* US
73
What is a planned/command economy?
An economy where economic decisions are passed down from government authority
74
Provide examples of command economies.
* Cuba
* North Korea
75
What is the main characteristic of a true communist economy?
Everyone owns the factors of production, with no private property
76
Define demand.
The relationship between the price of a good/service and the quantity someone is willing to buy
77
What is the law of demand?
An inverse relationship between price and quantity demanded
78
What does a demand schedule show?
The quantity demanded at each price
79
What is a demand curve?
Graph showing the relationship between price and quantity demanded
80
What is utility?
Satisfaction, usefulness, or value obtained from consuming goods/services
81
Differentiate between demand and quantity demanded.
Demand refers to the entire curve, while quantity demanded refers to a specific point on the curve
82
What does ceteris paribus mean?
Assumption that no relevant economic factors other than the product's price are changing
83
What are normal goods?
Goods whose demand increases when consumer income increases
84
What are inferior goods?
Goods whose demand decreases when consumer income increases
85
What factors can shift demand?
* Changing tastes/preferences
* Changes in population composition
* Changes in prices of related goods
86
What is the law of supply?
Higher price leads to higher quantity supplied of a good/service
87
Define supply.
The amount of a good/service a producer is willing to supply at each price
88
What is a supply schedule?
A table showing the quantity supplied at different prices
89
What is the relationship between supply and quantity supplied?
Supply refers to the curve, while quantity supplied is a specific point on that curve
90
What are factors that can increase supply?
* Favorable natural conditions for production
* A fall in input prices
* Improved technology
91
Define equilibrium in economics.
The price and quantity combination where supply equals demand
92
What is a surplus?
Situation where quantity demanded is less than quantity supplied
93
What is a shortage?
Situation where quantity demanded is greater than quantity supplied
94
What does the equilibrium price indicate?
The only price where quantity supplied equals quantity demanded
95
What is marginal analysis?
Examining the benefits and costs of choosing a little more or less of a good
96
Fill in the blank: The law of supply describes the relationship between _______ and quantity supplied.
price
97
How does a movement along the demand curve occur?
Because of a shift in supply affecting price
98
What happens when both supply and demand increase?
Equilibrium quantity will increase while price cannot be determined
99
What is the impact of a decrease in supply and an increase in demand?
Equilibrium price will increase while quantity demanded cannot be determined
100
What is price elasticity of demand?
The percentage change in quantity divided by the percentage change in price.
101
What does it indicate when |Ed| < 1?
The demand curve is inelastic.
102
What does it indicate when |Ed| > 1?
The demand curve is elastic.
103
What does it indicate when |Ed| = 1?
The demand curve is unit elastic.
104
What is the implication of an elastic demand curve?
An increase in price significantly reduces the quantity demanded.
105
What is the implication of an inelastic demand curve?
An increase in price reduces quantity demanded only slightly.
106
Why is elasticity useful for policy analysis?
It helps in understanding the impact of taxes and price controls.
107
How do firms use elasticity for profit maximization?
They analyze how changing prices will affect revenue.
108
What happens to revenue if demand is inelastic and prices are raised?
Revenue increases.
109
What happens to revenue if demand is elastic and prices are raised?
Revenue decreases.
110
What is the midpoint method in elasticity calculations?
A method that provides the same magnitude whether going from A to B or B to A.
111
What is a price ceiling?
A legal maximum price that reduces the quantity supplied.
112
What is deadweight loss?
The loss of total surplus from transactions that no longer occur due to price control.
113
What occurs when a price ceiling creates a shortage?
More consumers want the good than the quantity available.
114
What effect does a price ceiling have on product quality?
It leads to reduced product quality as sellers have no incentive to compete.
115
What is an excise tax?
A tax charged on each unit of a good or service sold.
116
How is tax burden determined?
It is shared between buyers and sellers based on elasticity.
117
What happens to total surplus due to a tax?
It results in a deadweight loss.
118
What 5 factors predict whether demand is elastic or inelastic?
1.Substitutes,
2.necessities vs. luxuries,
3.share of budget,
4.short run vs. long run,
5.competitive dynamics.
119
What is the formula for calculating price elasticity of demand?
Price elasticity of demand = % change in quantity demanded / % change in price.
120
What does unitary elasticity indicate?
Elasticity is equal to 1, meaning proportional responsiveness of demand.
121
What is the difference between point elasticity and midpoint elasticity?
Point elasticity uses a specific point, while midpoint elasticity uses averages for accuracy.
122
What does perfectly elastic demand look like on a graph?
It is shown by a horizontal line.
123
What does perfectly inelastic demand look like on a graph?
It is shown by a vertical line.
124
What is income elasticity of demand?
How sensitive the quantity demanded is to changes in consumer income.
125
What does a high income elasticity indicate?
It indicates luxury goods that are highly sensitive to income changes.
126
What does a negative income elasticity indicate?
It indicates inferior goods.
127
What is cross-price elasticity of demand?
The percentage change in quantity demanded of one good due to a percentage change in the price of another good.
128
What characterizes substitutes in terms of cross-price elasticity?
They have positive cross-price elasticities of demand.
129
What characterizes complements in terms of cross-price elasticity?
They have negative cross-price elasticities of demand.
130
What is wage elasticity of supply?
How sensitive workers are to changes in wages.
131
What is interest elasticity of savings?
How sensitive people's savings behavior is to changes in interest rates.
132
What happens to total revenue when demand is elastic and prices increase?
Total revenue decreases.
133
What happens to total revenue when demand is inelastic and prices increase?
Total revenue increases.
134
What is tax incidence?
How the tax burden is divided between consumers and producers.
135
What is consumer surplus?
The area above price and below the demand curve.
136
What is producer surplus?
The area below price and above the supply curve.
137
What is total surplus?
The sum of consumer surplus and producer surplus.
138
What happens to supply when it is elastic?
Consumers pay more and producers can't easily shift resources
## Footnote
Elastic supply means that producers can respond to price changes, but not easily switch resources to other products.
139
What is the consumer burden in tax graph interpretation?
The portion of the tax above the original equilibrium price
## Footnote
This reflects the additional cost consumers incur due to the tax.
140
What is the producer burden in tax graph interpretation?
The portion of the tax below the original equilibrium price
## Footnote
This indicates the loss producers face due to the tax.
141
How is consumer surplus (CS) defined before the tax?
The area above price and below the demand curve
## Footnote
CS represents the difference between what consumers are willing to pay and what they actually pay.
142
How is producer surplus (PS) defined before the tax?
The area below price and above the supply curve
## Footnote
PS reflects the difference between what producers receive and the minimum they would accept.
143
What is total surplus before the tax?
The sum of consumer surplus (CS) and producer surplus (PS)
## Footnote
Total surplus is represented by the whole triangle formed by the demand and supply curves.
144
What happens to consumer surplus (CS) after the tax?
CS shrinks because consumers now pay a higher price
## Footnote
This reduction indicates a loss in consumer welfare due to the tax.
145
What happens to producer surplus (PS) after the tax?
PS shrinks because producers receive a lower price
## Footnote
The decrease in PS shows the negative impact on producers due to the tax.
146
How is government revenue calculated after the tax?
The tax amount times the new, reduced quantity
## Footnote
This represents the income the government earns from the tax imposed.
147
What is deadweight loss (DWL)?
The total surplus from transactions that no longer happen due to tax
## Footnote
DWL represents the economic inefficiency caused by the tax, resulting in lost benefits to both consumers and producers.
