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Micro Economics > Midterm #1 > Flashcards

Midterm #1 Flashcards

1
Q

Competitive Market

A

A market where there are many buyers/sellers so no individual person can influence price

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2
Q

Relative Price

A

ratio of its money price to the money price of the next best alternative

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3
Q

Quantity Demand

A

The amount of a goods/services a consumer is planning to buy during a certain time period at a certain price

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4
Q

How a demand graph works

A

Higher price = small quantity demanded

Lower price = larger quantity demanded

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5
Q

2 causes of change in quantity demanded

A
  1. Substitution effect

2. Income effect

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6
Q

Substitution Effect

A

When prices of goods/services rise relative to other prices, people will seek a substitution. Therefore quantity demanded goes down.

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7
Q

Income Effect

A

When the price of a good/service rises relative to income. This could mean people can’t afford what they previously could which can lower quantity demanded

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8
Q

Demand Vs. Quantity Demanded

A

Demand;

  • refers to the ENTIRE graph
  • the relationship between the price of a good and the amount of product that consumers are willing to get at each price
  • Change in demand SHIFTS graph

Quantity Demanded;

  • refers to one particular POINT on the Demand curve
  • change in quantity demanded does NOT SHIFT graph
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9
Q

6 factors that change Demand

A
  1. prices of related goods
  2. expected future prices
  3. income
  4. expected future income and credit
  5. population
  6. preferences
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10
Q

Substitute

A

A good that can be used to replace another good

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11
Q

Complement

A

A good used in conjunction with another

Ex. Peanut butter complement could be jam

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12
Q

What happens if the price of a substitute for energy bar decreases?

A

This could decrease the demand of the energy bar

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13
Q

What happens if the price of a complement for energy bar decreases?

A

This could increase the demand of the energy bar

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14
Q

Expected Future Prices

A

Changes in expected future prices affects the current demand shifting the whole graph. Increased expected future price means people want to buy now before it goes up.

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15
Q

Normal Good + Example

A

A normal good is something where the quantity demanded increases with an increase of income
Ex.) Whole wheat pasta

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16
Q

Inferior Good + Example

A

An inferior good is something where the quantity demanded decreases with an increase of income
Ex.) Canned food

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17
Q

Quantity Supplied

A

the amount that a producers plan to sell during a given time period at a particular price

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18
Q

How a supply graph works

A

Higher price = Higher quantity supplied

Lower price = Lower quantity supplied

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19
Q

Supply

A
  • refers to the entire relationship between the quantity supplied and the price of a good
  • change in supply SHIFTS the graph
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20
Q

Minimum Supply Price

A

the lowest amount they are willing to sell a good is marginal cost

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21
Q

6 Main factors that change supply

A
  1. The prices of factors of production
  2. The prices of related goods produced
  3. Expected future prices
  4. The number of suppliers
  5. Technology
  6. State of nature
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22
Q

What happens if price of production increases

A

The minimum price that a supplier is willing to accept increases, therefore DECREASES supply

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23
Q

What happens if the price of a substitute falls

A

The supply would INCREASE

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24
Q

What happens if the price of a complement in production increases

A

The supply would INCREASE

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25
Q

What happens to supply if the expected future price falls

A

The supply would INCREASE

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26
Q

What happens if more suppliers come into the picture

A

The more suppliers means more of the product, therefore supply would INCREASE

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27
Q

How does advancement in technology affect supply

A

Advancement in technology decreases production cost of producing existing products, therefore INCREASES supply

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28
Q

How can State of Nature affect the supply

A

Natural disasters cause a DECREASE in supply

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29
Q

Equilibrium Price

A

point where quantity demanded = quantity supplied

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30
Q

Production Possibilities Frontier (PPF)

A

Boundary between those combinations of good/services that can be produced and those that cannot.

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31
Q

Marginal Cost

A

Is the opportunity cost of producing one more unit of a good/service

32
Q

How are Preferences described

A

Described through someone’s marginal benefit and marginal benefit curve

33
Q

Marginal Benefit and how is it measured

A

The benefit received from consuming one more unit. Measured by the amount that a person is willing to pay for an additional unit of a good/service

34
Q

Economic Growth

A

Expansion of production possibilities and increase in the standard of living

35
Q

2 Factors that influence economic growth

A
  1. Technological change

2. Capital accumulation

36
Q

Technological change

A

The development of new goods and better ways of producing goods/services

37
Q

Capital Accumulation

A

Growth of capital resources, which includes human capital

38
Q

Comparative Advantage

A

Something a person has if they can perform the activity at a lower opportunity cost

39
Q

Absolute Advantage

A

If a person is more productive than others

40
Q

Economics

A

Study of the choices people make as they cope with scarcity and the incentives that influence and reconcile those choices

41
Q

Micro vs. Macro

A

Micro: smaller scale, questioning choices of individuals and businesses
Macro: larger scale, questioning performance of the national and global economics

42
Q

Price Elasticity of Demand and Formula

A

How the quantity demanded of a good responds to a change in its price in ceteris peribs.
[delta Q / Q average] / [delta P / P average]

43
Q

Perfectly Inelastic Demand

A

When the quantity demanded doesn’t change when the price changes. Makes the price elasticity of demand = 0

44
Q

Elastic, Inelastic, and Unit Elastic relation with revenue

A 
Elastic = price cut increases total revenue
Inelastic = price cut decreases total revenue
Unit-Elastic = price cut does not change the total revenue
45
Q

3 things the Elasticity of Demand depends on and 1 reason for each

A
  1. Closeness of substitutes
    - the closer the substitute, the more elastic the demand is for the good/service
  2. Proportion of income spent on the good
    - bigger proportion of income spent on a good, the larger the elasticity of demand is
  3. Time elapsed since a price change
    - More time consumers have to adjust to a price change, the more elastic the demand is
46
Q

Cross Elasticity of Demand and Formula

A

How a goods demand responds to a change in price of a substitute or complement while ceteris peribus
[delta Q / Q average] / [delta Psubstitute / P average substitute]

47
Q

Income Elasticity of Demand and Formula

A

How quantity demanded responds to a change in income

[delta Qdemanded / Qdemanded average] / [delta I / I average]

48
Q

Elasticity of Supply and Formula

A

How quantity supply responds to a change in price of a good

[delta Qsupplied / Qsupplied average] / [delta P / P average]

49
Q

Resource Substitution Possibilities

A

the easier it is to substitute among the resources used for production, the greater elasticity of supply

50
Q

Time Frame for supply decision

A

More time that passes after a price change, the greater is the elasticity of supply

51
Q

8 Scarce resources allocation forms

A
  1. Market price
  2. Command
  3. Majority rule
  4. Contest
  5. First-come, first-serve
  6. Lottery
  7. Personal characteristics
  8. Force
52
Q

Market Price

A
  • most scarce resources that you supply get allocated by market price
  • For most goods/services, the market turns out to do a good job
53
Q

Command & Best When…

A
  • allocates resources by the order of someone in authority

- Works well in organizations with clear lines of authority

54
Q

Majority Rule & Best When…

A
  • Allocates resources in the way the majority of voters choose
  • Works well when the decision affects lots of people and self-interest must be suppressed to use resources efficiently
55
Q

Contest & Best When…

A
  • Allocates to winner
  • Ex.) Oscars, Sport events
  • Best when the efforts of the “players” are hard to monitor and reward directly
56
Q

First-come, first-serve & Best When…

A
  • Allocates to those who are first in line
  • Ex.) casual restaurants, supermarket checkouts, buffets
  • Best when scarce resources can serve just one person at a time in a sequence
57
Q

Lottery & Best When…

A
  • Allocates to those with the winning number
  • Ex.) draw, lucky cards, or any kind of lucky situation
  • Best when there is no effective way to distinguish among potential users of a scarce resource
58
Q

Personal Characteristics

A
  • Allocates to those with the “right” characteristics
  • Ex.) People choose marriage partners on the basis of person characteristics
  • Can sometimes be blurred in workforce with discrimination
59
Q

Force & Best When…

A
  • Allocating by force is one through taking or assigning without appropriate approval
  • Ex.) wars and stealing
  • Best for the state to transfer wealth from the rich to the poor and establish the legal framework in which voluntary exchange can take place in markets
60
Q

Marginal Benefit

A
  • the value of one more unit of a good/service

- marginal benefit curve = demand curve

61
Q

Consumer Surplus and Formula

A
  • area under the demand curve and above the price paid

[marginal benefit - price] / [quantity bought]

62
Q

Marginal Cost

A
  • the cost of one more unit of a good/service

- marginal cost curve = supply curve

63
Q

Producer Surplus

A
  • the area below market price and above the supply curve
64
Q

The Invisible Hand

A

the idea implied that competitive markets send resources to their highest valued use in society

65
Q

Market Failure

A

when markets don’t achieve an efficient outcome

66
Q

Deadweight Loss

A

The amount that could have been produced to create maximum capitalization

67
Q

5 sources of Market Failure

A
  1. Price and Quantity regulations
  2. Taxes and subsidies
  3. Monopoly
  4. Externalities
  5. Public Goods
68
Q

Price and Quantity Regulations

A

Price regulation: minimum wage law, rent control

Quantity regulation: hunting, fishing

69
Q

Taxes and Subsidies

A

Taxes: increase prices paid by buyers and lower prices received by sellers
Subsidies: lower the prices paid by buyers and increase the prices received by sellers

70
Q

Monopoly

A
  • is a firm that has sole provider of a good/service

- produces too little and underproduction results

71
Q

Externalities

A

Is a cost or benefit that affects someone other than the seller/buyer of a good
- Ex.) an electric utility creates an external cost by burning coal that creates pollution and acid rain

72
Q

Public Goods

A

Benefits everyone and no one can be excluded from its benefits

73
Q

Utilitarianism

A

The principle that states we should strive to achieve “the greatest happiness for the greatest number”

74
Q

When is Market Equilibrium reached

A

When “demand = supply”

75
Q

Efficiency

A

When “marginal social benefit = marginal social cost”

Micro Economics (1 decks)

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