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ECON 201 > Midterm 1 > Flashcards

Midterm 1 Flashcards

1
Q

Principles of Economics

A
  1. people face trade-offs
  2. the cost of something is what you give up to get it
  3. rational people think at the margin
  4. people respond to incentives
  5. trade makes everyone better off
  6. markets are usually a good way to organize economic activity
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2
Q

trade-off

A
  • have to give up something in order to get something

- ex. study one more hour or talk to a friend

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3
Q

opportunity cost

A

-whatever must be given up to obtain an item

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4
Q

thinking at the margin

A
  • -rational people who do the best they can given their opportunities
  • compare marginal benefits > marginal costs
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5
Q

firms and consumers respond to incentives

A
  • higher price: buyers consume less while sellers produce more
  • change in public policy
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6
Q

trade

A
  • increases welfare
  • allows people to specializes
  • enjoy greater variety of goods and services
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7
Q

markets organize economic activity

A
  • government officials best position to allocate economy’s scarce resources
  • guided by price and self interest
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8
Q

government improves market outcomes

A

-government promotes efficiency and equality

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9
Q

no gains from trade when

A
  • opportunity cost is the same
  • if one country as absolute advantage
  • ratio is the same between the two x and y outputs
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10
Q

absolute vs. comparative advantage

A

absolute: goes to producer that requires smaller input to produce good
comparative: ability of group to produce good at lower opportunity cost than another group

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11
Q

equilibrium price

A
  • where supply and demand intersect on graph

- quantity of goods demanded = quantity of goods supplied

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12
Q

supply shifters

A
  • change in technology
  • input prices
  • number of sellers
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13
Q

demand shifters

A
  • tastes
  • income
  • price of related goods
  • expectations
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14
Q

market demand

A

-sum of all individual demands

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15
Q

elasticity

A

the degree to which individuals change their supply or demand in response to price or income changes

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16
Q

inelastic

A
  • necessities
  • vertical demand
  • more than 1
  • y axis
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17
Q

elastic

A
  • luxuries
  • goods with close substitutes
  • horizontal demand
  • less than 1
  • x axis
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18
Q

perfectly inelastic

A

no matter what price stays the same

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19
Q

perfectly elastic

A

small change causes infinite cage in demand

20
Q

unit elastic

A
  • curve equal to 1

- quantity supplied or demanded changes the same as the change in price

21
Q

price floor above equilibrium market price

A

results in surplus

22
Q

price ceiling set below equilibrium market price

A

results in shortage

23
Q

tax on buyers vs sellers

A
  • buyers: shifts demand curve in

- sellers: shifts supply curve left

24
Q

burden of tax

A

shared by both consumers and sellers

25
Q

division of tax burden

A

depends on the relative elastic of supply and demand

26
Q

consumer surplus

A
  • amount buyer is willing to pay minus amount buyer actually pays
  • demand curve
27
Q

producer surplus

A

amount seller is paid for a good minus the seller’s cost of providing it
-supply curve

28
Q

externality

A
  • when a person does something that affects bystander
  • negative: bad impact of bystander, supply curve left
  • positive: good impact on bystander, demand curve left
29
Q

pigovian tax

A
  • tax on market that generates a negative externality
  • corrects inefficient market outcome
  • ex. paying extra for bags at grocery stores
30
Q

chase theorem

A
  • if private parties can bargain without cost over distributing resources, they can solve externality problems on their own
  • ex. offering someone money to get rid of their barking barking dog
31
Q

rival

A
  • one person’s consumption of a good reduces the amount of good available for others
  • private goods
  • common resources
32
Q

excludable

A

possible to prevent one person’s consumption go a good if that person does not pay for the good

  • private goods
  • club goods
33
Q

public good

A

non-rival and non-excludable

34
Q

private good

A

rival and excludable

35
Q

diminishing marginal product

A

as quantity of input increases, the amount of output (marginal product) decreases

36
Q

total cost

A

fixed cost + variable cost

37
Q

marginal cost curve

A
  • determines quantity of good firm is willing to supply at any time
  • intersects with average total cost at lowest point bc each new output lowers the ATC
38
Q

profit maximizing level of output

A

MC = MR

39
Q

firm should decrease output when

A

MC > MR

40
Q

firm should increase output when

A

MC < MR

41
Q

profits

A
  • P= (P - ATC) x Q
  • pushed to zero for all firms in competitive market
  • profit needs to be > ATC
42
Q

competitive market

A
  • firms earn zero profit
  • profit = ATC
  • hires amount of workers where equilibrium market wage = value marginal product of labor
43
Q

monopoly

A
  • firms earn positive profit
  • profit > ATC
  • MR not constant price (depends on quantity)
  • impose dead weight loss on society
  • reduce consumer surplus
  • increase producer surplus
44
Q

P > ATC

A

firm making profit

45
Q

P < ATC

A

firm losing profit

46
Q

P = ATC

A

firm making zero profit

47
Q

equilibrium wage

A

were supply and demand curves intersect

ECON 201 (2 decks)

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