Midterm 1 Material

Question 1

efficiency

Answer 1

allocating resources to those who value it the most

Question 2

principles of economics

Answer 2

1. people face trade-offs
   - efficiency vs. equality
2. cost of something, is what you give up to get it
3. people think at the margin
4. people respond to incentives
5. trade can make people better off
6. markets are usually a good way to organize economic activity
7. governments can sometimes improve market incomes

Question 3

marginal change

Answer 3

small change in quantity

Question 4

subsidies

Answer 4

discounted items

Question 5

opportunity cost

Answer 5

the sum of all costs (whatever has to be given up) to obtain something including accounting costs

• slope of a PPF (the good on the x-axis)
• to calculate: the thing you give up is in the numerator

Question 6

absolute advantage

Answer 6

ability to produce a good using fewer inputs (time, money, etc) than another producer

Question 7

comparative advantage

Answer 7

ability to produce a good at a LOWER OPPORTUNITY COST than another producer
-cannot have the comparative advantage in both activities

Question 8

imports

Answer 8

goods produced abroad and sold domestically

Question 9

exports

Answer 9

goods produced domestically and sold abroad

Question 10

markets

Answer 10

a group of buyers and sellers for a particular good or service

Question 11

competitive market

Answer 11

a market with so many buyers and sellers that neither can significantly affect the price
-buyers in the market create “demand” and sellers create “supply”

Question 12

demand

Answer 12

amount of goods or a good that buyers are willing to purchase at any price

Question 13

law of demand

Answer 13

all else equal, the quantity demanded of a good falls when the price of the good rises

Question 14

demand line

Answer 14

quantity in terms of prices

Question 15

inverse demand

Answer 15

price in terms of quantity

Question 16

demand shifts

Answer 16

something that causes the demand line to change

• increase in demand=shift right
• decrease in demand=shift left
• *change in the price=slide alone the demand shift

Question 17

reasons for the shifts

Answer 17

1. number of people in the market (buyers)
   - an increase in people means the demand will increase
2. tastes and/or information
   - increase or decrease - it depends
3. expectations
   - increase or decrease - it depends
4. change in income (with the buyer)
   - normal and inferior goods
   - when income increases, demand for normal goods increases, but will decrease for inferior good
   - opposite trend occurs when income decreases
5. prices of related goods
   - substitues and complements

Question 18

substitues

Answer 18

2 goods for which an INCREASE in the price of one leads to an INCREASE in demand for another
-ex.) if demand for beer increase, the wine demand will also increase

Question 19

complements

Answer 19

2 goods for which an INCREASE in the price of one leads to a DECREASE in the demand for the other
-ex.) complement for beer is red cups

Question 20

law of supply

Answer 20

all else equal, if the price of a good rises, the quantity supplied will rise

Question 21

quantity supplied

Answer 21

the amount of a good that sellers are willing to sell

Question 22

supply curve

Answer 22

relationship between the price of the good and the quantity supplied

Question 23

supply shifts

Answer 23

• increase in supply=shift to the right

- decrease in supply=shift to the left

Question 24

reasons for supply shifts

Answer 24

1. number of sellers
2. input prices
3. technology
   - the way the product is produced changes
   - decrease price, increase in supply
4. expectations

Question 25

equilibrium

Answer 25

when the market price (equilibrium price) reaches the level at which quantity supplied equals quantity demanded (equilibrium quantity)

Question 26

shortage

Answer 26

a situation in which quantity demanded is greater than quantity supplied
-ex.) natural disaster

Question 27

surplus

Answer 27

a situation in which quantity demanded is less than quantity supplied
-ex.) Lebron Miami Heat jerseys

Question 28

total revenue (TR)

Answer 28

the amount paid by buyers in a market and received by sellers
= price x quantity sold

Question 29

inelastic

Answer 29

elasticity < 1

• perfectly inelastic: 0
• large change in price barely changes demand
• short-term
• an increase in price and increase in TR

Question 30

elastic

Answer 30

elasticity > 1

• perfectly elastic: infinity
• small change in price, change in quantity is large
• long-term
• an increase in price and decrease in TR

Question 31

willingness to pay

Answer 31

the maximum amount a consumer would pay for something

Question 32

consumer surplus

Answer 32

a buyer’s willingness to pay for a good, minus what they actually pay for it

• a lower price means higher consumer surplus
• inelastic products tend to have higher consumer surplus

Question 33

cost of production

Answer 33

the value of everything a seller must give up to produce a good

Question 34

producer surplus

Answer 34

the amount a seller is paid for something/a good minus the seller’s cost of producing it

• the higher the price, the higher producer surplus
• inelastic supply means higher producer surplus

Question 35

price elasticity of demand

Answer 35

(% △ in quantity) / (% △ in price)

Question 36

income elasticity of demand

Answer 36

(% △ in quantity) / (% △ in income)

Question 37

cross - price elasticity of demand

Answer 37

(% △ quantity of good 1) / (% △ in price of good 2)

• for substitues = +
• for complements = -

Question 38

elasticity of supply

Answer 38

(% △ in quantity supplied) / (% △ in price)