midterm Flashcards
what is economics definition
study of the use of scarce resources to satisfy unlimited human wants
what are the factors of production
land, labor, and capital
what is opportunity cost
the value of the next best alternative that you give up when choosing one alternative (how much of one good you have to give up for another)
–> scarcity forces choice
what is the production possibilities boundary
how much of 2 goods can be produced with efficiency of given resources
–> illustrates scarcity (unattainable combos), choice (need to choose only one point) and opportunity cost (negatively sloped
–> concave in shape, points on the line are efficient and attainable, inside the boundary are inefficient but attainable, outside the boundary unattainable
what are the 4 key economic problems
- resource allocation (whats produced & how)
- distribution (whats consumed by who)
- why are some resources idle
- is productive capacity growing –> is PPB moving outwards
what is the difference between macro & micro econ
micro: study of causes and consequences of the allocation of resources as it is affected by the workings of price systems
macro: study of the determination of economic aggregates
what can govt policies do in the economy
- correct market failures, 2. address fairness of distribution, 3. provide solutions to reduce idleness, 4. promote econ growth
what is the market economy’s nature like
self organizing, efficient –> adam smith invisible hand
–> individuals pursue self-interest, respond to incentives
who are the 3 types of decision makers in the economy
consumers, producers, govt
what is the circular flow of income & expenditure
consumers sell factor services on factor market firms buy factor services for wages
consumers buy goods and services on the goods market, firms sell these goods
what is specialization and division of labor
specialization: allocation of different jobs to different people (comparative advantage and knowledge acquisition)
division: separation of steps in production process into specialized tasks
what is the barter system and its flaws
good for good –> need double coincidence of wants (money solves this issue)
what are the 4 economy types
- traditional - based on customs and habits
- free-market economy - allocation decided by individuals & firms, not govt
- mixed economy - mostly free-market but some govt intervention
- command economy - centralized decision making on production & allocation
what are normative vs positive statements
normative: value judgements on what ought to be
positive: about actual or alleged facts –> can be proven or disproven
endogenous v.s. exogenous variables
endogenous: value determined within the theory e.g. egg price depends on # produced
exogenous: influences endogenous but is outside the theory e.g. weather effects the egg market (egg market doesnt effect weather)
what is negative and positive correlation and what is causality
positive correlation = X & Y move together in same direction
negative correlation = X & Y move opposite direction
–> causation means X causes Y, needs to be proven seperately
what are index numbers
allow us to see change in relative values over time and compare volatility level of changing numbers from different data sets
value of index in given period = (given periods absolute value / absolute value in base period) 100
–> note: can only compare change between base year and given, not between given to given
what is cross sectional v.s. time series data
cross sectional shows one variable from different places in time e.g. average income for 10 provinces in 2020
time series shows one variable at successive points in time e.g. average canadian income 2000-2020
what is a function
for every X value there is only one Y value then Y is function of X –> Y = f(X)
–> 2 variables move together = positively related, 2 variables move opposite = negatively related, straight line = linearly related
how to find slope
change in vertical axis variable / change in horizontal axis variable
define demand
entire relationship between quantity demanded and price of product
define quantity demanded & demand schedule
amount of a product consumers desire to purchase
–> flow variable e.g. want to buy 10 eggs an hour
quantity bought is stock variable
demand schedule: table form comparing price versus quantity demanded
what is the law of demand
marshalls idea –> as price rises quantity demanded goes down –> negatively related
what movements can we see in the demand curve
-> price change = move location up or down demand curve
anything other than price change (e.g. consumer income, price of other goods etc) entire demand curve shifts –> right w increase, left with decrease
what are the 5 causes of demand curve shifts
- changes in household income: increase
- prices of other goods
- consumer preferences
- population
- significant changes in weather
what is quantity supplied
amount of product producers want to sell at given point in time
–> also a flow variable
what is the law of supply
as product prices rise the more producers will want to supply –> positively related
what movements can we see in the supply curve
up and down the curve = change in quantity supplied
the entire curve shifting = change in supply, increase moves rights, decrease moves left
what are the 6 causes of supply shifts
- price of inputs
- technology improvements
- govt taxes or subsidies
- prices of other products
- significant changes in weather
- number of suppliers
what is a market
any situation where buyers and sellers negotiate the exchange of goods and services
–> perfectly competitve market = # of buyers & sellers so large no singular firm has a big effect on price
what is the equilibrium price
point where supply & demand curves intersect aka market clearing price
what happens to supply and demand with prices not at equilibrium
any price above equilibrium = excess supply & downward pressure on price
any price below: excess demand and upward pressure on price
–> all disequilibrium, will stay in equilibrium until market conditions shift
what are the 4 possible curve shifts
- increase in demand –> increase in eq price & eq quantity
- decrease in demand –> decrease in eq price & eq quantity
- increase in supply –> decrease in eq price and increase in eq quantity
- decrease in supply –> increase in eq price and decrease in eq quantity
how to find equilibrium with a supply and demand function
Qd = 100 - 3p Qs = 20 + 2p
–> 100 - 20 = 80
–> 80 = 5p [3p + 2p]
–> 80/5 = 16
p = 16
Qd = 100 - 3(16)
Q = 52
whats absolute and relative price and which do we use
absolute = how much money needed to buy a unit of a good
relative = how much a good costs relative to the price of other goods
–> use relative in S & D b/c if all prices of goods changed it would not change you spending (S & D)
what is price elasticity of demand
equilibrium price changes (rises) and quantity demanded changes too (falls)
–> elastic: demand is very responsive to changes in price
–> inelastic: demand is not very responsive
—> more responsive quantity demanded is to price changes the less the equilibrium price will change and more the equilibrium quantity exchanged will change
how do you calculate elasticity
price elasticity of demand (n) = % change in quantity demanded / % change in price
–> og quantity - new quantity/avg quantity / og price - new price/avg price
(elasticity has no units, always read as absolute value)
(negatively sloped linear demand curve has constant slope but not constant elasticity)
what effects demand elasticity
- availability of substitues (demand very elastic if their are close substitutes)
- importance of product in consumer budgets (takes up bigger % of budget, increased elasticity)
- time frame (long run demand more elastic than short run)
what are the price elasticities & demand values
n = 0: perfectly inelastic, vertical demand curve, demand doesnt change w price
0 < n < 1: inelastic, % change in demand is smaller than % change in price
n = 1: unit elastic, % change in demand equals % change in price
n > 1: elastic, % change in demand is bigger than % change in price
n = infinity: perfectly elastic, willing to buy all they can at one singular price, horizontal demand curve
total expenditure - how do you calculate it
total expenditure = price x quantity
how does elasticity and total expenditure change as price falls
elastic demand = total expenditure rises
inelastic demand = total expenditure falls
unit elastic = total expenditure stays the same
how does elasticity and total expenditure change as price rises
elastic demand = total expenditure falls
inelastic demand = total expenditure rises
unit elastic = stays the same
(if n = 1 you get maximum of total expenditure)
what is price elasticity of supply & hows it measured
measure of responsiveness of quantity supplied to changes in products own price
ns = % change in quantity supplied / % change in price (calculate the same as demand elasticity)
–> values of ns mean the same thing for elasticity as values of n (for demand)
what effects price elasticity of supply
- ease of substitution: the easier it is for producers to shift production from/to other products when price changes (easier it is to shift, more elastic supply)
- time frame: easier to adjust supply in long run than short run
what is an excise tax and what does it do (what is tax incidence)
excise = tax imposed by govt on certain products
raises price paid by consumers and reduces amount received by producers
incidence = question who bears burden of tax
how does tax incidence change with elasticity of demand
when demand is inelastic relative to supply, consumers bear the burden
when demand is elastic relative to supply, producers bear the burden
–> quantity demanded WILL go down, but the amount depends on elasticity of demand
how do social programs effect tax incidence
govts payroll taxes for social programs like employment insurance
when the labor supply is inelastic this burden falls more on workers
when the labor supply is elastic (and demand inelastic) this burden falls more on firms/equally
what is income elasticity of demand and how is it measured
ny = % change in quantity demanded / % change in income
increased income = increased demand for normal goods & decreased demand for inferior goods
what are the income elasticities and demand values
normal goods: income positively related to demand
0 < ny < 1: income inelastic demand (necessity good)
1 < ny: income elastic demand (luxury good)
inferior goods: negatively related
0 > ny: inferior goods –> demand decreases with rising income
what is cross elasticity of demand & how is it measured
how demand changes in response to another products price changing –> change in price of Y causes demand curve of X to shift
nxy = % change in quantity demanded of good X / % change in price of good Y
what does the nxy value suggest
nxy > 0: X & Y are substitutes because increase in price of Y leads to increase in demand of X (X demand curve shifts right)
nxy < 0: X & Y are compliments because increase in price of Y leads to decrease in demand of X (X demand curve shifts left)
what are government price controls
policies aiming to keep price at disequilibrium –> decided by the lesser of supply & demandw
what are price floors & price ceilings and what do they lead to
price floors: govt sets minimum price
–> at/below equi = no effect, above equi = raises price leads to excess supply
- govt usually buys excess supply, minimum wage leads to unemployment
price ceilings: govt sets maximum price –> at/above = no effect, below = lowers price leads to excess demand, e.g. rent control
what is a hidden/black market and why does it emerge (also why do govts impose price ceilings
hidden: sellers buy all quantity at legal price and secretly sell at higher price
–> govt put in price ceilings to 1. restrict production to allocate resources 2. keep specific prices down 3. satisfy notions of equality
- hidden market means ceiling didnt work
explain the impacts of rent controls
lead to shortage of apartments –> short run (inelastic supply) because of quantity demanded exceeding supply, long run (elastic supply) because suppliers switch to other investments & stop maintaining buildings
–> alternative allocation schemes (renting based on gender, race etc) and black markets emerge
–> existing tenants win, landlords lose, prospective tenants lose
describe rent control trends in ontario
1975 - increase rent only when costs increase
1990s - rental shortage, govt loosens, exclude some units, permit increase when tenants vacate
2017 - ontario expands rent control despite opposition
2018 - change in govt, now newly built units are exempt
–> govt could solve issue by subsidizing or building rent controlled apartments directly (at taxpayers expense)
what is market efficiency
used to determine if economic policies make entire society better off
how do we view supply and demand in market efficiency concepts
demand as a value –> any point on demand curve represents how much customers value it depending on how much theyll pay for it
e.g. 400 pizza for 5$ but only 20 pizza for 10$
supply as a cost –> any point on supply curve represents the lowest price a supplier will sell that good for
e.g. will accept 5$ for the 20th pizza but only accept 7$ for the 100th pizza because of increasing prod costs
what is economic surplus and where do you find it (& other surpluses)
economic surplus: net value society receives from prod & consum of said good at said price –> area below the demand curve and above the supply
consumer surplus: below demand curve above equi price (how much consumers r willing to pay - how much they acc paid)
producer surplus: above supply curve below equi price
–> equi price = maximum surplus
what do price floors, ceilings, and quotas do to surpluses
if they are binding, floors & ceilings reduce quantity exchanged and lead to deadweight losses (area of econ surplus lost) –> makes markets inefficient
quotas lead to reduced output, and the same market inefficiency (good for the producers whose goods are inelastic like dairy farmers)
–> taxes do the same thing
how do you calculate surplus
if its triangular shaped –> area of a triangle = (b)(h) / 2
trapezoid = 1/2 (b1 + b2) (h)
what is utility
satisfaction consumer derives from a good/service
total utility: total satisfaction
marginal utility: satisfaction from one additional unit
measured in utils
what is diminishing marginal utility
over time as total utility increases, marginal utility decreases
how do you maximize utility (how to calculate it)
consume X & Y until marginal utility per $ spent on X is equal to marginal utility per $ spent on Y
MUx/Px = MUy/Py
also MUx/MUy = Px/Py
how do you maximize utility if a products price rises
if X price rises then –> MUx/MUy < Px/Py
because of diminishing marginal utility, as a consumer buys less of a product the utility rises
–> rise in price of product causes consumer to reduce quantity demanded of that product
so consume less X if price rises to restore utility maximization
how do you find the market demand curve
add up the quantity demanded by all individuals in the market
what is the substitution effect
2 things happen when price changes –> change in relative price & change in consumer income
substitution effect: when price falls, quantity demanded increases, when a products price rises, quantity demanded decreases
what is the income effect
consumers purchase more of a good when price drops (as long as its normal not inferior) because of their increased income due to price drop
how do income & substitution effects work on the demand curve
when the good is normal they work in the same direction, pushing the demand curve to negative slope, as price goes down demand goes up
–> when goods are inferior usually the demand is negative even if the income effect is working against the substitution effect
—-> when income effect > substitution effect for an inferior good, demand curve becomes positive
what are giffen goods & conspicuous consumption goods
giffen: inferior goods with positive demand curve b/c they take up large proportion of household income and have larger income effect e.g. bread
conspicuous: bought by wealthy because of price & status, price goes down wealthy wont buy (usually someone will tho so this positive slope is rare) e.g. hermes bag
what is the paradox of value
absolute value of water is higher than diamonds, but water is cheaper
–> water has low price, low marginal value, and high total value (also large consumer surplus)
–> diamonds have high price, high marginal value, and low total value (also low consumer surplus)
what are the 6 ways firms are organized
- single proprietorship: one owner responsible for all aspects e.g. landlord
- ordinary partnership: 2 or more partners e.g. small start up
- limited partnership: general partners responsible for debt & running firm, limited partners only invest e.g. law firm
- corporation: owners personally not liable for debt (board of directors are), shares traded = public, not traded = private
- state owned corporation: owned by govt, ran by board of directors, similar to corp e.g. crown corporations
- non profit organizations: goal to provide goods/services, not excessive individual profit
what is financial capital & how can firms get it
money raised by firm, not real capital (physical assets), firms can issue equities (stocks) from investors promising dividends (dont have to be repaid
or they can get bonds (loans) from bank/non-bank lenders which have to be repaid in a term by the redemption date
what is the production function (what do economists assume abt firms as well)
Q = f (K,L) max output with combo of inputs (flow concept)
–> assume firms are profit maximizing and single decision making units
what are profits/costs and the different types
profit: revenue - cost of production
explicit costs: anything you need to purchase (including repaid loans & depreciation of goods)
implicit costs: opportunity cost of firm
accounting profit: revenue - explicit costs
economic profit: revenue - explicit costs (labor, materials etc) + implicit costs (OP of owners time & capital)
what are the time horizons
short-run: period where some inputs (called fixed factors, usually capital) cannot be changed
long-run: all factors of production are variable except technology
very long-run: all factors variable including technology
what is TP & AP
TP = total product produced in given time
AP = TP / number of variable factor’s units used to produce product (usually Labor)
what is MP & law of diminishing returns
marginal productivity: change in TP / change in L (variable factor)
law of diminishing returns: marginal productivity increases, then decreases (mound shaped curve) –> because fixed factors cant keep up in short run when variable factors increase beyond a point
how do AP & TP curves change shape
AP curve will increase so long as marginal productivity curve is above it
–> MP curve intersects AP curve at AP’s maximum point
TP curve will increase first at increasing rate then increase at decreasing rate
how do you find total cost & average total, fixed & variable costs
TC = TFC + TVC
ATC = TC / Q
–> ATC also found by AFC + AVC
AFC = TFC / Q
AVC = TVC / Q
what is marginal cost and how do you calculate it
change in TC / change in Q
change in total cost with one additional unit of output
–> always marginal variable costs cuz fixed cost doesnt change with output
how do TC, TVC, and TFC curves change with increasing output
TC & TVC increase first at increasing rate then at decreasing rate (due to MP)
TFC stays horizontal the same
TC is above TVC but the same shape
how do ATC, AVC, AFC, and MC curves change with increasing output
ATC & AVC decrease as output increases then increase again –> U shaped
AFC decrease continually as output increases –> spreading overhead –> why ATC & AVC dont have same exact shape
MC decreases then increases again (U shape) intersecting ATC & AVC at their minimum points
–> when MC is lowest, MP is highest
what is capacity
highest level of productivity before costs increase –> minimum of AVC & maximum of AP
less than capacity is excess capacity, more than capacity is over capacity
–> some goods like electronic goods (e.g. rental movie) have no additional cost to more sales so MC = AVC
changes in factor prices
changes in variable factor price e.g. wages rise leads to entire ATC & MC curves shifting upwards
what is technical efficiency in terms of long run productivity
technical efficiency: occurs when given number of inputs are combined to maximize output level
–> firm must choose lowest cost technical efficiency combo of inputs
what is needed for cost minimization
MPk/Pk = MPL/PL also MPk/MPL = Pk/PL
–> if MPk/Pk < MPL/PL –> substitute k for L for lower costs –> use more (relatively) of whichever factor has larger ratio
what is the long run average cost curve
LRAC = boundary between costs that are unattainable (below curve) and attainable (above curve) using given technology and factor prices
–> only one unlike SRATC
U shaped, minimum efficiency scale –> point of lowest cost for highest output level (first point of lowest cost)
costs decrease until that point (increasing returns, economies of scale), costs are constant at that point (constant returns), costs increase past that point (decreasing returns, diseconomies of scale)
what is the SRATC and its relationship to the LRAC
short run avg total cost curve –> shows the lowest cost of producing an output level when one or more factors are fixed
–> multiple of them
each SRATC is tangent (touches) a LRAC at the level of output that is optimal for the fixed factor (even if its not lowest SRATC point)
what are short run and long run marginal cost curves
SMC < LMC increase output level –> SMC = LMC, increase output level more and SMC > LMC
what is the very long run and how is technological change measured
very long run all factors, even tech are variable
tech change is measured through productivity –> output per level of some input e.g. output per hour of work/worker
what are the aspects of tech change and how does it come about
- new techniques (process innovation)
- improved inputs (reduce firms costs & downward LRAC shift)
- new products (increase living standards)
endogenous because firms innovate in search of profit –> increase in input cost means firms can innovate or substitute away, innovate is unpredictable so need good returns
