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Principles of Economics > Midterm > Flashcards

Midterm Flashcards

1
Q

10 principles of economics

A
  1. people face tradeoffs (e.g. between efficiency and equality)
  2. cost is what is given up to recieve something
  3. rational people think at the margin
  4. people respond to incentives
  5. trade can make everyone better off (allows specialization and greater variety of goods)
  6. markets usually good way to organise economy
  7. country’s standard of living depends on ability to produce goods/services
  8. prices rise when government prints too much money
  9. SR trade off between inflation and unemployment (Philips’ curve)
  10. governments can improve market outcomes
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2
Q

economics

A

study of

  • how society manages scarce resources
  • how people make decisions
  • how people interact with each other
  • forces/trends that affect economy as a whole
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3
Q

efficiency

A

property of society getting the most it can from resources

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4
Q

equality

A

property of distributing economic prosperity among members of society

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5
Q

opportunity cost

A

whatever must be given up in order to obtain an item

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6
Q

market economy

A

economy that allocates resources through decentralised decisions of firms and households based on price and self-interest

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7
Q

market failure

A

situation in which market on its own fails to produce efficient allocation of resources

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8
Q

externality

A

impact of someone’s actions on well-being of bystander

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9
Q

market power

A

ability of single economic actor to have substantial influence on market prices

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10
Q

productivity

A

quantity of g/s produced from each unit of labor input

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11
Q

inflation

A

increase in overall price levels in an economy

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12
Q

macroeconomics

A

study of economy-wide phenomena (e.g. inflation, unemployment)

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13
Q

microeconomics

A

study of how individual households/firms make decisions and how they interact in markets

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14
Q

postive statements

A

claims that attempt to describe world as it is

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15
Q

normative statements

A

claims that attempt to prescribe how the world should be

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16
Q

circular flow model

A

photo

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17
Q

law of demand

A

decrease in price increases quantity demanded

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18
Q

normal good

A

good for which, ceteris paribus, an increase in income leads to an increase in demand

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19
Q

inferior good

A

good for which, ceteris paribus, an increase in income leads to a decrease in demand

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20
Q

substitutes

A

2 goods for which an increase in the price of one leads to an increase in the demand for another

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21
Q

complements

A

2 goods for which an increase in the price of one good leads to a decrease in demand for the other

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22
Q

law of supply

A

increase in price increases quantity supplied

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23
Q

non price determinants of demand and supply

A

demand

  • taste
  • expectations
  • number of buyers

supply

  • input prices (F of P)
  • technology
  • expectations
  • number of sellers
24
Q

equilibrium

A

situation in which the market price has reached level at which Qs equals Qd

25
Q

graph showing surplus, shortage, equilibrium

A
26
Q

PED

A

measure of how much Qd of a good responds to change in price of that good

27
Q

PED equation

A

((Qn-Qo)Po)/((Pn-Po)Qo)

28
Q

determinants of PED

A
  • availability of close substitutes (without close stubstitute demand less elastic)
  • necessities (inelastic) vs. luxuries (elastic)
  • SR (inelastic) vs. LR (more elastic)
29
Q

elastic vs. inelastic PED

A
  • |PED| > 1 elastic
  • |PED| < 1 inelastic
30
Q

perfectly inelastic demand

A

|PED| = 0 vertical demand curve

31
Q

unit elastic demand

A

|PED| = 1

32
Q

infinitely elastic demand

A

|PED| = infinity horizontal demand curve

33
Q

PES equation

A

((Qn-Qo)Po)/((Pn-Po)Qo)

34
Q

perfectly inelastic supply

A

PES = 0 vertical supply curve

35
Q

unit elastic supply

A

PES = 1

36
Q

infinitely elastic supply

A

PES = infinity horizontal supply curve

37
Q

elastic vs. inelastic PES

A
  • PES > 1 elastic
  • PES < 1 inelastic
38
Q

price ceiling

A

legal maximum on price at which a good can be sold

39
Q

price ceiling graph

A
40
Q

price ceiling example

A
  • both demand and supply inelastic
  • in LR, demand and supply increasingly elastic
  • D-side: Qd for apartments increases
  • S-side: no incentive to build new housing and don’t maintain old houses
  • ration housing, lower quality housing
41
Q

price floor

A

legal minimum on price at which good can be sold

42
Q

price floor graph

A
43
Q

price floor example

A

minimum wage –> labor surplus

44
Q

tax levied on sellers graph

A
45
Q

tax levied on buyers graph

A
46
Q

tax burden: elastic supply, inelastic demand

A

greater burden on consumers

47
Q

tax burden: elastic supply, elastic demand

A

consumers and producers share tax

48
Q

tax burden: inelastic supply, elastic demand

A

greater burden on producers

49
Q

willingness to pay

A

maximum amount that a buyer will pay for a good

50
Q

consumer surplus

A

difference between amount a buyer is willing to pay for a good and amount actually paid

51
Q

consumer surplus graph

A
52
Q

producer surplus

A

area below price and above supply curve

53
Q

total surplus

A
  • value to buyers - cost to sellers
  • consumers + producer surplus
54
Q

why does taxation lead to DWL?

A

prevent buyers/sellers from realising some gains of trade

55
Q

determinants of DWL

A
  • inelastic supply/demand –> increased DWL
  • elastic supply/demand –> decreased DWL

Principles of Economics (3 decks)

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