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ECO 102 > Midterm: Chapters 1, 2, 32, 3, 4, 5, 6, 6a, 7 > Flashcards

Midterm: Chapters 1, 2, 32, 3, 4, 5, 6, 6a, 7 Flashcards

1
Q

What is microeconomics?

A

The study of how households and firms make decisions to interact in markets.

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2
Q

What is Economics?

A

The study of how society manages its scarce resources to satisfy unlimited wants.

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3
Q

What is opportunity cost?

A

The next best alternative given up in order to obtain a certain good.

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4
Q

What is absolute advantage?

A

Who can produce more of a good using the same amount of resources and time.

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5
Q

Can you have an absolute advantage in both goods?

A

Yes

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6
Q

What is comparative advantage?

A

Who can produce the good with the lowest opportunity cost.

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7
Q

Can you have a comparative advantage in both goods?

A

No

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8
Q

What is a comparative disadvantage?

A

When countries import goods that would cost them a lot to make

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9
Q

On a production possibilities frontier/boundary, how does opportunity change on a straight line?

A

There is a constant opportunity cost

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10
Q

On a production possibilities frontier/boundary, how does opportunity change on a curved line?

A

The opportunity cost becomes greater as you move from a point on the y-axis towards the x-axis

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11
Q

An independent variable is also called what?

A

An exogenous variable

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12
Q

What is an exogenous variable?

A

A variable determined outside the theory

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13
Q

A dependent variable is also called what?

A

A endogenous variable

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14
Q

What is an endogenous variable?

A

A variable explained within a theory

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15
Q

Opportunity Cost example: With a budget of $200 million, a government can purchase 4 helicopters or repair 200km of highway. What is the opportunity cost of 1 helicopter?

A

50 km of highway

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16
Q

If a farmer can produce 8 meat or 8 vegetables, and a rancher 24 meat of 16 vegetables, who has absolute advantage in what and comparative advantage in what?

A

Rancher has an absolute advantage in both goods and comparative advantage in meat.

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17
Q

If two countries participate in trade and specialization, what is the best terms of trade?

A

The least amount a country can give of a product in trade with another, the better.

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18
Q

What is the law of demand?

A

The quantity demanded of a good will decrease when the price of a good increases

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19
Q

What is market demand?

A

The sum of all individual demands at each price of the good

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20
Q

What causes a change in demand? and how does the demand curve change

A

Caused by any factor besides price and represented by a shift in demand curve.

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21
Q

What causes a change in quantity demanded? How is change in quantity demanded represented on demand curve?

A

Caused by an increase in price and shown by movement along the same demand curve.

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22
Q

What is the law of supply?

A

The quantity supplied of a good will increase when price of a good increases

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23
Q

What is market supply?

A

The sum of all individual supply levels at each price of the good

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24
Q

What causes a change in supply and how is this represented on the supply curve?

A

Any other factors besides price and represented by shifts of the supply curve

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25
Q

What causes a change in quantity supplied and how is this represented on a supply curve?

A

Caused by a change in price and represented by movement along the same supply curve

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26
Q

What is market equilibrium?

A

When Quantity demand = Quantity Supply

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27
Q

What does a rightward shift in supply curve mean?

A

An increase in the quantity supplied at each price

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28
Q

What happens when there is an excess supply (surplus) from a change in equilibrium?

A

This happens what QS > QD

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29
Q

What happens when there is excess demand (shortage) from a change in equilibrium?

A

When QD > QS

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30
Q

What is price elasticity of demand definition?

A

A measure of how much QD of a good responds to a change in P of that good

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31
Q

What is price elasticity of demand equation?

A

n= %change in QD (QDnew-QDoriginal ÷ avg QD) ÷ % change in P (Pnew-Poriginal ÷ avg P)

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32
Q

At which number is something considered elastic and inelastic?

A

Elastic is from 1-infinity

Inelastic is 0-1

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33
Q

Price elasticity of demand example: If original price of a good is $15 and QD was 100 and the new price is $20 with a QD of 80, what is the price elasticity of demand?

A 
%△QD= -.22
%△P= .2857
n= -.22÷.2857 = .77
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34
Q

What is a perfectly inelastic demand?

A

n=0, so %△QD=0 which results in a vertical demand line

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35
Q

What is an inelastic demand? (Not very responsive)

A

0 < n < 1 so a change in price will cause a small change in QD which results in an almost vertical demand line

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36
Q

What is a perfectly elastic demand?

A

n= infinity and there is no change in price regardless of a change in QD the demand line is horizontal

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37
Q

What is an elastic demand? (largely responsive)

A

1< n < infinity. A small change in price will induce a large change in QD. The demand line will be in between horizontal and vertical.

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38
Q

What is a unitary elastic demand?

A

n=1 results in a curved demand

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39
Q

How do substitutes effect the price elasticity of demand?

A

The more substitutes that exist for a good, the more demand is elastic.

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40
Q

What is the difference between a necessity and a luxury regarding elasticity of demand?

A 
Necessity= less elastic demand
Luxury= more elastic demand
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41
Q

How is elasticity of demand on a straight line demand curve?

A

It is more elastic as n increases.

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42
Q

What is the equation for total revenue?

A

TR= P x Quantity sold

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43
Q

What happens to total revenue if price drops?

A

Total revenue decreases

44
Q

What is the definition of income elasticity of demand?

A

A measure of the responsiveness of quantity demanded to a change in income.

45
Q

What is the income elasticity of demand equation?

A

nY= %△QD ÷ %△Income

46
Q

At what number is a good a necessity or a luxury or inferior?

A

Necessity- 0-1
Inferior- 0 to negative infinity
Luxury- 1- infinity

47
Q

How does QD change with an increase in income for a necessity good? (income elasticity)

A

QD does not go up much

48
Q

How does QD change with an increase in income for a luxury good? (income elasticity)

A

A substantial increase in QD

49
Q

What is cross elasticity of demand?

A

A measure of the responsiveness of quantity of one commodity demanded to change in price of another commodity

50
Q

Cross elasticity of demand equation

A

nXY= %△QDx ÷ %△Py

51
Q

When is something considered a compliment or substitute? (cross elasticity of demand)

A 
Compliment= when nXY is between 0 and negative infinity
Substitute= when nXY is between 0 and infinity
52
Q

What is the price elasticity of supply equation?

A

ns= %△QS ÷ %△P

53
Q

What is a perfectly inelastic supply?

A

ns=0 and is not responsive to a change in price. The graph is a vertical line

54
Q

What is a perfectly elastic supply?

A

ns= infinity. the graph is horizontal

55
Q

What is an inelastic supply?

A

0 < ns < 1. The graph is curved by goes through middle where perfectly elastic and inelastic supplies would be

56
Q

What is a unitary elastic supply?

A

ns=1 the graph is a straight line

57
Q

What is an elastic supply?

A

1 < ns < infinity. The graph is not super curved, almost a line but not

58
Q

What is a price ceiling?

A

A legal maximum on the price at which a good can be sold

59
Q

Is a price ceiling set higher than equilibrium price impactful or not?

A

No impact/Non-binding

60
Q

Is a price ceiling set below than equilibrium price impactful or not?

A

Has an impact and is binding

61
Q

Does a price ceiling set below equilibrium shortage or surplus?

A

Shortage/excess demand

62
Q

What is a price floor?

A

A legal minimum on the price at which a good can be sold

63
Q

Is a price floor set higher than equilibrium price impactful or not?

A

Impactful and binding

64
Q

Is a price floor set lower than equilibrium price impactful or not?

A

No impact and non-binding

65
Q

Does a price floor set above equilibrium have surplus or shortage?

A

Surplus/ Excess supply

66
Q

Where is consumer surplus on a price ceiling/floor?

A

Above the price and below demand line. Also it is to the left of the quantity.

67
Q

Where is producer surplus on a price floor/ceiling?q

A

Below price and above supply line. Also it is to the left of the quantity.

68
Q

Where is Dead Weight Loss (D.W.L.)?

A

Difference from where previous consumer and producer surplus was and now is no longer with new quantity.

69
Q

What is a shortage?

A

Government controls the market price below the equilibrium

70
Q

What is a surplus?

A

Government controls the market price above equilibrium

71
Q

What is marginal utility?

A

Additional satisfaction resulting from one more unit of that product (underlies theory of demand)

72
Q

What is the law of diminishing returns?

A

The utility that any consumer derives from successive units of a particular product consumption over time diminishes as total consumption increases

73
Q

What is the substitution effect?

A

Increases the QD of a product whose price has fallen and decreases the QD of a product who price has risen

74
Q

What is consumer surplus?

A

Difference between the maximum amount a consumer is willing to pay for that unit and the price the consumer actually pays

75
Q

What is willingness to pay?

A

The maximum that a consumer will pay for a good

76
Q

Equation for total net gain for consumer surplus?

A

Willingness to pay-Price

77
Q

What happens to consumer surplus if price decreases?

A

There is an additional consumer surplus between the two prices and to the left of the quantity as well as to the right of the quantity

78
Q

What is producer surplus?

A

As quantity increases, the cost of production does as well

79
Q

Where is total revenue on producer surplus graph?

A

Underneath price and surplus but to the left of quantity

80
Q

What happens with an increase in price and producer surplus?

A

There is an additional producer surplus between the two prices but to the left of the quantity. Additional producer surplus to the right of quantity

81
Q

Equation for total net gain and producer surplus

A

Price-Cost of production

82
Q

Are indifference curves the same for everyone?

A

No

83
Q

What are two characteristics of indifference curves?

A
  1. Any point above an indifference curve is preferred to a point on the curve
  2. Any point on a curve is preferred to any point below it
84
Q

What is the marginal rate of substitution?

A

Amount of one product that a consumer is willing to give up for one more of another product

85
Q

What is the diminishing marginal rate of substitution?

A

The less of one product and the more of a second product that the consumer has already, the smaller the amount of that the consumer will be willing to give up to get an additional unit of product B.

86
Q

What is a budget line/ Budget Constraint?

A

Shows all the combinations of product that are available to the consumer so his income and the prices of the goods he purchases

87
Q

What is optimal consumption?

A

Consumers want to maximize utility, subject to budget constraint so it is when an indifference curve touches the budget constraint

88
Q

How does optimal consumption change when there is a change in income? 2 ways

A

There is either an increased consumption in both goods or an increase in one good and decrease in another

89
Q

How does optimal consumption change when there’s a change in one good?

A

There is less consumption of one good

90
Q

How does optimal consumption change when there is a change in price of both goods?

A

There will either a decrease in both goods

91
Q

What is the main goal for most firms?

A

Profit maximization

92
Q

Calculating profit equation?

A

Total revenue-total cost

93
Q

What is accounting cost?

A

Focuses on explicit costs and ignore implicit costs

94
Q

What is an economic cost?

A

Focuses on explicit and implicit costs

95
Q

What is an explicit cost?

A

Obvious costs

ex. wages, cost of materials

96
Q

What is an implicit cost?

A

Non-obvious costs

ex. time cost doing a job yourself as an owner

97
Q

Is economic or accounting profit smaller?

A

Economic profit is always smaller

98
Q

Marginal product of labor (MPL) equation

A

△Output ÷ △Labor

99
Q

Average product of labor (APL) equation

A

Total output (Q) ÷ Number of Workers (L)

100
Q

When is APL at its max?

A

When APL equals MPL and MPL is falling

101
Q

Total cost equation?

A

Variable cost + Fixed cost

102
Q

What is marginal cost?

A

An increase in cost as a result of producing an additional unit of output (not labor)

103
Q

Marginal cost equation?

A

Change in total cost ÷ change in total output

104
Q

Average total cost equation?

A

Total cost ÷ quantity of output

105
Q

Average fixed cost equation?

A

Fixed cost ÷ Quantity

106
Q

Average Variable cost equation?

A

Variable cost ÷ quantity

107
Q

Total variable cost equation?

A

Labor x Wage of labor

ECO 102 (2 decks)

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