Midterm: Chapters 1, 2, 32, 3, 4, 5, 6, 6a, 7 Flashcards
What is microeconomics?
The study of how households and firms make decisions to interact in markets.
What is Economics?
The study of how society manages its scarce resources to satisfy unlimited wants.
What is opportunity cost?
The next best alternative given up in order to obtain a certain good.
What is absolute advantage?
Who can produce more of a good using the same amount of resources and time.
Can you have an absolute advantage in both goods?
Yes
What is comparative advantage?
Who can produce the good with the lowest opportunity cost.
Can you have a comparative advantage in both goods?
No
What is a comparative disadvantage?
When countries import goods that would cost them a lot to make
On a production possibilities frontier/boundary, how does opportunity change on a straight line?
There is a constant opportunity cost
On a production possibilities frontier/boundary, how does opportunity change on a curved line?
The opportunity cost becomes greater as you move from a point on the y-axis towards the x-axis
An independent variable is also called what?
An exogenous variable
What is an exogenous variable?
A variable determined outside the theory
A dependent variable is also called what?
A endogenous variable
What is an endogenous variable?
A variable explained within a theory
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?
50 km of highway
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?
Rancher has an absolute advantage in both goods and comparative advantage in meat.
If two countries participate in trade and specialization, what is the best terms of trade?
The least amount a country can give of a product in trade with another, the better.
What is the law of demand?
The quantity demanded of a good will decrease when the price of a good increases
What is market demand?
The sum of all individual demands at each price of the good
What causes a change in demand? and how does the demand curve change
Caused by any factor besides price and represented by a shift in demand curve.
What causes a change in quantity demanded? How is change in quantity demanded represented on demand curve?
Caused by an increase in price and shown by movement along the same demand curve.
What is the law of supply?
The quantity supplied of a good will increase when price of a good increases
What is market supply?
The sum of all individual supply levels at each price of the good
What causes a change in supply and how is this represented on the supply curve?
Any other factors besides price and represented by shifts of the supply curve
What causes a change in quantity supplied and how is this represented on a supply curve?
Caused by a change in price and represented by movement along the same supply curve
What is market equilibrium?
When Quantity demand = Quantity Supply
What does a rightward shift in supply curve mean?
An increase in the quantity supplied at each price
What happens when there is an excess supply (surplus) from a change in equilibrium?
This happens what QS > QD
What happens when there is excess demand (shortage) from a change in equilibrium?
When QD > QS
What is price elasticity of demand definition?
A measure of how much QD of a good responds to a change in P of that good
What is price elasticity of demand equation?
n= %change in QD (QDnew-QDoriginal ÷ avg QD) ÷ % change in P (Pnew-Poriginal ÷ avg P)
At which number is something considered elastic and inelastic?
Elastic is from 1-infinity
Inelastic is 0-1
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?
%△QD= -.22 %△P= .2857 n= -.22÷.2857 = .77
What is a perfectly inelastic demand?
n=0, so %△QD=0 which results in a vertical demand line
What is an inelastic demand? (Not very responsive)
0 < n < 1 so a change in price will cause a small change in QD which results in an almost vertical demand line
What is a perfectly elastic demand?
n= infinity and there is no change in price regardless of a change in QD the demand line is horizontal
What is an elastic demand? (largely responsive)
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.
What is a unitary elastic demand?
n=1 results in a curved demand
How do substitutes effect the price elasticity of demand?
The more substitutes that exist for a good, the more demand is elastic.
What is the difference between a necessity and a luxury regarding elasticity of demand?
Necessity= less elastic demand Luxury= more elastic demand
How is elasticity of demand on a straight line demand curve?
It is more elastic as n increases.
What is the equation for total revenue?
TR= P x Quantity sold
What happens to total revenue if price drops?
Total revenue decreases
What is the definition of income elasticity of demand?
A measure of the responsiveness of quantity demanded to a change in income.
What is the income elasticity of demand equation?
nY= %△QD ÷ %△Income
At what number is a good a necessity or a luxury or inferior?
Necessity- 0-1
Inferior- 0 to negative infinity
Luxury- 1- infinity
How does QD change with an increase in income for a necessity good? (income elasticity)
QD does not go up much
How does QD change with an increase in income for a luxury good? (income elasticity)
A substantial increase in QD
What is cross elasticity of demand?
A measure of the responsiveness of quantity of one commodity demanded to change in price of another commodity
Cross elasticity of demand equation
nXY= %△QDx ÷ %△Py
When is something considered a compliment or substitute? (cross elasticity of demand)
Compliment= when nXY is between 0 and negative infinity Substitute= when nXY is between 0 and infinity
What is the price elasticity of supply equation?
ns= %△QS ÷ %△P
What is a perfectly inelastic supply?
ns=0 and is not responsive to a change in price. The graph is a vertical line
What is a perfectly elastic supply?
ns= infinity. the graph is horizontal
What is an inelastic supply?
0 < ns < 1. The graph is curved by goes through middle where perfectly elastic and inelastic supplies would be
What is a unitary elastic supply?
ns=1 the graph is a straight line
What is an elastic supply?
1 < ns < infinity. The graph is not super curved, almost a line but not
What is a price ceiling?
A legal maximum on the price at which a good can be sold
Is a price ceiling set higher than equilibrium price impactful or not?
No impact/Non-binding
Is a price ceiling set below than equilibrium price impactful or not?
Has an impact and is binding
Does a price ceiling set below equilibrium shortage or surplus?
Shortage/excess demand
What is a price floor?
A legal minimum on the price at which a good can be sold
Is a price floor set higher than equilibrium price impactful or not?
Impactful and binding
Is a price floor set lower than equilibrium price impactful or not?
No impact and non-binding
Does a price floor set above equilibrium have surplus or shortage?
Surplus/ Excess supply
Where is consumer surplus on a price ceiling/floor?
Above the price and below demand line. Also it is to the left of the quantity.
Where is producer surplus on a price floor/ceiling?q
Below price and above supply line. Also it is to the left of the quantity.
Where is Dead Weight Loss (D.W.L.)?
Difference from where previous consumer and producer surplus was and now is no longer with new quantity.
What is a shortage?
Government controls the market price below the equilibrium
What is a surplus?
Government controls the market price above equilibrium
What is marginal utility?
Additional satisfaction resulting from one more unit of that product (underlies theory of demand)
What is the law of diminishing returns?
The utility that any consumer derives from successive units of a particular product consumption over time diminishes as total consumption increases
What is the substitution effect?
Increases the QD of a product whose price has fallen and decreases the QD of a product who price has risen
What is consumer surplus?
Difference between the maximum amount a consumer is willing to pay for that unit and the price the consumer actually pays
What is willingness to pay?
The maximum that a consumer will pay for a good
Equation for total net gain for consumer surplus?
Willingness to pay-Price
What happens to consumer surplus if price decreases?
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
What is producer surplus?
As quantity increases, the cost of production does as well
Where is total revenue on producer surplus graph?
Underneath price and surplus but to the left of quantity
What happens with an increase in price and producer surplus?
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
Equation for total net gain and producer surplus
Price-Cost of production
Are indifference curves the same for everyone?
No
What are two characteristics of indifference curves?
- Any point above an indifference curve is preferred to a point on the curve
- Any point on a curve is preferred to any point below it
What is the marginal rate of substitution?
Amount of one product that a consumer is willing to give up for one more of another product
What is the diminishing marginal rate of substitution?
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.
What is a budget line/ Budget Constraint?
Shows all the combinations of product that are available to the consumer so his income and the prices of the goods he purchases
What is optimal consumption?
Consumers want to maximize utility, subject to budget constraint so it is when an indifference curve touches the budget constraint
How does optimal consumption change when there is a change in income? 2 ways
There is either an increased consumption in both goods or an increase in one good and decrease in another
How does optimal consumption change when there’s a change in one good?
There is less consumption of one good
How does optimal consumption change when there is a change in price of both goods?
There will either a decrease in both goods
What is the main goal for most firms?
Profit maximization
Calculating profit equation?
Total revenue-total cost
What is accounting cost?
Focuses on explicit costs and ignore implicit costs
What is an economic cost?
Focuses on explicit and implicit costs
What is an explicit cost?
Obvious costs
ex. wages, cost of materials
What is an implicit cost?
Non-obvious costs
ex. time cost doing a job yourself as an owner
Is economic or accounting profit smaller?
Economic profit is always smaller
Marginal product of labor (MPL) equation
△Output ÷ △Labor
Average product of labor (APL) equation
Total output (Q) ÷ Number of Workers (L)
When is APL at its max?
When APL equals MPL and MPL is falling
Total cost equation?
Variable cost + Fixed cost
What is marginal cost?
An increase in cost as a result of producing an additional unit of output (not labor)
Marginal cost equation?
Change in total cost ÷ change in total output
Average total cost equation?
Total cost ÷ quantity of output
Average fixed cost equation?
Fixed cost ÷ Quantity
Average Variable cost equation?
Variable cost ÷ quantity
Total variable cost equation?
Labor x Wage of labor
