Principles of Econ Test Flashcards
Why is the PPF curved?
Not all things are created equal
Units are different
What can cause a shift in the PPF curve?
New technology
More factors of production
Could go down with lack of resources too
Fresh air
Free goods that a price cannot be attached
According to Smith, what is the result of competition?
The provision of those goods that society wants, in quantities that society desires, and the prices society is prepared to pay
Why do the butcher, brewer, or the baker provide us with dinner?
Out of self interest
Law of competition
Operate fairly with eachother
How does the market regulate itself?
Competition and self interest
Consequence of the market
self regulating
competition
Law of accumulation
Every financial achievement is an accumulation of hundreds of small efforts and sacrifices
Are supposed to reinvest into society
Traditional economy
Allocation of scarce resources and nearly all other economic activity stems from ritual, habit, or custom
Pros of traditional economy
everyone knows their role
“for whom” is answered
life is stable
Everyone know how to produce things
Cons of traditional economy
Discourages new ideas and new ways of doing things
Command economy
Central authority makes most of the what, how, and for whon decisions
people are expected to follow the rules of their leaders
Strengths of command economy
can change direction/focus quickly
central government can change allocation of resources to meet goals
not affected by inflation
surplus and unemployment are relatively low
Weaknesses of command economy
Does not meet the needs of the individual
Lack of incentitives
No flexibility for day-to-day problems
Mixed economy
People and firms act in their own best interest with some guidance from the government
Mix of private enterprise and the government control
Government works as a protector
Mixed economy strengths
Adjusts to changes over time
freedom for individuals
variety of goods and services
consumers are happy
Mixed economy weaknesses
Rewards are given to the most productive resources
People’s age and health could leave them behind if they cannot work
need competition
Market economy
People and firms act in their own interest to answer essential questions
allows buyers and sellers to come together to exchange goods and services
Weakness of the market economy
Instable
inequal
class struggle
Competitive market
One with many buyers and sellers, each has a negligible effect on price
Perfectly competitive market
All goods exactly the same
Buyers and sellers so numerous that no one person can control the market
Market demand
Sum of all the individual demands
Substitutes
An increase in the price of one causes an increase in demand for the other
Ex: hot dogs and hot dog buns
Complements
an increase in the price of one causes a fall in demand for the other
Ex: if iPods are sold more, less MP3 players are sold
6 Economic goals
Freedom
efficiency (allocation of scarce resources)
equity (what is “fair”)
security (protect consumers, producers from risk)
stability (maintain stable prices)
growth (increasing production of goods)
Equilibrium
refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded
Equilibrium Price
the price that balances quantity supplied and quantity demanded
Equilibrium Quantity
the quantity supplied and the quantity demanded at the equilbrium price
Law of supply and demand
The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
Everything will balance out
Surplus
When price is greater than the equilibrium price
Shortage
When price is lower than equilibirum price
Price ceiling
a legal maximum on the price at which a good can be sold
Price floor
a legal minimum on the price at which a good can be sold
When is price ceiling binding?
When it is set below the equilibrium price
When is price floor binding?
When it is set above the equilibrium price
Who do price ceilings benefit?
Good for buyers and bad for sellers
What does price ceilings create?
Shortages
What does price floors create?
Surpluses
Black market
Underground market
Completely illegal
Gray market
Unauthorized, but not completely illegal
Ex: babysitting
Agricultural price support program is an example of
A price floor
Elasticity
a measure of how much buyers and sellers respond to changes in market conditions
Demand elasticity
indicates the extent to which changes in price cause changes in the quantity demanded
Price elasticity of demand
measure of how much the quantity demanded of a good responds to a change in the price of that good
Price elasticity of demand formula
% change in QD/ %change in price
What makes a good elastic?
Luxury
Specialized market
Available substitutes
Long run time horizon
What makes a good inelastic?
Short run time horizon
Neccessity
General market
Less substitutes available
Inelastic demand
Quantity demanded does not respond strongly to price changes
<1
Elastic demand
Quantity demanded responds strongly to changes in price
> 1
Perfectly inelastic demand
Quantity demanded does not respond to price changes
Vertical line
Perfectly elastic demand
Quantity demanded changes infinitely with any change in price
Horizontal line
Unit elastic
Quantity demanded changes by the same percentage as the price
Total revenue
the amount paid by buyers and recieved by sellers of a good
total revenue formula
TR= P*Q
Q=quantity sold
When does total revenue increase?
With inelastic demand, when an increase in price leads to a no/very small decrease in quantity demanded
When does total revenue decrease?
With elastic demand, an increase in price leads to a decrease in quantity demanded
Necessities: Inelastic or elastic?
Inelastic
Luxuries: Inelastic or elastic?
Elastic
Price elasticity of supply formula
% change in QS/ % change in price
Determinants of the elasticity of supply
Ability of sellers to change the amount of the good they produce
Time period
Ability of sellers to change amount of goods they produce
Beach front land=inelastic supply
Books, card=elastic supply
Time period and supply
Supply is more elastic in the long run
Cross-price elasticity of supply
A measure of how much the quantity demanded of one good responds to a change in the price of another good
