Principles of microeconomics Flashcards
what is the economic problem?
to match the limited resources to unlimited wants and needs
what is the economy?
all the production and exchange activities that take place every day
what is economic activity?
how much buying and selling goes on in the economy over a period of time
what does economics study?
the interactions between households and firms in relation to this activity
what is an economic system?
the way in which resources are organised and allocated to provide for the needs of an economy’s citizens
why is the management of society’s resources important?
because resources are ‘scarce’
what does scarcity mean for society?
that it has limited resources and therefore cannot produce all the goods and services people wish to have
what is microeconomics?
the study of how households and firms make decisions and how they interact in markets
what is macroeconomics?
the study of economy-wide phenomena, including inflation, unemployment and economic growth
what does efficiency mean for society?
society gets the most that it can from its scarce resources
what does equity mean for society?
the benefits of those resources are distributed fairly among the members of society
what is the opportunity cost of an item?
what you give up to obtain that item
what are marginal changes?
small, incremental adjustments to an existing plan of action
how do people make decisions?
by comparing costs and benefits at the margin
what does rational mean?
people make consistent choices between alternatives
what is a market economy?
an economy that allocates resources through the decentralised decisions of many firms and households as they interact in markets for goods and services
why does market failure occur?
when the market fails to allocate resources efficiently
when the market fails what can government do?
intervene to promote efficiency and equity
what is externality?
the impact of one person or firm’s actions on the well-being of a bystander
what is market power?
the ability of a single person or firm to unduly influence market prices
what do economists make to make the world easier to understand?
assumptions
what is the art in scientific thinking?
deciding which assumptions to make
what is an endogenous variable?
a variable whose value is determined within the model
what is an exogenous variable?
a variable whose value is
determined outside the model.
what are positive statements?
statements that attempt to describe the world as it is
what are normative statements?
statements about how the world
should be
what are the forces that make economies work?
supply and demand
what does supply and demand determine?
prices in a market economy and how prices, in turn,, allocate the economy’s scarce resources
what is the model of the market based on supply and demand on?
a series of assumptions
what do the terms supply and demand refer to?
the behaviour of people as they interact with one another in markets
what is a market?
a group of buyers and sellers of a particular good or services
what is a competitive market?
a market in which there are many buyers and sellers
what is the quantity demanded?
the amount of a good that buyers are willing and able to purchase
what is the law of demand?
the quantity demanded of a good falls when the price of the good rises
what is the demand schedule?
a table that shows the relationship between the price of the good and the quantity demanded
what is the demand curve?
a graph of the relationship between the price of a good and the quantity
what is meant by ceteris paribus?
other factors affecting demand are held constant so that we can analyze the effect of a change in price on demand
what are subsitute goods?
two goods for which an increase in the price of one good leads to an increase in the demand for the other
what are complement goods?
two goods for which an increase in the price of one good leads to a decrease in the demand for the other
what is the quantity supplied?
the amount of a good that sellers are willing and able to sell
what is the law of supply?
the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
what is the supply schedule?
a table that shows the relationship between the price of the good and the quantity supplied
what is the supply curve?
the graph of the relationship between the price of a good and the quantity supplied
what does the supply curve show?
how much producers offer for
sale at any given price
what is the equilibrium price?
the price that balances quantity supplied and quantity demanded
what is the equilibrium quantity?
the quantity supplied and the quantity demanded at the equilibrium price
where is the equilibrium price on the graph?
the price at which the supply and demand curves intersect
where is the equilibrium quantity on the graph?
at which the supply and demand curves intersect
what is the 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
what is a shift in the supply curve called?
a change in supply
what is a movement along a fixed supply curve called?
a change in quantity supplied
what is a shift in the demand curve called?
a change in demand
what is a movement along a fixed demand curve called?
a change in quantity demanded
what is the term elasticity used to describe?
the way one thing changes in a given environment in response to another variable that has a changed value
what is elasticity the measure of?
how much buyers and sellers respond to changes in market conditions
what does elasticity allow us to do?
analyze supply and demand with greater precision
what is the price elasticity of demand a measure of?
how much the quantity demanded of a good responds to a change in the price of that good
what is the price elasticity of demand the percentage of?
change in quantity demanded given a percentage change in the price
what does price elasticity of demand describe?
how changes in the price of goods and the demand for those same goods are related
what is total revenue?
the amount paid by buyers and received by sellers of a good
what does income elasticity of demand measure?
how much the quantity demanded of a good responds to a. change in consumers’ income
how is income elasticity of demand computed?
the percentage change in the quantity demanded divided by the percentage change in income
what does the cross-price elasticity of demand measure?
how much the quantity demanded of one good responds to a change in the price of another good
how is the cross-price elasticity computed?
the percentage change in quantity demanded of the first good, divided by the percentage change in the price of the second good
what is the price elasticity of supply a measure of?
how much the quantity supplied of a good responds to a change in the price of that good
how do you compute the price elasticity of supply?
the percentage change in the quantity supplied divided by the percentage change in price
what is market equilibrium?
when the quantity demanded is equal to the quantity supplied at the market price
how can whether the market allocation is desirable or not be addressed?
by welfare economics
what is welfare economics?
the study of how the allocation of resources affects economic well-being
what is well-being?
the happiness or satisfaction with life as reported by individuals
what is subject well-being?
the way in which people evaluate their own happiness
what is objective well-being?
physical factors that widely account for our basic needs
what is allocative efficiency?
a resource allocation where the value of the output by sellers matches the value placed on that output by buyers
what does the equilibrium in a market maximise?
the total welfare of buyers and sellers
what is willingness to pay?
the maximum amount that a buyer will pay for a good
what is consumer surplus?
the buyer’s willingness to pay for a good minus the amount the buyer actually pays for it
what does the market demand curve depict?
the various quantities that buyers would be willing and able to purchase at different prices
what does consumer surplus measure?
the benefit that buyers receive from a good as the buyers themselves perceive it
what is the bargaining process?
an agreed outcome between two interested and competing economic agents
what is producer surplus?
the amount a seller is paid for a good minus the seller’s cost
what is the cost?
the value of everything a seller must give up to produce a good
what is the general equilibrium?
the notion that the decisions and choices of economic agents are coordinated across markets
how is consumer surplus calculated?
value to buyers less the amount paid by buyers
how is the producer surplus calculated?
amount received by sellers less the cost to sellers
how is the total surplus calculated?
consumer surplus + producer surplus
when does pareto efficiency occur?
if it is not possible to reallocate resources in such a way as to make one person better off without making anyone else worse off
when does pareto improvement occur?
when an action makes at least one economic agent better off without harming another economic agent
what is the social welfare function?
the collective utility of society which is reflected by consumer and producer surplus
what is utility?
the satisfaction derived from the consumption of a product
what does the amount buyers are willing or prepared to pay for a good tell us?
something about the value they place on it
what is the budget constraint?
the limit on the consumption “bundles” that a consumer can afford
what is an indifference curve?
a curve that shows consumption bundles that give the consumer the same level of satisfaction
what is the marginal rate of substitution?
-the rate at which a consumer is willing to trade one good for another
-the amount of one good that a consumer requires as compensation to give up one unit of the other good
what is total utility?
the satisfaction that consumers gain from consuming a product
what is the marginal utility of consumption?
the increase in utility that the consumer gets from an additional unit of that good
what is diminishing marginal utility?
the tendency for the additional satisfaction from consuming extra units of a good to fall
what is the marginal rate of substitution equal to?
the slope of the indifference curve at any point
how is the marginal rate of substitution calculated?
the marginal utility of one good divided by the marginal utility of the other good
what is the income effect?
the change in consumption that results
when a price change moves the consumer to a higher or lower indifference curve.
what is the substitution effect?
the change in consumption that
results when a price change moves the consumer along an indifference curve to a point with a different marginal rate of substitution.
what can a consumer’s demand curve be viewed as?
a summary of the optimal decisions that arise from his or her budget constraint and indifference curves.
what is normal goods?
a situation where a consumer wants more of a good when their income rises
what is bounded rationality?
the idea that humans make decisions under the constraints of limited, and sometimes unreliable, information
what are explicit costs?
input costs that require a direct outlay of money by the firm
what are implicit costs?
input costs that do not require an outlay of money by the firm
what is the production function?
the relationship between quantity of inputs used to make a good and the quantity of output of that good
what is the marginal product of any input in production process?
the increase in output that arises from an additional unit of that input
what is the diminishing marginal product?
the property whereby the marginal product of an input declines as the quantity of the input increases
what are fixed costs?
costs that do not vary with the quantity of output produced
what are variable costs?
costs that do vary with the quantity of output produced
what are marginal costs?
measures the increase in total
cost that arises from an extra unit of production
what is meant by the term ‘constant returns to scale’?
the property whereby long-run average total cost stays the same as the quantity of output change
what is meant by the term ‘diseconomies of scale’?
the property whereby long-run average total cost rises as the quantity of output increases
what are external economies of scale?
the advantages of large-scale production that arise through the growth and concentration of the industry
why do diseconomies arise?
because of coordination and communication problems that are inherent in any large organisation
what is X-efficiency?
the failure of a firm to operate at maximum efficiency due to a lack of competitive pressure and reduced incentives to control cost
what does average revenue tell us?
how much revenue a firm receives for the typical unit sold
what is the marginal revenue?
the change in total revenue from an additional unit sold
what is normal profit?
the amount required to keep the factors of production in their current use
what is abnormal profit?
the profit over and above normal profit
