Quiz 1 Flashcards
What is economics about?
Scarcity of resources
What do economists do?
Make assumptions
Fundamental assumption
Individuals optimize
Microeconomics
Individual consumers and businesses; what and how to produce? for whom?
Macroeconomics
National economy
Positive statements
describes the way things are and can be tested
Normative statements
Describes the way things should be
Efficiency
How society gets the most from its resources (size of the pie)
Equity
How the benefits are split among society (size of each slice)
Absolute advantage
The ability to produce every (both) goods more efficiently
Opportunity cost
What must be given up to obtain another good
Comparative advantage
The ability to produce a good at a lower opportunity cost than another producer. You cannot have a comparative advantage in all goods.
Market
A group of buyers and sellers of a particular good or service
Demand shift
increase: right shift
decrease: left shift
Supply shift
increase: right shift
decrease: left shift
Substitute good
An increase in the price of one increases the demand for the other
Complement good
An increase in the price of one decreases the demand for the other
Inelastic
Steeper supply or demand slope
Elastic
Flatter supply or demand slope
On whom does the tax burden fall?
The less elastic side
Welfare economics
The study of how the allocation of resources affects economic well-being
Pareto optimality
Conduct trade with only positive effects
Consumer surplus
Willingness to pay - price (area above cost and below demand)
Producer surplus
Willingness to sell - cost (area below cost and above supply)
Where is total surplus maximized?
At market equilibrium
In order for Adam Smith’s Invisible Hand theory to work, what must be true?
Perfectly competitive market, with no externalities, all agents must have all the information
What causes market failure?
Monopolies, externalities, information imbalance
How does the supply curve change if the taxes are levied on the sellers?
The supply curve shifts up
How does the demand curve change if the taxes are levied on the buyers?
The demand curve shifts downward
How does the tax burden get distributed?
The tax burden is distributed to both buyers and sellers no matter who owes the government the money
Export vs import country
If the world price is higher than the domestic price, the country is an exporter. Otherwise, they are an importer
Export quantity
Domestic supply - domestic demand
Import quantity
Domestic demand - domestic supply
Tariff
Tax on imported goods produced abroad and sold domestically
Who opposes free trade?
Domestic producers. They want less money to go to international producers.
Reasons to regulate trade
Protect domestic jobs, safety from over-reliance, nurturing of new industries, safety from unfair competition, and bargaining advantage
