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Economics > Test 1 Terms > Flashcards

Test 1 Terms Flashcards

1
Q

how people make decisions

A

1. People Face Trade-Offs

-to get something we like, we have to give up something we also like

2. The Cost of Something Is What You Give Up to Get It

-making decisions requires comparing the costs and benefits of alternative courses of action

*opportunity cost*- decision makers should be aware of the opportunity costs that accompany each possible action

3. Rational People Think at the Margin

  • rational people systematically and purposefully do the best they can to achieve their objectives, given the available opportunities
    4. People Respond to Incentives
  • incentives play a central role in economics
  • because rational people make decisions comparing costs and benefits, they respond to incentives
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2
Q

how people interact

A

5. Trade Can Make Everyone Better Off

-trade between two countries can make each country better off

6. Markets Are Usually a Good Way to Organize Economic Activity

  • market economy: the decisions of a central planner are replaced by the decisions of millions of firms and households
  • households decide which firms to work for and what to buy with their incomes; these firms and households interact in a market place, where prices and self-interest guide their decisions

7. Governments Can Sometimes Improve Market Outcomes

  • the invisible hand can work its magic only if the gov’t. enforced the rules and maintains the institutions that are key to a market economy
  • market economies need institutions to enforce property rights so that individuals can own and control scarce resources.
  • the invisible hand is powerful, but not omnipotent.
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3
Q

how the economy as a whole works

A

8. A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services

  • almost all variation in living standards is attributable to differences in countries productivity (the amount of goods and services produced by each unit of labor input)
  • in nations where workers can produce a large quantity of goods and services per hour, most people can enjoy a high standard of living- and vice versa

9. Prices Rise When the Government Prints Too Much Money

-when gov’t. creates a large amount of money, the value of the money decreases= inflation

10. Society Faces a Short-Run Trade-off between Inflation and Unemployment

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4
Q

scarcity

A

the limited nature of society’s resources

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5
Q

economics

A

the study of how society manages its scarce resources

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6
Q

efficiency

A

the property of a resource allocation by maximizing the total surplus received by all members of society

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7
Q

equality

A

the property of distributing economic prosperity uniformly among the members of society

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8
Q

opportunity cost

A

whatever must be given up to obtain some item

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9
Q

rational people

A

people who systematically and purposefully do the best they can to achieve their objectives

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10
Q

market economy

A

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

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11
Q

incentive

A

something that induces a person to act

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12
Q

externality

A

the uncompensated impact of one person’s actions on the well-being of a bystander

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13
Q

property rights

A

the ability to an individual to own and exercise control over scarce resources

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14
Q

inflation

A

an increase in the overall level of prices in the economy

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15
Q

business cycle

A

fluctuations in economic activity, such as employment and production

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16
Q

productivity

A

the quantity of goods and services produced from each unit of labor input

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17
Q

macroeconomics

A

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

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18
Q

positive statements

A

claims that attempt to describe the world as it is

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19
Q

the scientific method

A

the dispassionate development and testing of theories about how the world works

-is as applicable to studying the nations economy as it is to studying the earth’s gravity or a species’ evolution

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20
Q

circular flow diagram

A

a visual model that shows how dollars flow through markets among households and firms

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21
Q

productions possible frontier (PPF)

A

a graph that shows the combinations of output that economy can possibly produce given the available factors of production and the available production technology

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22
Q

imports

A

goods and services that are produced abroad and sold domestically

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23
Q

exports

A

goods and services that are produced domestically and sold abroad

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24
Q

market

A

a group of buyers and sellers of a particular good or service

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25
Q

competitive market

A

a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

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26
Q

demand schedule

A

a table that shows the relationship between the price of a good and the quantity demanded

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27
Q

normal good

A

a good for which, other things being equal, an increase in income leads to an increase in demand

ex. Nike, Adidas– as you make more money you will likely move from off brand items to name brands

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28
Q

inferior good

A

a good for which, other things being equal, an increase in income leads to a decrease in demand

ex. off brand items– when you make lower income, you usually buy cheaper items. when your income increases, you decide to move to “better quality” items and they are more expensive

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29
Q

complements

A

two goods for which an increase in the price of one leads to a decrease in the demand for the other

ex. printer and ink cartridges

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30
Q

equillibrium

A

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

-middle point

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31
Q

create demand curve

A

demand curve: the line relating price and quantity demanded

  • graphs the demand schedule
  • illustrates how the quantity demanded of the good changes as the price varies
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32
Q

shift demand curve

A

any change that increases the quantity demanded at every price shifts the demand curve to the right and is called an increase in demand

any change that reduces the quantity demanded at every price shifts the demand curve to the left and is called a decrease in demand

different variables can shift the demand curve

  • income
  • price of related goods
  • tastes
  • expectations
  • number of buyers
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33
Q

create supply curve

A

supply curve: the curve relating price and quantity supplied

“the supply curve slopes upward because, other things being equal, a higher price means a greater quantity supplied”

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34
Q

shift supply curve

A

any change that raises quantity supplied at every price, such as a fall in the price of sugar, shifts the supply curve to the right and is called an increase in supply

any change that reduces the quantity supplied at every price shifts the supply curve to the left and is called a decrease in supply

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35
Q

equilibrium quantity/price

A

the quantity or price at the point of the equilibrium intersection

36
Q

surplus

A

a situation in which quantity supplied is greater than quantity demanded

37
Q

law of demand

A

the claim that, other things being equal, the quantity demanded of a good falls when the price of a good rises

38
Q

law of supply

A

the claim that, other things being equal, the quantity supplied of a good falls when the price of a good rises

39
Q

law of supply and demand

A

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

40
Q

elasticity in general formula

A

Ep= *delta*Q/Q(lineontop) OVER *delta*P/P(lineontop)

(percentage change in some quantity)/ (percentage change in some factor)

41
Q

midpoint method in general

A

LONG look on power point

42
Q

elasticity

A

the measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

43
Q

price elasticity of demand

A

a measure of how much the quantity demanded of a good responds to a change in the price of that good

computed as the percentage change in quantity demanded divided by the percentage change in price

44
Q

income elasticity of demand

A

a measure of how much the quantity demanded of a good responds to a change in consumers’ income

computed as the percentage change in quantity demanded by the percentage change in income

45
Q

cross-price elasticity of demand

A

a measure of how much the quantity demanded of one good responds to a change in the price of another good

computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good

46
Q

price-elasticity of supply

A

a measure of how much the quantity supplied of a good responds to a change in the price of that good

computed as the percentage change in quantity supplied divided by the percentage change in price

47
Q

price ceiling

A

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

48
Q

price floor

A

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

49
Q

consumer surplus

A

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

50
Q

producer surplus

A

the amount a seller is paid for a good minus the sellers cost of providing it

51
Q

cost

A

the value of everything a seller must give up to produce a good

52
Q

deadweight loss

A

the fall in total surplus that results from a market distortion, such as a tax

53
Q

tax incidence

A

the manner in which the burden of a tax is shared among participants in a market

54
Q

welfare economics

A

the study of how the allocation of resources affects economic well-being

55
Q

willingness to pay

A

the maximum amount that a buyer will pay for that good

56
Q

world price

A

the price of a good that prevails in the world market for that good

57
Q

shape of elastic curves

A

an actual curve

demand is considered elastic when the elasticity is greater than 1, and the quantity moves proportionately more than the price

58
Q

shape of inelastic curves

A

look like the letter I

inelastic- when the demand is less than one, which means the quantity moves more proportionately less than the price

59
Q

total revenue

A

the amount paid by buyers and received by sellers of a good computed as he price of he good times the quantity sold

60
Q

price ceiling

A

a legal maximum on a price which a good can be sold

61
Q

effect of binding/nonbinding price ceiling

A

when the gov’t. imposes a binding price ceiling on a competitive market, a shortage of good arises, and sellers must ration the scarce goods among the large number of potential buyers

62
Q

effect of binding price floor

A

a binding price floor causes surplus

63
Q

effect of nonbinding price floor/ceiling

A

market forces naturally move the economy to the equilibrium and the price floor/ceiling has no effect

……??

64
Q

taxes on buyers

A

ex. law passed requiring buyers of ice cream cones to send $0.50 to the gov’t for each ice cream cone they buy

STEP ONE: initial impact is on the demand for ice cream. the supply curve is not affected because, at any given price of ice cream, sellers have the same incentive to provide ice cream to the market. in contrast, buyers now have to pay a tax to the gov’t whenever they buy ice cream and the tax shifts the demand curve for ice cream.

STEP TWO: because the tax on buyers makes buying ice cream less attractive, buyers demand a smaller quantity of ice cream at every price. as a result, the demand curve shifts to the left (or equivalently, downward)

STEP THREE: now that we know how the curve shifts, we can determine the effect of the tax by comparing the initial equilibrium and the new equilibrium. the tax on ice cream reduces the size of the ice-cream market, and once again, buyers and sellers share the burden of the tax. sellers get a lower price for their product and buyers pay a lower price to sellers than they did previously

65
Q

taxes on sellers

A

ex. gov’t passed law requiring sellers of ice cream to send $0.50 to them for every cone they sell

STEP ONE: the immediate impact of the tax is on the sellers. the tax on sellers makes the ice-cream business less profitable at any given price so it shifts the demand curve

STEP TWO: because the tax on sellers raises the cost of producing and selling ice cream, it reduces the quantity supplied at every price. the supply curve then shifts to the right (and inevitably, upward)

STEP THREE: because sellers sell less and buyers buy less in the new equilibrium, the tax reduces the size of the ice-cream market.

66
Q

tax elasticity

A

a tax burden falls heavily on the side of the market that is less elastic

67
Q

world price above domestic price

A

ex. economists compare the current Isolandian price of textiles to the price of textiles in other countries

If the world price of textiles is higher than the domestic price, then Isoland will export textiles once trade is permitted. Isolandian textile producers will be eager to recieve the higher prices available abroad and will start selling their textiles to buyers in other countries.

68
Q

world price below domestic price

A

ex. economists compare the current Isolandian price of textiles to the price of textiles in other countries

if the world price of textiles is lower than the domestic price, then Isoland will import textiles. because foreign sellers offer a better price, Isolandian textile consumers will quickly start buying textiles from other countries

69
Q

effects of a tariff

A

a tariff raises the price of imported textiles above the world price by the amout of the tariff. domestic suppliers of textiles, who compete with suppliers of imported textiles, can now sell their textiles for the world price plus the amount of the tariff.

the tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade

70
Q

marginal change

A

a small incremental adjustment to a plan of action

71
Q

market failure

A

a situation in which a market is left on its own fails to allocate resources efficiently

72
Q

market power

A

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

73
Q

microeconomics

A

the study of how households and firms make decisions and how they interact in markets

74
Q

normative statements

A

claims that attempt to prescribe how the world should be

75
Q

absolute advantage

A

the ability to produce a good using fewer inputs than another producer

76
Q

quantity demanded

A

the amount of a good that buyers are willing and able to purchase

77
Q

demand curve

A

a graph of the relationship between the price of a good and the quantity demanded

78
Q

substitutes

A

two goods for which an increase in the price of one leads to an increase in the demand for the other

ex. margarine and butter; beer and wine; coffee and tea

79
Q

quantity supplied

A

the amount of a good that sellers are willing and able to sell

80
Q

supply curve

A

a graph of the relationship between the price of a good and the quantity supplied

81
Q

shortage

A

a situation in which quantity demanded is greater than quantity supplied

82
Q

supply schedule

A

a table that shows the relationship between the price of a good and the quantity supplied

83
Q

equilibrium price

A

the price that balances quantity supplied and quantity demanded

84
Q

tariff

A

a tax on goods produced abroad and sold domestically

85
Q

midpoint

A

midpoint method: obtains the same elasticity between two price points whether there is a price increase or decrease

formula:

*delta*Q/Q(lineontop)

OVER

*delta*P/P(lineontop)

86
Q

ex of elastic goods

A

furniture, motor vehicles, professional services

generally have plenty of substitutes

when the quantity demanded changes a lot when prices change a little= elastic

87
Q

ex. of inelastic goods

A

gas, electricity, water, drinks, clothing, food, tobacco, and oil

price changes and the demand doesnt change much

Economics (4 decks)

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