UNIT 1 Flashcards
CHAPTER 1 START
what is economics?
a social science concerned with making optimal choices under conditions of scarcity
what is a utility?
the pleasure, happiness, or satisfaction from obtaining a good or service
what makes microeconomics different than macroeconomics?
microeconomics is a discipline that studies the decision-making process of customers, workers, households, and business firms on an individual basis rather than as aggregates
our income comes in what kind of forms?
comes in the form of wages, interest, rent, profit, and even government programs
what is a budget line?
A curve showing various combinations of two products a consumer can purchase with a specific amount of income.
Which of the following can be stated as potentially true about any economy?
Its current choice of position on its production possibilities curve helps determine the curve’s future location.
what is the economic perspective?
it is the way economists view the world through scarcity, choice, opportunity cost of economic decisions, use of utility, and marginal analysis; weighing marginal benefits to marginal costs.
what is the goal of rational self-interest?
to maximize utility or satisfaction. Firms are rational when they make choices about which products to produce in an attempt to maximize thier profits
what is the scientific method?
the procedure for the systematic pursuit of knowledge involving the observation of facts and the formulation of testing hypotheses to obtain theories, principles, and laws
what are economic principles?
generalizations about ecnomic behavior that are true for the average person. Of these include the “ceteris paribus,” the assumption that factors other than those considered did not change
what is the difference between positive and normative economics?
positive economics are economic statements that are factual while normative involves value judgments, subjective.
what is the economizing problem?
limited income and unlimited wants
what is the budget line?
it is used to illustrate the greatest combinations of two good that can be purchased with a certain amount of income
know the four factors of production
what are the functions of entrepreneurs?
- take initiative
- make strategic business decisions
- innovate
- take risk
what is the purpose of the production possibilities model?
it is an economic model that shows different combinations of good and services that society can produce in a fully employed, assuming a fixed availability of supplies of resources and fixed technology. When production is inside the curve, it means that the economy is inefficient
why is the production possibilities curve a curve?
the law of increasing opportunity costs is the reason the PPC is a curve. As more of a particular good is produced, its marginal opportunity costs increase
what happens in international trade?
enables countires to specialize in the production of goods which they produce more efficiently than other countries, resources are allocated more efficiently
CHAPTER 3 START
a change in demand is represented by a _
shift of the demand curve
change in quantity demanded is represented by a _
movement along the demand curve
The ability of the competitive forces of supply and demand to establish a price at which selling and buying decisions are consistent is called _
the rationing function of prices
The effects on equilibrium price and quantity due to an increase in supply and a simultaneous decrease in demand are shown by __ (caused me confusion)
a decrease in equilibrium price and an indeterminate change in equilibrium quantity
what is a market?
interaction between buyers and sellers that can be local, national, and international
where is the price discovered?
in the interactions between buyers and sellers
explain the law of demand
an inverse relationship exists between price and quantity demanded. As the price falls, the quantity demanded rises, and as prices rise, the quantity demanded falls
what is the law of diminishing marginal utility?
it refers to the decrease in added satisfaction that results as one consumes additional units of a good or service, ex the second big mac yields less satisfaction than the first
when does the income effect occur?
the income effect occurs as a lower price increases the purchasing power of money income; this enables the consumer to buy more at a lower price without having to reduce consumption of other goods
what is the substitution effect?
when a lower price gives the incentive to substitute the lower-priced good for the now relatively higher-priced goods, an example is when the price of beef increases, consumers respond by purchasing more turkey and chicken.
what are the determinants of demand?
- change in consumer tastes and preferences
- change in the number of buyers
- change in income
- normal goods; we buy more as our incomes increase
- inferior goods; goods we buy as our income decreases - change in the prices of related goods
- complementary goods
- substitute goods - changes in consumer expectations such as future prices and future income
what is the supply schedule?
amount producers are willing and able to sell at a given price
what is the law of supply?
as the price rises, the quantity supplied rises. as the prices fall, the quantity supplied falls, direct relationship
what are the shifters of the supply curve?
- change in resource prices
- change in technology
- change in taxes and subsidies
- change in prices of other goods
- change in producer expectations
- change in the number of suppliers
what is the market equilibrium?
also known as the market-clearing price. equilibrium price and quantity are where the supply and demand curves intersect
what is productive efficiency
- producing goods in the least costly way
- using the best technology
- using the right mix of resources
what is allocative efficiency
- producing the right mix of goods
- the combination of goods most highly valued by society
CHAPTER 4. START
what does one mean when the market fails?
markets fail to produce the right amount of the product either by overallocation or underallocation
what does efficient outcomes require?
- demand curve must reflect full willingness to pay
- supply curve must reflect all costs of production
when is consumer surplus generated?
when the consumers’ utility exceeds the price paid
when is producer surplus created?
when producers receive a price greater than their marginal cost. often their lowest price they are willing to accept
what is efficiency loss, or deadweight loss?
reductions of combined consumer surplus and producer surplus
what is an externality?
a cost or benefit accruing to a third party external to the market transaction
when does a POSITIVE externality occur
The good is underproduced when positive externalities are present. The equilibrium output will be smaller than the efficient output because the consumer is willing to pay a price equal to the consumer’s individual marginal benefit
- too little is produced
- demand-side market failures
when does a NEGATIVE externality occur
The good is overproduced and the equilibrium output will be greater than the efficient output. This is because the producer, who is not bearing the full cost of production, will be able to produce more at a lower price than the efficient level.
- too much produced
- supply-side market failures
how can the government correct NEGATIVE externalities
- direct controls; reduce supply by driving costs of production and would shift the supply curve and reduce output
- Pigovian Tax: specific tax assessment on the related good, to the extent that the cost of producing the good increases
- shifts supply curve to the left
how can the government correct POSITIVE externalities
- subsidies
- government provision
what is the coarse theorem
it suggests that under the right conditions private bargaining can solve externality problems, thus government intervention may not always be necessary
describe the optimal reduction of an externality
- officials must correctly identify the existence and cause
- government failure may occur
when does asymmetric information occur
- occurs when one party to a transaction possessed substantially more information than the other party
CHAPTER 26 START
International trade is a key component in most nations’ economies because it allows growth in the economy
what are the principal U.S. exports
reflects the fact that the US has a more skilled workforce and also a thriving agricultural industry, also includes
- chemicals
- agricultural products
- consumer durables
- computer software and services
-aircraft
what are some principal US imports
- petroleum
- automobiles
- metals
- household appliances
- computers
what are the trade benefits that derive from three facts
- the distribution of natural, human, and capital resources is uneven among nations
- not all nations have the same degree of technology
- people have different preferences
what is comparative advantage
- self-sufficiency output mix
- specialization and trade
- produce the good with the lowest domestic opportunity cost
what is the absolute advantage
exists when one nation is the most efficient producer of a good, meaning it can produce the good at the lowest price
trade with increasing costs
- concave production curve
- resources not perfectly substitutable
- incomplete specialization
explain how supply and demand affect equilibrium prices and quantities
when world price > domestic price
- export surplus
- export supply curve, suppliers would produce more than that demanded by the domestic economy and would then export it to receive the higher world price
when world price < domestic price
- import shortage
- import supply curve
what is a tariff
is an excise tax on the dollar value, or quantity of an imported good
what is a revenue tariff
a good that is typically not produced in the domestic country, and they are designed to raise revenue for the domestic country, tend to be fairly low
what is a protective tariff
applied to goods that do have a domestic competitor and are designed to make the imported good cost at least as much as, or more than, the domestic good, tend to be quite high
what is an import quota
are another common barrier countries use; a limit on the amount of a particular good that could be imported in a given amount of time, imported good is more expensive than domestic competitor
what is a nontariff barrier
can include such things as requiring extensive documentation for imported goods, restricting the location available to receive the imported goods, or having unreasonable standards for imported goods
what is a Voluntary Export Restriction
when foreign firms “voluntarily” agree to limit the number of their exports to a particular country
what is an export subsidy
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