Econ 100-Exam #1

Front 1

Define: Economics

Back 1

The study of how to allocate resources among competing ends (decision making)

Front 2

Define: microeconomics

Back 2

Branch of economics that examines decision making by individuals, firms, gov.

Front 3

Define: macroeconomics

Back 3

Study of the economy as a whole (unemployment, national production/income, price level)

Front 4

Define: market economy

Back 4

-US uses
-Capitalist

Front 5

Define: command economy

Back 5

Communism, opposite of a market economy

Front 6

What do systems decide? (3 points)

Back 6

1.What goods and services will be produced
2.What inputs will we use in the production process
3.Who is going to receive the goods

Front 7

Define: scarcity

Back 7

We have limited resources but unlimited wants

Front 8

What are 5 resources?

Back 8

1.Natural resources
2.Physical capital (factories/materials)
3.Labor
4.Human capital (knowledge/skills)
5.Entrepreneurship

Front 9

Explain trade-offs

Back 9

-Because of scarcity
-To get one thing we usually have to give up something
-Trade-offs--conflicts (over resources)--competition--choices--costs

Front 10

Define: opportunity cost

Back 10

What you give up to get something

Front 11

What are two approaches to opportunity cost?

Back 11

1.All or nothing= 0 or 72 hours on Econ
2."On the margin"= do I spend another hour on econ

Front 12

Define: margin

Back 12

Incremental adjustment, one unit more

Front 13

Define: rational

Back 13

People don't intentionally make themselves worse off, make decisions to increase general happiness

Front 14

Define: theory

Back 14

Simplified representation of the world

Front 15

What are the characteristics of a useful theory?

Back 15

1.Simple
2.General
3.Predictive power

Front 16

What are the assumptions about market consumer?

Back 16

1.Self-interested
2.Rational
3.Consistent (preferences continue)

Front 17

Define: Production Possibilites Frontier (PPF)

Back 17

Curve representing all possible combos of maximum outputs that can be produces assuming fixed resources

Front 18

What are the assumptions of the PPF?

Back 18

1.Production takes place over a specific time period
2.Resources and technology are fixed
3.All resources are fully employed

Front 19

How is the PPF related to opportunity cost?

Back 19

It illustrates the cost of one good in terms of another

Front 20

What communicates the opportunity cost of the X axis good in a PPF?

Back 20

The slope

Front 21

What communicates the opportunity cost of the Y axis good?

Back 21

Inverse slope

Front 22

Define: absolute advantage

Back 22

Ability to produce a good using fewer inputs than another producer

Front 23

Define: comparative advantage

Back 23

Ability to produce a good at a lower opportunity cost than another producer

Front 24

What shape of a PPF is the most realistic?

Back 24

Curved

Front 25

Define: property rights

Back 25

Government gives so individuals can own and control scarce resources

Front 26

Define: market failure

Back 26

When the market fails on its own to efficiently allocate resources

Front 27

Define: externality

Back 27

Impact of one person's actions on a bystander

Front 28

Define: market power

Back 28

Ability of a single person to influence market

Front 29

Define: inflation

Back 29

Increase in overall prices in economy

Front 30

Define: business cycle

Back 30

Unpredictable fluctuations in economy

Front 31

What could change the shape of the PPF?

Back 31

Shift to the right=increase in resources

Front 32

Define: "balanced growth" in a PPF

Back 32

Proportional increase

Front 33

What should a producer specialize in?

Back 33

The good they have the comparative advantage in

Front 34

What will the range of trading prices be?

Back 34

Min: opp. cost of the seller
Max: opp. cost of the buyer

Front 35

What does voluntary trade impact?

Back 35

-Wealth is created
-Improves efficiency

Front 36

What are the steps to graph a joint PPF?

Back 36

1.Find endpoints for all resources (max out)
2.Find who should produce the first of the x-axis good (whoever has the comparative advantage/lower y-axis cost to produce x-axis)

Front 37

Define: market

Back 37

A group of buyers and sellers of a good

Front 38

Define: competitive market

Back 38

Large # of sellers and buyers for a similar good, no individual buyer/seller can impact outcome (price)

Front 39

Define: quantity demanded

Back 39

Amount of good/service that buyers are willing to purchase

Front 40

Define: Law of Demand

Back 40

As price goes up, quantity demanded decreases (and vice versa)

Front 41

Define: demand curve

Back 41

Displays relationship between price and quantity demanded

Front 42

Why does the demand curve slope downward?

Back 42

1.Subsititution effect= as good becomes more expensive ppl will find other similar goods
2.Income effect= as price increases, ppl experience decrease in purchasing power
3.Buyers' reservation prices= consumers differ in willingness to pay

Front 43

What are the determinates of demand?

Back 43

1.Number of buyers
2.Taste/preferences
3.Income
4.Price of related good
5.Expectations about future

Front 44

Define: quantity supplied

Back 44

Amount of good a producer is willing/able to supply at a given price

Front 45

Define: Law of Supply

Back 45

Quantity supplied increases as price increases (vice versa)

Front 46

Define: market supply

Back 46

Sum of all supply curves

Front 47

What could cause shifts in the supply curve?

Back 47

1.Change in input prices
2.Technology
3.Expectations (ex. if suppliers expect price to go up later decrease what they supply today)
4.Number of sellers (more sellers, more market supply)

Front 48

What is true at market equilibrium?

Back 48

Quantity demanded=quantity supplied=Q*

Front 49

What is true when quantity demanded is greater than quantity supplied?

Back 49

A shortage occurs, causing price increase (eventually goes back to equilibrium

Front 50

What is true when quantity supplied is greater than quantity demanded?

Back 50

A surplus occurs, prices fall (eventually equilibrium

Front 51

Define: consumer surplus

Back 51

Amount buyer is willing to pay -- amount buyer actually pays

Front 52

Define: producer surplus

Back 52

Amount producer is paid for a good - amount it cost to make the good

Front 53

Define: total surplus

Back 53

Consumer and producer surplus together

Front 54

Define: welfare economics

Back 54

Study of how the allocation of resources effects economic well-being

Front 55

Define: market efficiency

Back 55

Resource allocation that maximizes well-being or surplus

Front 56

Define: free markets

Back 56

Allocate supply of goods yo buyers who value them the most highly (most willing to pay)

Front 57

What is the 1st Fundamental Theorem of Economics?

Back 57

1.Perfect competition
2.Market existence
Under these assumptions, a competitive economy allocates resources efficiently w/o central planning

Front 58

Define: elasticity

Back 58

Response to change

Front 59

Define: elasticity of demand

Back 59

How responsive is quantity demanded to change in price?

Front 60

Define: elasticity of supply

Back 60

How responsive is quantity supplied to change in price?

Front 61

Define: income elasticity of demand

Back 61

How responsive is quantity demanded to change in income?

Front 62

Define: cross-price elasticity of demand

Back 62

How responsive is quantity demanded of one good to the price of another? (substitutes and complements)

Front 63

When does the elasticity of demand tend to be "high" (large, elastic)

Back 63

1.High number of close substitutes
2.Market is narrowly defined
3.Good is a luxury good
4.Time to adjust is large

Front 64

Define: expenditure

Back 64

How much money spent on a good

Front 65

How is expenditure calculated?

Back 65

Price x quantity demanded

Front 66

How is the elasticity of demand calculated?

Back 66

Percent change in quantity demanded/percent change in price

Front 67

How is percent change in quantity demanded calculated?

Back 67

(Qnew -- Qold)/average Q

Front 68

How is percent change in price calculated?

Back 68

(Pnew -- Pold/average P)

Front 69

What sign is elasticity of demand always?

Back 69

Negative

Front 70

When is a good considered elastic?

Back 70

-When percent change in Q is greater than percent change in P
-E>1
-Less steep curve

Front 71

When is a good considered inelastic?

Back 71

-When percent change in Q is less than percent change in P
-E<1
-"Steeper" curve

Front 72

When is a good considered unit elastic?

Back 72

When percent change in Q is equal to percent change in P, or when E=1

Front 73

What does the demand curve look like when a good is perfectly inelastic and elastic?

Back 73

-Inelastic=vertical line
-Elastic=horizontal line

Front 74

How does elasticity determine how revenue changes when price changes?

Back 74

-Inelastic (relatively)=price and revenue change in same direction
-Elastic (relatively)=price change and revenue in opposite directions

Front 75

How is elasticity of supply calculated?

Back 75

"Eta"=change in quantity supplied/change in price

Front 76

What sign is elasticity of supply always?

Back 76

Positive

Front 77

Under what circumstances is elasticity of supply elastic, inelastic, and unit elastic?

Back 77

-Elastic= eta>1, not steep
-Inestlastic=eta<1, steeper
-Unit elastic=eta=1

Front 78

When does elasticity of supply tend to be "large" (or elastic)?

Back 78

Time to adjust is large
-Single firm can adjust production levels
-New firm enters market

Front 79

What is the formula for cross-price elasticity?

Back 79

Percent change in quantity demanded of x/percent change in price of y

Front 80

What are the two options for cross-price elasticity and what are their signs?

Back 80

-Substitutes=positive, Q and P move in same direction
-Complements=negative, Q and P move in opposite directions

Front 81

What is the formula for income elasticity of demand?

Back 81

Percent change in quantity demanded/percent change in income

Front 82

What are the two options for income elasticity and what are their signs?

Back 82

-Normal=positive, Q and I move in same direction
-Inferior=negative, Q and I move in opposite directions