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49 Cards in this Set

  • Front
  • Back
define economics
the study of how individuals allocate scarce resources to best satisfy their unlimited wants (more is better than less) (the study of choices of consumers, firms and governments)
What is the ultimate goal of microeconomists?
to create models to predict and analyze behavior. This leads to the formatio of an economic system that maximizes total benefit to all members of the economy
what is a scarce good?
an economic good (you can't get all you want for free)
What are three types of cost?
1. explicit/accounting costs (out of pocket expenditures)
2. opportunity/implicit costs (most valued opp. foregone)
3. economic costs: implicit costs + explicit costs
What is the production possibility frontier? (PPF)
the curve that graphs all possible combinations of two given goods that an economy can produce
What are three assumptions of the PPF?
1. two goods produced
2. quantities of scarce resources are fixed
3. technology is constant
What are the factors that cause growth/PPF shift? (3)
1. technological improvement
2. increase in the quantity of resources
3. increasing capital investments
What are homogeneous resources?
production based on equally skilled people
What is the Law of Increasing Costs?
a society becomes more specialized in the production of one good, the opportunity cost per unit rises
What is the absolute advantage?
the ability to produce more in a given time frame
What is the comparative advantage?
the ability to produce at a lower opportunity cost. It is mathematically impossible for someone to have the comparative advantage in both products
What is the Law of Supply?
there is a postive relationship between the price and quantity
What is the Law of Demand? What are inversely related?
people will buy more if the price goes down and will buy less if the price goes up. The price of a good and the QD are inversely related.
What is demand?
the relationship between price and quantity
What is quantity demanded?
a number and price
What are 5 factors that shift demand?
1. income
2. price of related goods
(substitutes, complements)
3. expectations of future prices
4. tastes and preferences
5. # buyers in market (# buyers goes up, so goes D)
What are 4 factors that shift supply?
1. change in price of input
2. change in technology
3. expectations of future prices
4. # of sellers changes
What are four determinants of elasticity?
1. # and availability of substitutes
2. time to make purchase
3. proportion of budget
4. importance of item
What is marginal utility?
willingness to pay
What is consumer surplus?
the difference between total amount you're willing to pay and the total paid for a given quantity.
What is the mathematics for consumer surplus?
CS = willing to pay - actually paid
What is the Law of Diminishing Marginal Returns? What does it explain the shape of?
adding more and more of a variable input to a fixed input results in smaller additions to output (explains shape of SR cost).
What are economies of scale?
as q increases, LRATC decreases (increasing returns to scale)
What are diseconomies of scale?
as q increases, LRATC increases (decreasing returns to scale)
What are 3 factors that shift cost curves?
1. change in price of input (inc. P input, inc. MC & ATC)
2. Change in technology (new tech. dec. MC and ATC)
3. change in regulation (tax)
(tax inc., inc. MC and ATC)
What are the necessicary conditions for LR competitive equilibrium?
Qs = Qd
profit = 0
What is price discrimination?
the practice of charging different groups of buyers different prices based on differences in elasticity rather than cost
What are 3 necessicary conditions for price discrimination?
1. some monopoly power
2. two groups of buyers with different Ep
3. prevention of resale
What are 3 things in monopolistic competition?
1. many small buyers and sellers (but no one can effect equil.)
2. differentated products
3. no barriers to entry or exit
What are 3 characteristics of an oligopoly?
1. few mutually interdependent firms
2. high barriers to entry
3. imperfect information
What are three random cartel facts?
1. illegal in US
2. firms split monopoly profit
3. product type doesn't matter
What is game theory?
When two players make a decision independently and at the same time and they don't know the choice of the other person
What is derived demand?
the demand for inputs that exists because of the demand for outputs they produce.
(increase demand for big mac's, increase in demand for products to make big macs)
What does a union work to prevent? What is a union's goal?
A union works to prevent exploitation of labor. Their goal is to maximize wage AND max. employment... they want to keep W and L as high as possible
What are three factors that increase demand of labor?
1. increase demand output
2. increase price of substitute inputs
3. increase marginal productivity of workers
What are two factors that decrease price elasticity for labor?
1. decrease Ep for output
2. decrease # of substitute inputs
What are resources/inputs/factors of production?
things used to produce goods and services (which is output, production and quantity)
Market analysis: What happens when there is an increase in the price of an input?
supply goes down
price goes up
QD goes up
D stays the same
Market analysis: What happens when there is an increase in future prices of an input?
supply goes down
demand goes up
QD is indeterminate
Market analysis: What happens when there is an increase in the price of a substitute good?
P of peanut increase, then
QD goes down.
P of jelly goes down with the QD
What is the equation for total revenue?
TR = Q x P
What happens when elasticity = 1?
total revenue is maximized
What is elasticity?
measure of the relative responsiveness of one variable to a change in another
What is total utility? What is the relationship between QD and TU?
the measure of satisfaction that consumption yields an individual. QD goes up while TU goes down
What are three things for Normal Rate of Return?
1. economic profit = 0
2. just as well in next best industry
3. acc. profit = opp. cost of K
Supply goes up when :
_____ price of input
_____ improvement
expect _____ future prices
_____ # of sellers
drop price of input
techc. improvement
expect lower future prices
increase # sellers
Supply goes down when:
____ price of inputs
expect ____ future prices
____ # sellers
increase price of inputs
expect higher future prices
decrease # of sellers
Demand increases when:
income ____
income ____
_____ price of sub. good
_____ price of comp. good
expect ____ future prices
_____ # buyers
income rises (normal)
income falls (inferior)
increase price of sub.
decrease price of comp.
expect higher future prices
increase # buyers
Demand decreases when:
income ____
income ____
____ price of sub. good
____ price of comp. good
expect ____ future prices
____ # buyers
income falls (normal good)
income rises (inferior)
decrease price of sub.
increase price comp.
expect lower future prices
decrease # buyers