Economics Test 1

Front 1

Economics

Back 1

· the study of exchange relationships and theinstitutions within which they take place

Front 2

Microeconomics

Back 2

the study of how householdsand firms make decisions and interact in markets

Front 3

Macroeconomics

Back 3

the study of economy-widephenomenon, such as growth, unemployment, and inflation

Front 4

Incentives

Back 4

rewards and penalties thatmotivate behavior

Front 5

Opportunity Cost

Back 5

the value of theopportunities lost in a choice

Front 6

Inflation

Back 6

an increase in the generallevel of prices

Front 7

Demand Curve

Back 7

a function that shows thequantity demanded at different prices

Front 8

Quantity Demanded

Back 8

the quantity that buyersare willing and able to buy at a particular price

Front 9

Consumer Surplus

Back 9

the consumer’s gain from exchange, or thedifference between the maximum price a consumer is willing to pay for a certainquantity and the market price.

Front 10

Total Consumer Surplus

Back 10

measured by the area beneath the demand curveand above the price

Front 11

Normal Good

Back 11

a good for which demandincreases when income increases

Front 12

Inferior Good

Back 12

a good for which demand decreases when incomeincreases

Front 13

Substitutes

Back 13

a decrease in the price ofone good leads to a decrease in demand for the other good

Front 14

Complements

Back 14

a decrease in the price ofone good leads to an increase in the demand for the other good

Front 15

Supply Curve

Back 15

a function that shows thequantity supplied at different prices

Front 16

Quantity Supplied

Back 16

the amount of a good thatsellers are willing and able to sell at a particular price

Front 17

Producer Surplus

Back 17

the producer’s gain fromexchange, or the difference between the market price and the minimum priceat which a producer would be willing to sell a particular quantity

Front 18

Total Producer Surplus

Back 18

measured by the area abovethe supply curve and below the price

Front 19

Surplus

Back 19

a situation in which thequantity supplied is greater than the quantity demanded

Front 20

Shortage

Back 20

a situation in which the quantity demanded isgreater than the quantity supplied

Front 21

Equilibrium Price

Back 21

the price at which thequantity demanded is equal to the quantity supplied

Front 22

Equilibrium Quantity

Back 22

the quantity at which thequantity demanded is equal to the quantity supplied

Front 23

Elasticity of Demand

Back 23

measures how responsive thequantity demanded is to a change in price; more responsive equals more elastic

Front 24

What are three key characteristics in exchange relationships?

Back 24

1. Win-win; mutually beneficial; symbiotic2. Voluntary (not coercive)

3. Cooperative (not competitive)

Front 25

Why do people engage in exchange?

Back 25

1. Difference and diversity

2. It corrects mistakes in allocation by movingthings toward higher valued uses

3. It makes everyone involved in exchange happier

Front 26

The market

Back 26

the network ofrelationships that emerges or evolves out of the trading process and theinstitutional framework

Front 27

· Adam smith on innate human desires

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1. Mutual sympathy2. To do more and to better for ourselves3. To truck, barter, and exchangeo Property rights must be respected for justice

Front 28

· Thinking on the margin

Back 28

Making choices by thinking in terms of marginalbenefits and marginal costs, the benefits and costs of a little bit more (or alittle bit less)

Front 29

What are the most powerful institutions for supporting good incentives?

Back 29

are property rights, political stability, an honestgovernment, a dependable legal system, and competitive and open markets

Front 30

Law of Demand

Back 30

the lower the price, thegreater the quantity demanded

Front 31

Consumer Surplus

Back 31

The consumer's gain from exchange; The difference between the maximum price aconsumer is willing to pay for a certain quantity and market price

Front 32

What shifts the demand curve?

Back 32

Income, Population, Price of substitutes, price of complements, expectations, tastes.

Front 33

Law of Supply

Back 33

The higher the price, the greater the quantity supplied.

Front 34

Producer Surplus

Back 34

The producer's gain from exchange

Front 35

What shifts the supply curve?

Back 35

Technological innovations and changes in the price of inputs

Taxes and Subsidies

Expectations

Entry or exit of producers

Changes in opportunity cost

Front 36

When are there potential gains from trade?

Back 36

When buyers are willing to pay more than sellers are willing to accept.

Front 37

When are there unexploited gains from trade?

Back 37

At any time when quantity is less than the equilibrium quantity.

Front 38

What do economists believe in a free market?

Back 38

Unexploited gains from trade won't last for long.

Front 39

Where does gains from trade push the quantity?

Back 39

Towards the equilibrium quantity.

Front 40

If the quantity exceeds the equilibrium quantity what happens?

Back 40

Resources are wasted.

Front 41

Increase in quantity demanded

Back 41

Movement along a fixed demand curve

Front 42

Increase in demand

Back 42

A shift of the entire demand curve (up and to the right)

Front 43

Increase in supply

Back 43

A shift of the entire supply curve

Front 44

Increase in quantity supplied

Back 44

Movement along a fixed supply curve

Front 45

Elasticity rule

Back 45

If two linear demand (or supply) curves run through a common point, then at any given quantity the curve that is flatter is more elastic

Front 46

Less elastic demand

Back 46

Fewer substitutes for a good

Front 47

More time to adjust to change in price [demand curve]

Back 47

more elastic the demand curve will be

Front 48

Elasticity for necessities [for demand]

Back 48

Less elastic

Front 49

Elasticities for luxuries [for demand]

Back 49

More Elastic

Front 50

what is the equation for finding Revenue?

Back 50

Revenue = Price * Quantity

Front 51

If demand curve is inelastic [necessities,etc] , revenues...

Back 51

go up when price goes up.

Front 52

If demand curve is elastic [luxuries], revenues..

Back 52

go down when price goes up.

Front 53

if demand curve is unit elastic, a change in price...

Back 53

warrants no change in revenue.

Front 54

If farming productivity has reduced cost, where does the supply curve shift?

Back 54

The supply curve shifts down.

Front 55

What is the fundamental determinant of elasticity of supply?

Back 55

How quickly per-unit costs increase with an increase in production.

Front 56

If increased production requires much higher per-unit costs.. [supply elasticity]

Back 56

then supply will be less elastic

Front 57

If production can increase without much increasing per-unit costs...

Back 57

the supply will be elastic.

Front 58

What is a perfectly elastic supply curve look like and imply?

Back 58

A perfectly elastic supply curve is flat, indicating that even a tiny increase in price increases the quantity supplied by a large amount.

Front 59

When is supply more elastic?

Back 59

Supply is more elastic When the industry can be expanded without causing a big increase in the demand for that industry inputs.

Front 60

What is more elastic the local supply or the global supply of a good?

Back 60

The local supply of the good is much more elastic.

Front 61

In the long run suppliers have more time to adjust thus..

Back 61

supply tends stop be more elastic in the long run.

Front 62

Calculating the elasticity of supply [definition]

Back 62

Measure of how responsive the quantity supplied is to a change in price

Front 63

Elasticity of Supply [Formula]

Back 63

Es = (%change in quantity supplied)/(%change in price)

Front 64

Percent change in price from a shift in demand [formula]

Back 64

(percent change in demand)/ (|Ed|+Es)

Front 65

Percent change in price from a shift in supply [formula]

Back 65

(percent change in supply) / (|Ed| + Es)

Front 66

Commodity Taxes

Back 66

Taxes on Goods

Front 67

Who pays the tax is not determined by the government it is determined by...

Back 67

the laws of supply and demand

Front 68

Tax [formula]

Back 68

price paid by buyers - price received by sellers

Front 69

When demand is more elastic then supply, who pays more of the tax?

Back 69

Demanders pay less of the tax than the sellers.

Front 70

When supply is more elastic than demand, who pays more of the tax?

Back 70

Suppliers pay less of the tax than buyers.

Front 71

Elasticity = Escape

Back 71

Elasticity = Escape from the tax

Front 72

What is likely to be more elastic, the demand for labor or the supply for labor?

Back 72

The demand for labor (people need jobs)

Front 73

Why is tax Analysis useful?

Back 73

Tax analysis allows us to see the true benefits of costs of economics policy.

Front 74

What does a commodity tax do?

Back 74

Raises revenue and creates a deadweight loss.

Front 75

Does a tax increase or decrease consumer and producer surplus?

Back 75

Decrease.

Front 76

Deadweight Loss

Back 76

The consumer and producer surplus decrease by more than government revenue increases. The lost gains from trade.

Front 77

Deadweight loss from taxation is lower when..

Back 77

the supply curve is less elastic.

Front 78

Subsidies

Back 78

Reverse tax; government gives money to producers or consumers.

Front 79

How are subsidies paid for?

Back 79

By the tax payers and they create inefficient increases in trade

Front 80

Subsidy [Formula]

Back 80

Price received by sellers - price paid by buyers

Front 81

Do subsides also create deadweight loss? why?

Back 81

yes, non-beneficial trades occur.