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97 Cards in this Set
- Front
- Back
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The "Real Cost" of something is ......
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The "Real Cost" of something is what you must give up to get it.
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People respond to ......
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People respond to incentives
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Production Possibilities Frontier
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PPF illustrates all the combinations of goods that an economy can produce in a given time period.
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Opportunity Cost
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When one activity is pursued other activities cannot be pursued.
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Invisible Hand
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The way a market economy manages to harness the power of self-interest for the good of society.
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Market Failure
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When an individual's selfish pursuits cause the economy to be worse off.
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Price
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Ratio at which two goods may be exchanged in a market.
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T/F: It is impossible to change just one price
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True
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Socialism
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An economy based on people's good will towards others rather than on their own self-interest.
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Capitalism
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An economic system based on private property, the market, and prices.
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When is an economy efficient
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When there is no way to make some people better off than by making other people worse off.
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Why is the production possibilities frontier curved outward?
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Based on the assumption that the opportunity cost changes as the mix of output changes.
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Absolute Advantage
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An individual has an absolute advantage if he or she can produce a good or service better than other people.
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Comparative Advantage
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An individual has a comparative advantage if he or she can produce a good or service at a lower price than other people.
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Is it possible for an individual or country to have an absolute advantage in all products or services?
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YES!
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Is it possible for an individual or country to have a comparative advantage in all products or services?
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No, not as long opportunity costs diverge.
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Theory of Comparative Advantage
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If each nation specializes in the good in which it enjoys a comparative advantage, the production of goods in the world as a whole can increase!
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What is comparative advantage based on?
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Opportunity Cost
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Gains from specialization and trade are always possible as long as .................
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Gains from specialization and trade are always possible as long as OPPORTUNITY COSTS DIVERGE
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What is Supply and Demand?
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It is a model of how a market behaves that is useful for understanding COMPETITIVE markets.
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Law of Demand
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As price increases, customers respond by buying less, all else equal.
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Substitutes
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Two goods are substitutes if an increase in the price of one makes consumers more willing to buy the other.
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Complements
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Two goods are complements if a decrease in the price of one makes people more willing to buy the other.
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Normal Good
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When a rise in income increases the demand for a good.
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Inferior Good
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When a rise in income decreases the demand for a good.
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A change in price of the specific good in question....
A. Causes the demand curve to shift B. Causes a movement along the demand curve |
B. A change in the price leads to a movement ALONG the demand curve.
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Does the demand curve determine the price of a product?
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No, it only provides the answer to a series of hypothetical questions.
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What would shift the supply curve?
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Changes in input prices
Changes in technology |
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Equilibrium Price
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The price where quantity demanded equals the quantity supplied
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Market Forces
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The response of prices to shortages and surplus
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Shortage or Excess Demand
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If the the quantity demanded EXCEEDS the quantity supplied
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Surplus or Excess Supply
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If the quantity supplied EXCEEDS the quantity demanded
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When there is a surplus, producers will _______ the price.
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When there is a surplus, producers will CUT the price.
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When there is a shortage, consumers will bid ______ the price.
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When there is a shortage, consumers will bid UP the price.
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What is the effect of a leftward shift in the demand curve?
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Equilibrium price and equilibrium quantity both fall.
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A decrease in demand for a product causes the demand curve to shift left or right?
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LEFT
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An increase in demand for a product causes the demand curve to shift left or right?
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RIGHT
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What is the effect of a rightward shift in the demand curve?
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Equilibrium price and equilibrium quantity both rise.
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A decrease in supply shifts the supply curve right or left?
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LEFT
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An increase in supply shifts the supply curve which way?
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RIGHT
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What is the effect of a leftward shift in the supply curve?
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Equilibrium price rises and the equilibrium quantity falls.
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What is the effect of a rightward shift on the supply curve?
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Equilibrium price falls and the equilibrium quantity rises.
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If the quantity sold changes in the same direction as the price, the ______ curve has probably shifted
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If the quantity sold changes in the same direction as the price, the DEMAND curve has probably shifted
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If quantity and price move in OPPOSITE directions, the probable cause is a shift in the ________ curve
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If quantity and price move in OPPOSITE directions, the probable cause is a shift in the SUPPLY curve
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The market rewards ______
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SCARCITY
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Price Ceiling
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An upper limit on prices, such as rent control.
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Price Floor
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A lower limit on prices, such as the minimum wage.
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What is the effect of a price ceiling that is ABOVE the equlibirum?
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None
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A binding price ceiling is always _________ the price floor.
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A binding price ceiling is always below the price floor.
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Quota
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Regulated quantity under a quantity control.
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Side-effects from taxes
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Inefficiency
Prevention of some mutually beneficial transactions from occurring. |
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Price Elasticity indicates what?
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Price elasticity indicates how responsive the quantity demanded is to the price.
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When is a price ELASTIC?
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If the quantity demanded is VERY RESPONSIVE to the price, the demand is considered ELASTIC.
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When is a price INELASTIC
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IF the quantity demanded is not very responsive to the price, demand is considered INELASTIC.
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Why is the price elasticity of demand almost always a negative number?
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Because the law of demand says that the demand curves slope downward.
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If quantity demanded is very sensitive to price, what is the price elasticity of demand?
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Price elasticity of demand is greater than 1 (in absolute value)
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If a 1% change in price causes the quantity demanded to change by more than 1% then the quantity demanded is ______ sensitive to price.
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Very sensitive to price.
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If quantity demanded is NOT very sensitive to price, what is the price elasticity of demand?
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Price elasticity of demand is less than 1 (in absolute value)
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If a 1% change in price causes the quantity demanded to change by less than 1% then the quantity demanded is ______ sensitive to price.
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Not very sensitive to price.
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Unit Elastic
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If the price elasticity demanded equals exactly -1, demand is considered unit elastic.
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If there is a 1% change in price which results in a 1% change in quantity demanded, the good or service is ________ elastic
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Unit Elastic
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Demand is unit elastic where on the demand curve?
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Demand is unit elastic at the MIDPOINT of the demand curve.
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On a straight-line demand curve, elasticity decreases as the price ______ and the quantity _______ increases.
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On a straight-line demand curve, elasticity decreases as the price FALLS and the quantity demanded INCREASES.
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Above the mid-point on a straight-line demand curve, demand is ___________
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Elastic
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Below the mid-point on a straight-line demand curve, demand is ___________
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Inelastic.
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The Formula for Price Elasticity of Demand
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% Change in Quantity Demanded/
% Change in Price |
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How to determine % change in quantity demanded?
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(Change in Quantity Demanded/Average Quantity Demanded) X 100
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How to determine % change in price?
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(Change in price/Average Price) X100
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Graphically, does a good with elastic demand have a relatively flat or relatively steep demand curve?
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FLAT, because the quantity demanded is dramatically affected by price.
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Demand tends to become more or less elastic over time?
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More Elastic, because consumers have more time to adjust to a price change.
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The Long-run price elasticity of demand is often larger or smaller (in absolute value) than the short-run elasticity?
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LARGER!
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How to calculate Total Revenue?
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Total Revenue= Price X Quantity Demanded
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Will total revenue rise or fall when the price increases?
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We can only tell if we know the price elasticity of demand.
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If Demand is ELASTIC.....
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P Rises 1% and Q Drops >1%
PxQ Falls |
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If demand is UNIT ELASTIC
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P Rises 1% and Q drops 1%
PxQ Constant |
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If demand is INELASTIC?
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P Rises 1% and Q Falls <1%
PxQ RISES |
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If demand is PERFECTLY INELASTIC?
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P rises 1% and Q unchanged
PxQ definitely rises |
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Labor Equilibrium
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In equilibrium, the quantity of labor demanded equals the quantity of labor supplied.
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Formula for Total Earnings
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Total Earnings =
Wage x Quantity of Labor Demanded |
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For Substitutes, the cross-price elasticity of demand is - or +?
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For substitutes, the cross-price elasticity of demand is POSITIVE
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For COMPLEMENTS, the cross-price elasticity of demand is - or +?
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For COMPLEMENTS, the cross-price elasticity of demand is NEGATIVE?
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Cross-Price Elasticity of Demand
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Ratio of percent change in quantity demanded to the percent change in the other good's price.
-Tells us how responsive the quantity demanded is to the price of OTHER goods. |
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Income Elasticity of Demand
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The ratio of the percent change in quantity demanded to the percent change in income.
-Tells us how responsive the quantity demanded is to INCOME. |
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For NORMAL GOODS, the income elasticity of demand is - or +?
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POSITIVE
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For INFERIOR GOOD, the income elasticity of demand is - or +?
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NEGATIVE
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Price Elasticity of Supply
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Ratio of percentage change in quantity supplied is to percent change in price.
-Tells us how responsive the quantity SUPPLIED is to price. |
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IF quantity supplied is very sensitive to price (elasticity>1), supply is _________
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IF quantity supplied is very sensitive to price (elasticity>1), supply is ELASTIC
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IF quantity supplied is not very sensitive to price (elasticity<1), supply is _________
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IF quantity supplied is not very sensitive to price (elasticity<1), supply is INELASTIC
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WILLINGNESS TO BUY
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The maximum price at which he or she would buy a good
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INDIVIDUAL CONSUMER SURPLUS
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The consumer's willingness to pay minus the price paid.
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Total Consumer Surplus
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Sum of all the individual consumer surpluses is called the total consumer surplus.
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Graphically, where is the total consumer surplus located?
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Under the demand curve, but above the price.
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How to calculate total consumer surplus?
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(1/2 Base) x Height
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Producer Surplus
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Producer surplus arises from the fact that most sellers of a good would have been willing to accept a lower price than they received.
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Graphically, where is the total producer surplus located?
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Total producer surplus is equal to the area that is under the price but above the supply curve.
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Total Surplus
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The sum of the consumer and producer surplus is the total surplus.
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Total Surplus Represents
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GAINS FROM TRADE
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