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15 Cards in this Set

  • Front
  • Back
What is the definition of economics?
the study of how individuals and society choose among alternative uses of scarce resources
What are the objectives of government?
1. Full Employment
2. Price Stability (<= 2% inflation)
3. Economic growth (GDP)
4. Optimal external balance (X>I)
What are the assumptions about consumers?
1. Rational (prefer good)
2. Efficient (most for least cost)
3. Risk-adverse (no uncertain)
4. Forward-looking
Basic question of economics (3)?
What, how, and for whom?
What is RTS? What do increasing, decreasing, and constant Returns to Scale signify?
The increase in output generated by a certain amount of increase in inputs.
Increasing RTS: Output increases at greater rate than input; costs decreasing
Decreasing RTS: Output increases at lesser rate than input; costs increasing
What are the factors of production?
Land, labor, capital, entrepreneurship
How does industry structure evolve?
From the nature of the production process, which is reflected in the production function. If ^RTS, firms produce cheaper as they get bigger, so they produce more. Big firms that produce a lot = a concentrated industry- monopoly, oligopoly. If dRTS, more production means increasing costs, so they limit output. This enables more firms to enter industry- monopolistic, perfect comp.
Increasing RTS is related to what, and caused by what?
Increasing RTS is tied to technology and manufacturing. Caused by learning by doing, specialization.
What is the difference between the production function and the total product curve?
PF maps output when ALL inputs can change while the TP maps output when 1 input only changes and all the others are fixed.
What is the PPF?
The graphical representation of all feasible combinations of goods and services that a society can produce if all resources are fully and efficiently employed.
Anything that changes the production function will change the production possibilities frontier, including:
1. Technology
2. Change in government law
3. Change in efficiency - labor
4. Change in efficiency - capital
Law of Diminishing Returns
At some point the additions to output start to decline as you add additional variable inputs.
Some input must be fixed --> Differs from RTS.
Deriving the supply and demand curves
Supply: Marginal Cost above the break even point (AVC) for perfect comp
Demand: From the production function; the slope of it is marginal product; multiplied times the wage (price) is marginal revenue product curve; point at which wage intersects MRP on downward sloping part. Demand curve is MRP to the right of that point.
Decision to hire labor depends on:
1. Wage
2. Revenue worker generates

see MP/MRP graph