Principles Of Microeconomics Exam 1

Front 1

Economy

Back 1

system for coordinating society's productive activities

Front 2

Market Economy

Back 2

economy in which decisions about productions and consumption are made by individuals---not a central authority

Front 3

Microeconomics

Back 3

study of how individuals, firms, governments make DECISIONS about what to do with SCARCE resouces and how they INTERACT with eachother

Front 4

Opportunity Cost

Back 4

"real" (economic) cost of an item -- what you must give up to get it

Front 5

Marginal Analysis

Back 5

solves the question of "how much"?

Front 6

Specialization

Back 6

we each do the task we're best at performing

Front 7

Adam Smith

Back 7

looked at assembly line for pins and came up with SPECIALIZATION

Front 8

Incentive

Back 8

anything that offers rewards to individuals for a change in behavior

Front 9

Equilibrium

Back 9

situation in which no one is better off by changing their behavior
--arises out of arbitrage
--ex. 2nd grocery line opens & they eventually stabilize at the same length

Front 10

Pareto Efficiency

Back 10

no one can be better off without making someone worse off

Front 11

4 Themes in Econ

How Individuals Make Decisions

Back 11

1. Resources are scarce (income, natural resources, labor, land, time)

2. Opportunity Cost
(the next best alternative)

3. Marginal Analysis
(decide not to buy a second..)

4. Arbitrage
(agents exploit opportunities to make themselves better off---incentives matter)

Front 12

5 Themes in Econ

How Economies Work

Back 12

1. There are gains from trade
(we're not self sufficient --higher standard of living through specialization

2. Equilibrium
(no one's better off changing their behavior -- arises from arbitrage)

3. Efficiency is desirable
(using resources to their fullest ability--(not the same as equity))

4. Markets Usually lead to Efficiency
(idividuals doing the best for themselves brings us to efficiency -- incentives are key -- makes individuals use resources wisely)

5. Government Intervention can improve well being by correcting market failures
(environmental pollution, provision of public services, monopolies, labor rights, natural disasters(releif), civil rights

Front 13

MODELS

(& 2 Types)

Back 13

simplified representation of reality to better understand real situations

1) Production Possibilities Frontier [PPF]
2)Circular Flow Diagram

Front 14

Production Possibilites Frontier [PPF]
Shows:

Back 14

Shows Maximum quantitiy of a good that can be produced for a given quantity of another good

(ex. france's production of airplanes decreases with increasing production of wheat)

Front 15

Opportunity Cost

Back 15

(what you give up) / (what you give)

Front 16

Command Economy
-opp of market

Back 16

Central authorities make decisions about production/consumption

Front 17

Invisible Hand

Back 17

the tendency of market economies to harness the power of self interest for the good of society
(a person is led to make decisions that are good for society as a whole)

Front 18

Market Failure

Back 18

when the pursuit of one's own interest makes society worse off

Front 19

Recession

Back 19

A downturn in the economy

---main concern of MACROeconomics (overall ups & downs of society)

Front 20

Economic Growth

Back 20

the growing ability of the economy to produce goods/services

Front 21

Trade Off

Back 21

When you compare the costs/benefits of doing something (studying for chem = less studying for econ)

Front 22

Marginal Decision

Back 22

decisions making trade-offs at the margin

Front 23

the study of marginal decisions

Back 23

Marginal Analysis

Front 24

Gains From Trade

Back 24

people get more of what they want by specializing and trading

The economy as a whole can produce more w/ trade & specialization

Front 25

Equilibrium

Back 25

when no individual would be better off doing something different

[ex. rule of road-everyone stays to the right before law was in place]

Front 26

When is an economy efficient?

Back 26

When it takes all opportunities to make people better off without making anyone worse off
-all resources are being used efficiently

*the invisible hand enforces officiency --brain surgeons don't plow fields

Front 27

Why Markets Fail
(3)

Back 27

1) Individual actions have side effects not taken into account by the market
2)one party tries to capture more resources for themselves preventing mutually beneficial trades
3)Some goods by nature are unsuited for efficient management in markets

Front 28

Supply/Demand Model

Back 28

describes how competetive markets work

Front 29

Market

Back 29

mechanism which allows buyers/selleers to exchange goods/services

Front 30

Competitive Market

Back 30

many buyers & sellerns of the same good or service

Front 31

Demand Curve

Back 31

Shows how much goods/services consumers buy at a given price

Front 32

Quantity Demanded

Back 32

The actual amount consumers are willing to buy at a certain point

Front 33

Market Demand

Back 33

sum (aggregate) of all the individuals demands

Front 34

Law of Demand

Back 34

a higher price for a good = a smaller quantity demanded of the good

*exceptions = Giffen Goods

Front 35

Determinants of Demand
*Demand Shifters*

Back 35

1)Price of a related good
a)substitute goods
b)complimentary goods
2)Change in Income
a)normal goods
b)inferior goods
3)Taste/Preferences
*big sunglasses*
4)Expectations
*if price will be higher in the future (xmas) demand will increase now
5) # of consumers

Front 36

Substitute Goods

Back 36

an increase in the price of one good = an increase in the demand of a second good
*coke & pepsi*

Front 37

Complimentary Goods

Back 37

an increase in the price of one good = a decrease in demand for the other good
(*hot dogs & hot dog buns,
dvds & dvd players*)

Front 38

Normal good

Back 38

with an increase in income there is an increase in demand for the good

Front 39

Inferior Goods

Back 39

with an increase in income there is a decrease in demand for the good
*ramen*

Front 40

Supply Curve

Back 40

shows how much of a good/service producers want to sell at a given price

Front 41

Quantity Supplied

Back 41

actual amount sellers are willing to sell at a given price

Front 42

Market supply

Back 42

sum (aggregation) of an individual firm's supplies

Front 43

Law of Supply

Back 43

increasing price for a good = firms supply a larger quantity

Front 44

Determinants of supply
(supply shifters)

Back 44

1) change input prices (wages, rent)
-with increase in resource prices, firms will supply a lower quantity at each given price
2)Technology
-increase in technology = increase in supply
3)Expectations
-when planning increase in future price (xmas) supply is lowered now
4)number of sellers

Front 45

Price Control

Back 45

legal restriction of how low/high the price can go

a)price celing (legal max)
b)price floor (legal min)

Front 46

Quotas

Back 46

quantity contorls
-legal restrictions on quantity of good that can be bought/sold

*taxi liscences*
----can = shortages, higher prices, gypsy cabs

Front 47

Excise Tax

Back 47

tax on sales of a good/service
ex. cigs, gas, alcohol

Front 48

Tax Revenue
Equation

Back 48

Quantity taxed times tax

(Qt x t)

Front 49

Tax Amount
Equation

Back 49

consumer price - producer price

Pc - Pp = tax amt

Front 50

Elasticity

Back 50

measure of responsiveness to changes in price / income

(how sensitive you are to price)

Front 51

Price Elasticity of Demand
(Ed)


(same equation for supply)

Back 51

% changes in quantity demanded
DIVIDED BY
% change in price

absval* %Qchange/%Pchange *absval

Front 52

% Change
Equation

Back 52

(new value - old value) /
(old value)

*100

Front 53

Elasticity of Something
(Ed) Values for inelatic v elastic

Back 53

Ed > 1 = Elastic
Ed = 1 = Unit Elastic
Ed < 1 = Inelastic

Front 54

Perfectly Elastic v
Perfectly Inelastic
Demand

Back 54

Perfectly Elastic
Ed = infinity

Perfectly Inelastic
Ed = 0

Front 55

Midpoint Formula

Back 55

*absval* Q2-Q1/([Q1+Q2]/2)
divided by
P2-P1/([P1+P2]/2) *absval*

Front 56

Decision Rules for Elasticity

Back 56

Elastic---->lower price
Inelastic---->raise price
Unit Elastic---->stay the same

Front 57

Determinants of Elasticity of Demand

Back 57

1)are there close substitutes?
-yes=more elastic
2)Time Frame
-longer time frame=more elastic
3)Necessities = more inelastic
Luxuries = more elastic

Front 58

Cross-price elasticity of Demand

definition & equation

Back 58

How is the demand of one good affected by a price change in another good

% change in Qa /
% change in Pb

(quantity a & price b)

Front 59

Substitutes
(goods that are similar)
&
Complements

affecting cross price

Back 59

substitues = + cross price

complements = - cross price

Front 60

Income Elasticity of Demand

Back 60

How is the demand for a good affected by a change in income

Ei = %change in Qd /
%change in I

Front 61

Determinants of Price Elasticity of Supply

Back 61

1)availability of inputs
-lots of substitute inputs=more elastic

2)Time
-longer time periods=more elastic

Front 62

Market Equilibrium Maximized Total Surplus

BECAUSE:

Back 62

1)Buyer who values good the most actually purchases it

2)Seller who values the sale the most will make the sale
(sellers with the lowest cost)

Front 63

When is the market outcome not efficient
(3)

Back 63

1)Monopolies
[1 seller]
2)Public Goods
[H20, public transportation]
3)Externalities
[pollution]