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82 Cards in this Set

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  • Back
Define: Economics
The study of how to allocate resources among competing ends (decision making)
Define: microeconomics
Branch of economics that examines decision making by individuals, firms, gov.
Define: macroeconomics
Study of the economy as a whole (unemployment, national production/income, price level)
Define: market economy
-US uses
Define: command economy
Communism, opposite of a market economy
What do systems decide? (3 points)
1.What goods and services will be produced
2.What inputs will we use in the production process
3.Who is going to receive the goods
Define: scarcity
We have limited resources but unlimited wants
What are 5 resources?
1.Natural resources
2.Physical capital (factories/materials)
4.Human capital (knowledge/skills)
Explain trade-offs
-Because of scarcity
-To get one thing we usually have to give up something
-Trade-offs--conflicts (over resources)--competition--choices--costs
Define: opportunity cost
What you give up to get something
What are two approaches to opportunity cost?
1.All or nothing= 0 or 72 hours on Econ
2."On the margin"= do I spend another hour on econ
Define: margin
Incremental adjustment, one unit more
Define: rational
People don't intentionally make themselves worse off, make decisions to increase general happiness
Define: theory
Simplified representation of the world
What are the characteristics of a useful theory?
3.Predictive power
What are the assumptions about market consumer?
3.Consistent (preferences continue)
Define: Production Possibilites Frontier (PPF)
Curve representing all possible combos of maximum outputs that can be produces assuming fixed resources
What are the assumptions of the PPF?
1.Production takes place over a specific time period
2.Resources and technology are fixed
3.All resources are fully employed
How is the PPF related to opportunity cost?
It illustrates the cost of one good in terms of another
What communicates the opportunity cost of the X axis good in a PPF?
The slope
What communicates the opportunity cost of the Y axis good?
Inverse slope
Define: absolute advantage
Ability to produce a good using fewer inputs than another producer
Define: comparative advantage
Ability to produce a good at a lower opportunity cost than another producer
What shape of a PPF is the most realistic?
Define: property rights
Government gives so individuals can own and control scarce resources
Define: market failure
When the market fails on its own to efficiently allocate resources
Define: externality
Impact of one person's actions on a bystander
Define: market power
Ability of a single person to influence market
Define: inflation
Increase in overall prices in economy
Define: business cycle
Unpredictable fluctuations in economy
What could change the shape of the PPF?
Shift to the right=increase in resources
Define: "balanced growth" in a PPF
Proportional increase
What should a producer specialize in?
The good they have the comparative advantage in
What will the range of trading prices be?
Min: opp. cost of the seller
Max: opp. cost of the buyer
What does voluntary trade impact?
-Wealth is created
-Improves efficiency
What are the steps to graph a joint PPF?
1.Find endpoints for all resources (max out)
2.Find who should produce the first of the x-axis good (whoever has the comparative advantage/lower y-axis cost to produce x-axis)
Define: market
A group of buyers and sellers of a good
Define: competitive market
Large # of sellers and buyers for a similar good, no individual buyer/seller can impact outcome (price)
Define: quantity demanded
Amount of good/service that buyers are willing to purchase
Define: Law of Demand
As price goes up, quantity demanded decreases (and vice versa)
Define: demand curve
Displays relationship between price and quantity demanded
Why does the demand curve slope downward?
1.Subsititution effect= as good becomes more expensive ppl will find other similar goods
2.Income effect= as price increases, ppl experience decrease in purchasing power
3.Buyers' reservation prices= consumers differ in willingness to pay
What are the determinates of demand?
1.Number of buyers
4.Price of related good
5.Expectations about future
Define: quantity supplied
Amount of good a producer is willing/able to supply at a given price
Define: Law of Supply
Quantity supplied increases as price increases (vice versa)
Define: market supply
Sum of all supply curves
What could cause shifts in the supply curve?
1.Change in input prices
3.Expectations (ex. if suppliers expect price to go up later decrease what they supply today)
4.Number of sellers (more sellers, more market supply)
What is true at market equilibrium?
Quantity demanded=quantity supplied=Q*
What is true when quantity demanded is greater than quantity supplied?
A shortage occurs, causing price increase (eventually goes back to equilibrium
What is true when quantity supplied is greater than quantity demanded?
A surplus occurs, prices fall (eventually equilibrium
Define: consumer surplus
Amount buyer is willing to pay -- amount buyer actually pays
Define: producer surplus
Amount producer is paid for a good - amount it cost to make the good
Define: total surplus
Consumer and producer surplus together
Define: welfare economics
Study of how the allocation of resources effects economic well-being
Define: market efficiency
Resource allocation that maximizes well-being or surplus
Define: free markets
Allocate supply of goods yo buyers who value them the most highly (most willing to pay)
What is the 1st Fundamental Theorem of Economics?
1.Perfect competition
2.Market existence
Under these assumptions, a competitive economy allocates resources efficiently w/o central planning
Define: elasticity
Response to change
Define: elasticity of demand
How responsive is quantity demanded to change in price?
Define: elasticity of supply
How responsive is quantity supplied to change in price?
Define: income elasticity of demand
How responsive is quantity demanded to change in income?
Define: cross-price elasticity of demand
How responsive is quantity demanded of one good to the price of another? (substitutes and complements)
When does the elasticity of demand tend to be "high" (large, elastic)
1.High number of close substitutes
2.Market is narrowly defined
3.Good is a luxury good
4.Time to adjust is large
Define: expenditure
How much money spent on a good
How is expenditure calculated?
Price x quantity demanded
How is the elasticity of demand calculated?
Percent change in quantity demanded/percent change in price
How is percent change in quantity demanded calculated?
(Qnew -- Qold)/average Q
How is percent change in price calculated?
(Pnew -- Pold/average P)
What sign is elasticity of demand always?
When is a good considered elastic?
-When percent change in Q is greater than percent change in P
-Less steep curve
When is a good considered inelastic?
-When percent change in Q is less than percent change in P
-"Steeper" curve
When is a good considered unit elastic?
When percent change in Q is equal to percent change in P, or when E=1
What does the demand curve look like when a good is perfectly inelastic and elastic?
-Inelastic=vertical line
-Elastic=horizontal line
How does elasticity determine how revenue changes when price changes?
-Inelastic (relatively)=price and revenue change in same direction
-Elastic (relatively)=price change and revenue in opposite directions
How is elasticity of supply calculated?
"Eta"=change in quantity supplied/change in price
What sign is elasticity of supply always?
Under what circumstances is elasticity of supply elastic, inelastic, and unit elastic?
-Elastic= eta>1, not steep
-Inestlastic=eta<1, steeper
-Unit elastic=eta=1
When does elasticity of supply tend to be "large" (or elastic)?
Time to adjust is large
-Single firm can adjust production levels
-New firm enters market
What is the formula for cross-price elasticity?
Percent change in quantity demanded of x/percent change in price of y
What are the two options for cross-price elasticity and what are their signs?
-Substitutes=positive, Q and P move in same direction
-Complements=negative, Q and P move in opposite directions
What is the formula for income elasticity of demand?
Percent change in quantity demanded/percent change in income
What are the two options for income elasticity and what are their signs?
-Normal=positive, Q and I move in same direction
-Inferior=negative, Q and I move in opposite directions