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25 Cards in this Set

  • Front
  • Back
What causes in inflation?
The law of demand explains how inflation occurs.


Example:
The law of demand says that the marginal value of any good falls as the quantity of this good increases relative to other goods.

-This law also applies to money.

-The price of one US dollar is measured by the amount of other goods one would be willing to give up in order to hold the dollar.
What happens when the gov't prints money?
When the government prints new money in greater amounts than the increase in the amount of other goods available, the inevitable consequence is a decrease in the marginal value of money, or, equivalently, an increase in the price of goods in terms of money.
Price-elasticity of demand:
ε =
(% change in quantity of x)/
( % change in price of x)
What determines an individual’s demand for a particular product?
Income or wealth, tastes, age, quality, advertising, season, the legality of consuming the good, ect.
An increase in demand?
At every price, the individual is now willing and able to purchase more units than before


-An increase in demand increases equilibrium price and quantity
Substitutes?
Two goods for which the demand of one good increases as the price of the other good increases.
Complements?
Two goods for which the demand of one good increases as the price of the other good decreases.
What is the basis of trade?
Voluntary exchange is based on mutual benefits
Does a change in one of the determinants change demand or just the quantity demanded?
A change in any determinant other than the good’s own price has the potential to influence demand... the whole relationship between prices and quantities demanded
Income Elasticity
ε =
(% change in quantity of x)/
( % change in income of x)
Price floor?
A price floor is a government-imposed limit on how low a dollar-price can be charged
Effectiveness of price floor?
A price floor imposed above (below) the equilibrium price is effective (ineffective)
Price ceiling?
A price ceiling is a government-imposed limit on how high a dollar-price can be charged
Effectiveness of price ceiling?
A price ceiling imposed below (above) the equilibrium price is effective (ineffective)
What would you expect to happen in the market for oil if the U.N. “froze” an oil pact that was to permit Iraq to resume sales of oil on the world market?
Price increases and quantity demanded increases
The Production Possibilities Frontier?
The combinations of various goods that can be produced given available resources and technology
Absolute Advantage?
An individual has an absolute advantage in the production of a good if that individual can produce more than others in the same time or can produce the same amount as others in less time
Comparative Advantage?
An individual has a comparative advantage in the production of a good if that individual can produce the good at lower cost than others
Comparative Advantage examples?
An additional case of guns costs Cal 2 tons of butter but only costs Tex 1 ton of butter.


-Tex has a comparative advantage in the production of guns.

-Cal has a comparative advantage in the production of butter.
The Principle of Increasing Opportunity Cost
As the production of one good increases, the opportunity cost of producing another unit (i.e., the marginal cost) of producing that good generally increases.
Consumer Surplus
The amount above the price paid that a consumer would willingly spend, if necessary, to acquire the units purchased.
Producer Surplus
The amount producers receive upon selling the units above the costs of producing the units
Deadweight Loss
The cost to society of not operating efficiently.
Efficiency
The absence of waste. Efficiency is obtained where the MC of production equals the MV of consumption (i.e., at the market-clearing price and quantity).
Welfare
Commonly, the sum of consumer and producer surplus. Defined this way, welfare is maximized in the perfectly competitive markets.