Econ Comps Flashcards
What are factors of production?
Factors of production are the inputs available to supply goods and services in an economy. It includes land, labor, capital, and enterprise.
What is scarcity?
We have limited resources and unlimited wants. We don’t have enough of everything to go around.
Why does scarcity make choices necessary?
We have to find a way to solve the problem of not having many resources as we would like. In society, we pick a way to distribute resources (allocate)
What are economic goods?
Something that is wanted and limited
What are two characteristics of economic goods?
1) rivalrous/non-rivalrous
2) excludable/nonexcludable
What is opportunity costs?
When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you cannot spend the money on something else.
What do incentives do?
Economic incentives are what motivates you to behave in a certain way. Economic incentives provide you the motivation to pursue your preferences.
For example, let’s say you want wealth. You are motivated to work because you will be paid, which will help you achieve your preference for accumulating wealth.
What is marginal analysis? What is meant by “thinking on the margin”?
It is the examination of the costs and benefits of a marginal (small) change in the production of goods or an additional unit of an input or good. Marginal analysis allows business owners to measure the additional benefits of one production activity versus its costs.
Thinking on the margin means to let the past go and to think forward to the next hour, day, year, or dollar that you expend in time or money. What’s better for you now or in the next few minutes?
What is the theory of consumer choice?
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The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves.
The theory of consumer choice addresses the following questions:
Do all demand curves slope downward?
How do wages affect labor supply?
How do interest rates affect household saving?
What is total utility?
The overall amount of satisfaction achieved by a consumer due to the purchase and use of a particular item or service.
What is marginal utility?
Marginal utility refers to the satisfaction gained from an extra unit consumed.
How is total utility calculated?
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How is marginal utility calculated?
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What is diminishing marginal utility?
As a person gets more units of something, the additional satisfaction from each extra unit decreases
How is diminishing marginal utility different from diminishing marginal returns?
First increment of resources used to something is most productive.
Law of diminishing marginal returns is used to refer to a point at which the level of profits or benefits gained is less than the amount of money or energy invested.
How does one weigh marginal costs and marginal benefits to make a good choice?
Additional units of a good should be produced as long as marginal benefit exceeds marginal cost.
Marginal benefit refers to what people are willing to give up in order to obtain one more unit of a good, while marginal cost refers to the value of what is given up in order to produce that additional unit.
What does production possibility curves show?
Shows the possible combination of two goods that can be produced by an entity given resources, available tech, and institutions (e.g., laws, culture). Show trade offs (what you give up to get something else).
What causes production possibility curves to shift?
1) change in size of the labor force
2) change in the quantity/quality of capital (more capital available to produce goods, the more goods that can be produced.)
3) change in quantity/quality of resources (more and better resource create more goods)
4) change in technology (improved technology produces goods faster and more efficiently)
5) health (healthier economies have more citizens in the work force as well as stronger workers)
6) education (smarter economies create faster, better ways of producing goods)
What is absolute advantage? What is comparative advantage?
Absolute advantage: one person/country is better at doing an activity than another person or country
Comparative advantage: one person or country can do an activity with a lower opportunity costs than the other
Economic Systems: What are 3 fundamental questions?
1) What to make
2) How to make it
3) Who’s going to make it
What are characteristics of marked economic systems?
1) limited government
2) economic decisions are made by buyers and sellers, not the government
3) a competitive market economy promotes efficient use of resources
What are characteristics of mixed economic systems?
A mixed economy consists of both private companies and government/state-owned entities. Both have control of owning, making, selling, and exchanging goods in the country.
1) ownership of goods by both private and government/state-owned entities.
2) monopolies have the potential to occur in this type of economy, but the government closely monitors this.
3) the government can control some parts but not all (e.g., government may control health care and/or welfare)
What are characteristics of command economic systems?
The government controls all of the decisions for owning, making, issuing, and exchanging goods.’
What is the law of demand?
As price goes up, quantity demanded goes down
Why is the demand curve downward sloping?
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What are 6 determinants (shifters) of demand?
1) expectation of future price
2) price of related good
3) tastes of prefs
4) income
5) normal goods: goods for which demand increases as consumers’ incomoes increase
6) inferior goods for which demand decreases as income increase
How do determinants (shifters) change the quantity demanded of a good at every price?
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What are substitutes and complements?
Substitute: a product or service that a consumer sees as the same or similar to another product. In the formal language of economics, X and Y are substitutes if the demand for X increases when the price of Y increases (e.g., substituting a Fuji apple for a Gala apple)
Complementary goods: a good whose use is related to the use of an associated or paired good. Two goods (A and B) are complementary if using more of good A requires the use of more of good B. (e.g., When you go to Best Buy to get a new computer, what usually happens? You end up buying some software or programs to go with it.)
What are inferior goods and normal goods?
A normal good is any good that increases in demand when income increases (e.g., organic pasta)
An inferior good is a type of good that decreases in demand when income rises (e.g., cheap cars)
Explain the difference between change in demand and change in quantity demanded
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What is elasticity of demand?
measures responsiveness of consumers to change in price of good
How is elasticity of demand calculated? After calculating elasticity of demand, how can you tell if the answer is elastic, inelastic, or unit elastic?
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What determines the elasticity of demand?
Closeness of substitutes
What is the law of supply?
ceteris paribus as price increases, quantity supplied also increases
How does the law of supply explain why the supply curve is upward sloping?
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What are 4 determinants (shifters) of supply?
1) change in productivity
2) change in price of resources
3) change in productivity/tech/innovations
4) change in opportunity cost of producing the good (change in appeal of producing substitutes in something else)
How do determinants (shifters) change the quantity supplied of the good at every price?
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Explain the difference between change in supply vs. change in quantity supplied
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change in supply: the whole set of data points
quantity supplied: amount producer is willing to supply at a given price shifter price
How is elasticity of supply calculated?
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After calculating elasticity of supply, how can you tell if the answer is elastic, inelastic, or unit elastic?
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What determines elasticity of supply?
There are numerous factors that directly impact the elasticity of supply for a good including stock, time period, availability of substitutes, and spare capacity.
Explain how supply and demand determine price; shortages or surpluses when the price is too low or too high.
The supply and demand model states that the price of a good will be the level where the quantity demanded equals the quantity supplied. There is never a surplus or shortage of goods at the equilibrium level.
If a price for a particular product goes up, demand will be reduced for that product.
In a perfectly competitive market, a shortage in supply will lead to a higher price point due to the limited supply availability. Surpluses will lead to a lower price point.
What two things are equal in equilibrium?
Forces of supply and demand are balanced
How do price signals tell consumers and producers how to make good choices about the use of resources? (Think about the gas prices and oil refinery example I gave you in class.)
A price signal is information conveyed to consumers and producers, via the price charged for a product or service, which provides a signal to increase/decrease supply and/or increase/decrease demand for the priced item.
How is consumer surplus and producer surplus calculated?
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consumer surplus: extra value to consumers who pay less for good than they are willing to pay
producer surplus: extra value to producers who receive more for good than they are willing to sell for
What are price floors?
Mandated minimum price for good. Illegal to sell good at lower price.
What are ceilings?
A price ceiling is a government-imposed price control or limit on how high a price is charged for a product. Governments intend price ceilings to protect consumers from conditions that could make necessary commodities unattainable
How do price floors and ceilings create shortages/surpluses?
When the price ceiling is set below the market price, there will be a shortage. Producers won’t produce as much at the lower price, while consumers will demand more because the goods are cheaper.
When price ceilings are set above the market price, then there is a possibility that there will be a shortage or a surplus. If this happens, producers who can’t foresee trouble ahead will produce the larger quantity where the new price intersects their supply curve. Unbeknownst to them, consumers will not buy that many goods at the higher price and so those goods will go unsold.
Costs of production. How are the following graphed? (Be familiar with the relationships between the curves as well.)
1) TC
2) TVC or VC
3) TFC or FC
4) ATC
5) AVC
6) AFC
7) MC
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What is TR? MR? How can profit be identified?
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What are economies of scale (graphically with LRATC)?
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spreading fixed costs, advertising, big capital
If given change in ATC, how can one identify EOS, CRS, or DOS?
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What is the profit maximizing rule?
The general rule is that firm maximizes profit by producing that quantity of output where marginal revenue equals marginal costs. MC (the change in costs caused by making a new item) = MR (the change in revenue by making a new item)
What is the differences between accounting and economic profit?
Economic profit consists of revenue minus implicit (opportunity) and explicit (monetary) costs. Economic profit = total revenue - (explicit costs + implicit costs)
Accounting profit consists of revenue minus explicit costs. (implicit costs is not considered). Accounting profit = total monetary revenue- total costs.
What is normal profit?
Zero economic profit. The accounting profit a firm makes equals the firm’s opportunity cost.
What are the characteristics of perfect competition? (Name four)
1) a large number of small firms,
2) identical products sold by all firms
3) perfect resource mobility or the freedom of entry into and exit out of the industry
4) perfect knowledge of prices and technology.
What is profit maximization?
The ability for company to achieve a maximum profit with low operating expenses.
The calculation for profit maximization is: the number of units where MR = MC.
How is MR=MC shown on a graph? How can you find the MR=MC output if you are given a table of numbers?
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What is short run economic profits?
A firm in a perfectly competitive market may generate a profit in the short-run, but in the long-run it will have economic profits of zero.
How can you determine if short run profit conditions are positive, negative, or zero?
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Short run business decisions:
How can you tell if a firm will stay in business, shut down, or is at the shut down point?
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What does the short run to long run adjustment flowchart look like?
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What does long run equilibrium look like graphically?
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What are allocative and productive efficiency?
allocative efficiency - producing the amount of the good that society wants
productive efficiency - firm produces lowest ATC
What are the characteristics of a monopoly?
1) a single firm selling all output in a market
2) a unique product
3) restrictions on entry into and exit out of the industry, and more often than not
4) specialized information about production techniques unavailable to other potential producers.
Monopoly: What are barriers to entry?
Barriers to entry are factors that prevent or make it difficult for new firms to enter a market. Examples include patents, copyrights, government licenses, exclusive ownership of resources, economies of scale.
What is natural monopoly?
A monopoly that exists if economies of scale are huge for the production of that good. The market demand for the good is unable to sustain more than one firm at the minimum efficient scale (MES). Examples are utility companies and telephone companies.
What is profit maximization? What does it look like on a graph with numbers?
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