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ASTR 121 > ECON 302 Midterm > Flashcards

ECON 302 Midterm Flashcards

1
Q

What is economics?

A

The social science that studies the choices individuals make as they cope with scarcity and the incentives that influence these choices.

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2
Q

What is scarcity?

A

A good is scarce if you have to give something up to get it.

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3
Q

What is a positive statement?

A

Statements about how the world is.

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4
Q

what is a normative statement

A

A value judgment about costs and benefit which describes what situation an individual prefers.

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5
Q

What is a hypothesis?

A

An assertion of a relationship between two or more variables that could be proven true or false.

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6
Q

what is a regression analysis?

A

A method of statistical analysis which uses data to determine the effect of one or more variables on another. Can be used to create a line of best fit.

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7
Q

What is big data?

A

Companies and governments can collect large amounts of data on individual behavior. Statistical analysis of this data can reveal trends and correlations between variables.

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8
Q

What is a theory?

A

A simplified representation of how two or more variables interact with each other. The purpose of a theory is to take a complex, real-world issue and simplify it down to its essentials.

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9
Q

What are the elements to a theory?

A
  • Simple- Focusing on fewer variables than the real world.
  • General- Applies everywhere and always.
  • Useful- Able to correctly predict real world phenomenon.
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10
Q

What is the law of demand?

A

There is an inverse relationship between the price of a good and the quantity demanded of that good.

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11
Q

what does the demand curve portray.

A

A line or curve that shows the quantity demanded of a good over a range of possible prices.

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12
Q

What is the demand function?

A

Mathematical relationship where quantity demanded is a function of price.
Functional Form: QD=f(P)

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13
Q

How do you solve an inverse demand function?

A

Find the equation equal to P.

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14
Q

What is the choke price?

A

The price at which quantity demanded is equal to Zero. The constant in an inverse linear demand curve.

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15
Q

What is the reservation price?

A

The highest price a person is willing to pay and still purchase the good. In theory, the maximum a person would be willing to pay would be equal to their use value. The inverse demand function has price on the lefthand side. This price can also be considered the reservation price for a particular unit of the good.

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16
Q

which way does the supply curve slope?

A

The supply curve slopes downward

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17
Q

What is the law of demand?

A

An increase in the price of Good X will cause the quantity demanded of Good X to fall and a decrease in the price of Good X will cause the quantity demanded of Good X to rise, ceteris paribus.

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18
Q

Percentage change formula?

A

:%∆X=((XNew-XOld ))/XOld

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19
Q

What is elasticity?

A

A measure of responsiveness of one variable to a change in one of its determinants.

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20
Q

What is own-price elasticity of demand?

A

A measure of responsiveness of quantity demanded of good X to a change in the price of good X.

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21
Q

Own-price elasticity of demand equation?

A

E_D=(∂QDX)/(∂PX)*PX/QDX

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22
Q

When comparing own price elasticity what does a negative sign imply?

A

An inverse relationship.

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23
Q

Own-price elasticity of supply?

A

A measure of responsiveness of Quantity supplied of good X to a change in the price of good X.

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24
Q

What is the Own-Price Elasticity of Supply (Calculus Formula)?

A

E_S=(∂QSX)/(∂PX)*PX/QSX

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25
Q

when comparing Own-Price Elasticity of Supply what does a positive sign mean.

A

if Both are positive, implying positive relationship

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26
Q

rearrange the elasticity formula to find the %∆QDX

A

ED*%∆PX=%∆QDX

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27
Q

what are the categories of elasticity.

A

Perfectly inelastic
inelastic
Unit Elastic
Elastic
Perfectly Elastic

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28
Q

What is perfectly inelastic?

A
  • Change in price has zero reaction effect on quantity demanded (or supplied).
    o E = 0.0
    graph is vertical (like an I)
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29
Q

What is Inelastic?

A

A percentage change in price has caused a smaller reaction percentage change in quantity.
o 0.0 < |E| < 1.0,
Graph is steeper then unit elastic.

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30
Q

What is unit elastic?

A

A percentage change in price has caused an Equal Reaction percentage change in quantity.
o |E| = 1.0
The graph is perfect slope

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31
Q

What is elastic ?

A
  • A percentage change in price has caused a Larger Reaction percentage change in quantity.
    o 1.0 < |E| < ∞
    The graph is flatter then the unit elastic.
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32
Q

What is perfectly elastic?

A

A percentage change in price has caused an Infinite Reaction percentage change in quantity.
o |E| = ∞
The graph is a flat line ( like this ___)

33
Q

What are the characteristics of elastic good for substitute goods?

A
  • Goods with more substitutes tend to be more elastic.
34
Q

What happens to goods elasticity that have a larger share of a consumers budget?

A
  • Goods that are a larger share of a consumer’s budget tend to be more elastic.
35
Q

The Longer a consumer has to react to a price change what happens to the elasticity

A
  • The Longer a consumer has to react to a price change the more elastic they can be.
36
Q

The elasticity at every point on a linear demand curve is different. what are higher prices on the demand curve?

A

They will have a higher elasticity.

37
Q

The elasticity at every point on a linear demand curve is different. what are lower prices on the demand curve?

A

They will have a higher inelasticity.

38
Q

What are expenditure and the equation?

A

The total amount spent by consumers.
* Expenditure = Price * Quantity

39
Q

What is Revenue and the equation?

A

The total amount received by producers. It must be equal to expenditures.
* Revenue = Price * Quantity

40
Q

What must the revenue and expenditures do?

A

be equal

41
Q

In the elastic region of a demand curve a price increase will?

A

cause expenditure and revenue to decrease.

42
Q

In the elastic region of a demand curve a price decrease will?

A

cause expenditure and revenue to increase.

43
Q

In the inelastic region of a demand curve a price increase will?

A

cause expenditure and revenue to increase.

44
Q

In the inelastic region of a demand curve a price decrease will?

A

cause expenditure and revenue to decrease.

45
Q

What is Cross-Price elasticity of demand and equation(percentage change formula)?

A

A measure of responsiveness of quantity demanded of good X to a change in the price of good Y.
ECross=(%∆QDX)/(%∆PY )

46
Q

Cross-Price Elasticity of Demand (Calculus Formula).

A

ECross=(∂QDX)/(∂PY )*PY/QDX

47
Q

Income Elasticity of demand and Income Elasticity of Demand (Percentage Change Formula).

A
  • A measure of responsiveness of quantity demanded of good X to a change in income.
    EInc=(%∆QDX)/(%∆I)
48
Q

Income Elasticity of Demand (Calculus Formula).

A

EInc=(∂QDX)/∂I* I/QDX

49
Q

What is a market bundle(or basket)?

A

List with specific quantities of one or more goods.

50
Q

What is the consumer goal?

A

We assume people choose between options in the way that will make them happiest (maximize their utility).

51
Q

What is completeness?

A

Completeness- Consumers can compare and rank all possible bundles. If you give someone a choice between any two possible sets of options, then they will be able to rank one bundle as better than the other or say the two bundles are equally good.

52
Q

What is indifference?

A

When a consumer is equally happy with either of two bundles. This doesn’t mean that a people don’t want the good. They just like the two goods equally.

53
Q

What is transitivity?

A
  • If A is preferred to B and B is preferred to C, then A will be preferred to C.
    A > B > C
54
Q

what does “More is better then Less” mean?

A

”- If Bundle X has at least as much of every good as Bundle Y, plus more of one good, then Bundle X is preferred to Bundle Y. This doesn’t mean that a person just chooses the bundle with the most total objects.

55
Q

if a bundle is in the upper right region what is prefed to?

A

more preferred to Bundle X.

56
Q

What is the Marginal Rate of Substitution- (MRS)?

A

The rate at which a consumer is willing to substitute one good for another and still maintain the same level of satisfaction

57
Q

What is Marginal?

A

The change in some variable.

58
Q

Diminishing Marginal Rate of Substitution?

A

As the consumer obtains more of Good X, the amount of Good Y she is willing to give up for another unit of Good X decreases. “The more of a good I have the less I’m willing to give up to get another unit.”

59
Q

What are the four main Assumptions about Preferences?

A
  • Completeness
  • Transitivity
  • More is better than less
  • Diminishing Marginal Rate of Substitution
60
Q

What is utility?

A

A numerical score representing the satisfaction that a consumer gets from a given market bundle.

61
Q

What is the Utility Function and what is the formula?

A
  • A formula that assigns a utility score to a bundle of goods.
    Functional Form: U=f(X,Y)
62
Q

What is an indifference curve?

A

Also called an utility curve. Shows all possible combinations of two goods that generate the same level of utility.

63
Q

What is the Cobb-Douglas Utility Function and equation?

A

A common version of a utility function. Values can be used for parameters a, c and d to fit a particular individual’s preferences for Good X and Good Y.
General Functional Form: U=aX^C Y^D

64
Q

What is marginal Utility and equation?

A

The change in an individual’s total utility from receiving an additional unit of a good. This can be interpreted as how much a consumer’s utility changes when they get one more unit of Good X while holding all other goods at a constant level.
Formula: MUx=∂U/∂X.

65
Q

What is diminishing Marginal Utility?

A

The increase in utility attained from receiving another unit of Good X, gets smaller at higher levels of Good X.

66
Q

What is the Marginal Rate of Substitution (Calculus Formula)?

A

MRSxy=(MUx)/(MUy)

67
Q

What is the Cobb-Douglas Shortcut for MRS

A

U=aX^c Y^d
MRSxy=c/d Y/X

68
Q

What are perfect substitutes?

A

Two goods for which the marginal rate of substitution of one for the other is constant. There is no diminishing to the marginal rate of substitution.

69
Q

What are Perfect Complements?

A

Getting more of one good will not increase utility unless it comes with an increase in the other good as well. Two goods for which the marginal rate of substitution is either zero or infinite.

70
Q

What is a budget constraint?

A

The boundaries in consumption that individuals face as a result of limited incomes.
Budget Constraint Formula: M = Px X+Py Y

71
Q

What is the market Rate of Substitution- (MktRS)?

A

The rate at which one good can be traded for another. The absolute value of the slope of the budget line.

72
Q

MktRS Formula:

A

MktRSXY=PX/PY

73
Q

What is true when optimizing utility?

A

MRSXY = MktRSXY.

74
Q

What is the Corner Solution?

A

A situation in which the marginal rate of substitution of one good for another cannot be equal for non-negative quantities of both goods. The consumer will choose to spend their entire budget on only Good X or only Good Y, whichever brings the highest utility.

75
Q

What does MRSXY mean?

A

How much of Good Y the consumer is willing to give up to get a unit of Good X.

76
Q

What does MktRSXY mean?

A

How much of Good Y the consumer has to give up to get a unit of Good X.

77
Q

What does MRSXY > MktRSXY mean?

A

The consumer is willing to give up more than they have to in order to get another unit of Good X. Buying Good X increases their utility.

78
Q

What does MRSXY < MktRSXY mean?

A

The consumer is willing to give up more than they have to in order to get another unit of Good X. Buying Good X decreases their utility.

ASTR 121 (7 decks)

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