EXAM 1

Question 1

What is economics?

Answer 1

study how how society manages its limited resources to satisfy unlimited wants

Question 2

scarcity

Answer 2

limited nature of resources

Question 3

resources

Answer 3

land, labor, capital, time, entrepreneurship

Question 4

microeconomics

Answer 4

household, firms, day to day

Question 5

macroeconomics

Answer 5

economy-wide phenomena like inflation, unemployment, economic growth

Question 6

rational behavior

Answer 6

taking action if the benefit outweighs the cost

Question 7

opportunity cost

Answer 7

the forgone value of the next highest-valued alternative

Question 8

marginal change

Answer 8

incremental adjustment

Question 9

incentives

Answer 9

rewards and penalties that motivate behavior

Question 10

how does trade make everyone better off?

Answer 10

allows for variety of goods, for each person to specialize in what she’s good at, enjoy a variety of services at a lower cost

Question 11

self-interest

Answer 11

making choices in your own best interest

Question 12

social interest

Answer 12

choices that benefit everyone

Question 13

normal good

Answer 13

demand increases when income increases

Question 14

inferior good

Answer 14

demand decreases when income increases

Question 15

compliment goods

Answer 15

things that go together (hot dogs and buns), decrease in price of one increases demand for the other

Question 16

substitute goods

Answer 16

goods that are similar, decrease in the price of one good increases demand for the other

Question 17

Determinants of demand (TRIBE)

Answer 17

tastes, related goods, income, buyers, expectations

Question 18

determinants of supply (ROTTEN)

Answer 18

resource costs, opportunity costs, technological innovation, taxes/subsidies, expectations, number of sellers

Question 19

LAW OF DEMAND

Answer 19

when the price increases, the demand decreases

Question 20

LAW OF SUPPLY

Answer 20

when the price increases, the quantity supplied increases

Question 21

surplus

Answer 21

when the quantity supplied is greater than the quantity demanded

Question 22

shortage

Answer 22

when the quantity demanded is greater than the quantity supplied

Question 23

determinants of price elasticity: LESS ELASTIC

Answer 23

less substitutes, short run, broadly defined goods, necessities

Question 24

determinants of price elasticity: MORE ELASTIC

Answer 24

more substitutes, long run, specific goods, luxuries

Question 25

elasticity greater than 1

Answer 25

elastic (price, and revenue move in opposite directions)

Question 26

elasticity less than 1

Answer 26

inelastic, price and revenue move together

Question 27

elasticity equal to 1

Answer 27

unit elastic, price changes but revenue stays the same

Question 28

budget constraint

Answer 28

shows the possible combinations of goods you can buy given your income and the price of goods

Question 29

indifference curves

Answer 29

shows consumption bundles that give consumer the same level of satisfaction

Question 30

marginal rate of substitution

Answer 30

the rate at which a consumer is willing to trade one good for another

Question 31

optimum

Answer 31

the point where the budget constraint touches the highest possible indifference curve

Question 32

income effect

Answer 32

a decrease in the price of one good boosts your purchasing power and allows you to buy more of both goods

Question 33

substitution effect

Answer 33

a decrease in the price of good A makes good B seem more expensive so you buy more of good A and more of good B

Question 34

Giffen good

Answer 34

as the price rises, we demand/consume more