Exam 1: ch 1-8

Question 1

10 principles of economics

Answer 1

1. people face trade-offs
2. the cost of something is what you give up to get it
3. rational people think at the margin
4. people respond to incentives
5. trade can make everyone better off
6. markets are sometimes a good way to organize economic activity
7. governments can sometimes improve outcomes

Question 2

opportunity cost

Answer 2

what is given up to obtain something

Question 3

what does it mean to think on the margin

Answer 3

making decisions based on small changes in resources (leads to optimal decisions being made)

Question 4

what does the slope of a PPF say

Answer 4

the opportunity cost

Question 5

what is a PPF

Answer 5

production possibilities frontier shows all combinations of output an economy can produce

Question 6

absolute advantage

Answer 6

ability to produce greater quantity than competitor

Question 7

comparative advantage

Answer 7

ability to produce a good at a lower opportunity cost

Question 8

how to solve PPF

Answer 8

make a chart/table, then find the slope using points.

Question 9

when do you use the midpoint method

Answer 9

when calculating elasticity

Question 10

what is the midpoint method formula

Answer 10

(P2-P1)/[P2-P1)/2]

Question 11

conditions for perfect competition satisfaction

Answer 11

• a large number of buyers and sellers
• free entry and exit
• no product differentiation
• price taking

Question 12

demand curve shifters

Answer 12

• income
• price of related goods
• tastes
• expectations
• number of buyers

Question 13

supply curve shifters

Answer 13

• input prices
• technology
• expectations
• number of sellers

Question 14

what happens if demand price is inelastic and there is an increasing price

Answer 14

revenue will decrease

Question 15

substitutes

Answer 15

goods that are interchangeable

Question 16

compliments

Answer 16

consumed together

Question 17

inferior goods and their effect with income increase

Answer 17

increase in income; demand shifts left

Question 18

normal goods and their effect with income decrease

Answer 18

decrease in income; demand shifts right

Question 19

cross-price elasticity formula

Answer 19

% change Qd/ %change P

Question 20

income elasticity of demand formula

Answer 20

% change Qd/ % change y

Question 21

what is the difference between the change in quantity demand and change in demand

Answer 21

• change in Qd results from change in price and moves along the demand curve
• the shift in the curve is the change in demand (shifting left or right)

Question 22

what is the difference between a change in Quantity Supplied and a change in
Supply?

Answer 22

• change in quantity supply is a movement along the curve

- change in supply is the movement of the curve (left or right)

Question 23

law of demand

Answer 23

as the price of a good decreases the quantity demand of that good increases

Question 24

law of supply

Answer 24

as the price of a good increases, the quantity that suppliers offer will increase

Question 25

what does the law of demand tell us about the slope of the demand curve

Answer 25

the demand curve is always downward sloping

Question 26

whats does the law of supply tell us about the slope of the supply curve

Answer 26

there is always an upward slope

Question 27

3 steps to analyzing the shifts:

Answer 27

1. does the event shift supply or demand? 2. which direction does it shift? 3. see how the shift changes

Question 28

how to identify a shortage graphically

Answer 28

If the market price is below the equilibrium price, quantity supplied is less than quantity demanded

Question 29

determinants of the price of elasticity of demand

Answer 29

- availability of substitutes - necessities v. luxuries - the extent of the market - long run vs. short run

Question 30

determinants of the price elasticity of supply

Answer 30

- ability to quickly scale up production | - long run vs. short run

Question 31

relationship between elasticity, price changes, and total revenue. price increase increases total revenue when...

Answer 31

demand is elastic

Question 32

relationship between elasticity, price changes, and total revenue. price increase decreases total revenue when...

Answer 32

demand is inelastic

Question 33

consumer surplus

Answer 33

a good measure of economic well-being

Question 34

how to identify consumer surplus on a graph

Answer 34

the area below the demand curve and above the market price

Question 35

willingness to pay (WTP)

Answer 35

maximum amount someone is willing to pay

Question 36

producer surplus defintion

Answer 36

main measure of producer welfare

Question 37

consumer surplus for an individual is equal to what

Answer 37

the difference between WTP and P

Question 38

produce surplus for and individual firm is equal to what

Answer 38

the difference between P and Cost

Question 39

how to identify producer surplus on a graph

Answer 39

the area above the supply urve below price

Question 40

total surplus formula

Answer 40

total surplus= CS+PS=WTP-cost

Question 41

how does the allocation produced under perfect competition | maximizes total surplus

Answer 41

shortages and surplusses reduce total surplus

Question 42

is legal incidence equal to economic incidence

Answer 42

no

Question 43

legal incidence

Answer 43

person or company who is legally obliged to pay the tax

Question 44

economic incidence

Answer 44

the division of a tax burden between buyers and sellers.

Question 45

When supply is more elastic than demand, where does the tax burden fall

Answer 45

the tax burden falls on the buyers

Question 46

when demand is more elastic than supply, where does tax burden fall

Answer 46

tax burden falls on the sellers

Question 47

when is DWL lower for goods

Answer 47

when supply/demand is less elastic (more inelastic)

Question 48

Deadweight loss (DWL)

Answer 48

a loss of economic efficiency

Question 49

optimal tax policy

Answer 49

a tax system should be chosen to maximize a social welfare function

Question 50

the relationship between tax size and total tax revenue

Answer 50

at low marginal tax rates, tax revenues are an increasing function of tax rates. while at high marginal rates, tax revenues are a decreasing function of tax rates

Question 51

``` locations on the graph (typically) for -Government Revenue  Deadweight Loss  Old CS  Old PS  New CS  New PS  Buyer’s tax incidence  Seller’s tax incidence ```

Answer 51

``` gov revenue: B,D DWL: C,E Old (w/out tax) cs: A,B,C Old (w/ out tax) PS: D,E,F New (w/ tax) CS: A New (w/ tax) PS: F Buyers tax incidence: B Seller tax incidence: D ```

Question 52

if demand price is elastic then what happens to revenue with a decrease in price?

Answer 52

increase revenue

Question 53

the flatter the curve gets:

Answer 53

the higher the elasticity