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Flashcards in Midterm 1 Deck (47):
1

Principles of Economics

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 makes everyone better off
6. markets are usually a good way to organize economic activity

2

trade-off

-have to give up something in order to get something
-ex. study one more hour or talk to a friend

3

opportunity cost

-whatever must be given up to obtain an item

4

thinking at the margin

--rational people who do the best they can given their opportunities
-compare marginal benefits > marginal costs

5

firms and consumers respond to incentives

-higher price: buyers consume less while sellers produce more
-change in public policy

6

trade

-increases welfare
-allows people to specializes
-enjoy greater variety of goods and services

7

markets organize economic activity

-government officials best position to allocate economy's scarce resources
-guided by price and self interest

8

government improves market outcomes

-government promotes efficiency and equality

9

no gains from trade when

-opportunity cost is the same
-if one country as absolute advantage
-ratio is the same between the two x and y outputs

10

absolute vs. comparative advantage

absolute: goes to producer that requires smaller input to produce good
comparative: ability of group to produce good at lower opportunity cost than another group

11

equilibrium price

-where supply and demand intersect on graph
-quantity of goods demanded = quantity of goods supplied

12

supply shifters

-change in technology
-input prices
-number of sellers

13

demand shifters

-tastes
-income
-price of related goods
-expectations

14

market demand

-sum of all individual demands

15

elasticity

the degree to which individuals change their supply or demand in response to price or income changes

16

inelastic

-necessities
-vertical demand
-more than 1
-y axis

17

elastic

-luxuries
-goods with close substitutes
-horizontal demand
-less than 1
-x axis

18

perfectly inelastic

no matter what price stays the same

19

perfectly elastic

small change causes infinite cage in demand

20

unit elastic

-curve equal to 1
-quantity supplied or demanded changes the same as the change in price

21

price floor above equilibrium market price

results in surplus

22

price ceiling set below equilibrium market price

results in shortage

23

tax on buyers vs sellers

-buyers: shifts demand curve in
-sellers: shifts supply curve left

24

burden of tax

shared by both consumers and sellers

25

division of tax burden

depends on the relative elastic of supply and demand

26

consumer surplus

-amount buyer is willing to pay minus amount buyer actually pays
-demand curve

27

producer surplus

amount seller is paid for a good minus the seller's cost of providing it
-supply curve

28

externality

-when a person does something that affects bystander
-negative: bad impact of bystander, supply curve left
-positive: good impact on bystander, demand curve left

29

pigovian tax

-tax on market that generates a negative externality
-corrects inefficient market outcome
-ex. paying extra for bags at grocery stores

30

chase theorem

-if private parties can bargain without cost over distributing resources, they can solve externality problems on their own
-ex. offering someone money to get rid of their barking barking dog

31

rival

-one person's consumption of a good reduces the amount of good available for others
-private goods
-common resources

32

excludable

possible to prevent one person's consumption go a good if that person does not pay for the good
-private goods
-club goods

33

public good

non-rival and non-excludable

34

private good

rival and excludable

35

diminishing marginal product

as quantity of input increases, the amount of output (marginal product) decreases

36

total cost

fixed cost + variable cost

37

marginal cost curve

-determines quantity of good firm is willing to supply at any time
-intersects with average total cost at lowest point bc each new output lowers the ATC

38

profit maximizing level of output

MC = MR

39

firm should decrease output when

MC > MR

40

firm should increase output when

MC < MR

41

profits

-P= (P - ATC) x Q
-pushed to zero for all firms in competitive market
-profit needs to be > ATC

42

competitive market

-firms earn zero profit
-profit = ATC
-hires amount of workers where equilibrium market wage = value marginal product of labor

43

monopoly

-firms earn positive profit
-profit > ATC
-MR not constant price (depends on quantity)
-impose dead weight loss on society
-reduce consumer surplus
-increase producer surplus

44

P > ATC

firm making profit

45

P < ATC

firm losing profit

46

P = ATC

firm making zero profit

47

equilibrium wage

were supply and demand curves intersect