Midterm 1 Chapters 1-3 (Supply & Demand)

Question 1

Economics

Answer 1

Study of the choices people make & the actions they take to make the best use of scarce resources to meet wants & needs

Question 2

Scarcity

Answer 2

Allocation of resources

Question 3

How are Allocaitons Evaluated

Answer 3

1. Efficiency
2. Equity
3. Moral & Political Consequences

Question 4

Calculation of Net Benefits

Answer 4

Benefits - Costs

Question 5

If Benefits of X > Cost …

Answer 5

DO activity X

Question 6

If Benefits of X < Cost …

Answer 6

DO NOT do activity X

Question 7

Contingent Valuation

Answer 7

What is this worth to you?

Question 8

Thinking on the Margin

Answer 8

What’s the Benefits & Costs of adding a value

Marginal = Additional

Question 9

Microeconomics

Answer 9

Choices & actions of individual economic units

• EX: households, firms, consumers

Question 10

Macroeconomics

Answer 10

Behavior of the entire economy

• EX: unemployment, inflation, national income

Question 11

Positive Economics

Answer 11

Statements about what is / can be tested by checking against observed facts

• AKA Empirical Science

Question 12

Negative Economics

Answer 12

Statements that depends on values & beliefs

- CANNOT be tested

Question 13

Correlation Fallacy

Answer 13

Incorrect belief that Correlation = Causation

Question 14

Post Hoc Fallacy - Special Case of Correlation Fallacy

Answer 14

Incorrect reasoning that a 1st event Causes a 2nd event because it occurred before the 2nd

Question 15

Fallacy of Composition

Answer 15

Incorrect belief that what is true for an individual = true for a group

Question 16

The Production Possibilities Frontier (PPF)

Answer 16

Show what we are capable of producing

(Unattainable VS Inefficient)

• Combinations of goods that can be produced when the factors of production are at full-potential

Question 17

Opportunity Cost (Opp Cost)

Answer 17

Benefit given up by not using the resources in the next best alternative way

Question 18

Law of Increasing Cost

Answer 18

To produce extra amounts of a good, the supplier must give up increasing amounts of another good

Question 19

Pure Centrally Planned

Answer 19

All decisions made by governemnt

Question 20

Market Chooses

Answer 20

Thousands of industrial choices directed by market prices

Question 21

Mixed Economy

Answer 21

Market economy guided by the government

Question 22

Absolute Advantage

Answer 22

Good / Service can be produced at a Lower Absolute Cost

• # of Goods

Question 23

Comparative Advantage

Answer 23

Good / Service can be produced with a Lower Opportunity Cost

Question 24

Rationality Assumption

Answer 24

We assume people are motivated by self-interest & act rationally

• Individuals do not make decisions that will leave them worse off

- The baker doesn’t make bread for the good for society, it’s to make $$$

Question 25

Quantity Demanded

Answer 25

**Amount consumers wish to buy**

Question 26

Law of Demand

Answer 26

As the product's **Price INCREASES, the Quantity Demanded DECREASES** As the product's **Price DECREASES, the Quantity Demanded INCREASES**

Question 27

Changes in Quantity Demanded

Answer 27

**Changes in Price** corresponds to **movements across Demand Curve**

Question 28

Price of Substitute for good A Increases ...

Answer 28

Demand for good A Increases

Question 29

Price of Complement of good A Increases ...

Answer 29

Demand for good A Decreases

Question 30

Normal Goods

Answer 30

A commodity that **Increases when your income Increases** - EX: Going out to eat MORE after getting a raise

Question 31

Inferior Goods

Answer 31

A commodity that **DECREASES when your income Increases** - EX: Buying LESS ramen when you get a raise

Question 32

Law of Supply

Answer 32

As the product's **Price INCREASES, the Quantity Supplied INCREASES** As the product's **Price DECREASES, the Quantity Supplied DECREASES**

Question 33

Change in Quantity Supplied

Answer 33

**Change in Price** corresponds to a movement along the curve

Question 34

As Technology IMPROVES ...

Answer 34

Costs Decreases, Increase in Supply

Question 35

Costs of Inputs INCREASE ...

Answer 35

Supply Curve shifts, Decrease in Supply

Question 36

Number of Firms INCREASE ...

Answer 36

Supply Increases

Question 37

Taxes INCREASE ...

Answer 37

Costs Increase, Supply Decreases

Question 38

Equilibrium

Answer 38

Where **Supply** Curve **interesects** with the **Demand** Curve *- When the Market Clears*

Question 39

FOUND the Equilibrium

Answer 39

When **Quantity Supplied = Quantity Demanded**

Question 40

The Invisible Hand

Answer 40

A metaphor for the **unseen forces that coordinates economic actions & allocation of resources**

Question 41

The Invisible Foot

Answer 41

How **political / legal policies & regulations** have the opposite effect of what is intended in influencing the market

Question 42

Why do we need governments to take part in the market economy?

Answer 42

- To conform to social, cultural, legal, political norms - Allocation of resources - To correct failing markets

Question 43

Price Floor

Answer 43

Government set the **MINIMUM Price** for good / service - EX: Minimum Wage Laws

Question 44

Price Ceiling

Answer 44

Government sets the **MAXIMUM Price** for good / service - EX: Rent Ceilings

Question 45

Quotas

Answer 45

Government sets **MAXIMUM Quantity** for a good / service

Question 46

The Invisible HandShake

Answer 46

Combination of **Social & Historical forces & Cultural norms** that **influence market outcomes**