Midterm 1 (Weeks 1-6)

Question 1

economics

Answer 1

study of human choices in response to scarcity

Question 2

scarcity

Answer 2

want exceeds limited resources

Question 3

principles of economics

Answer 3

1) people are rational (use all available info to achieve their goals)
2)optimal decisions are made by calculating opportunity costs at the margin
3) people respond to incentives

Question 4

opportunity costs

Answer 4

the true cost of something is the value you could have gained by doing something else

Question 5

marginal cost/marginal benefit

Answer 5

cost/benefit associated with doing a small amount extra of some action, e.g producing one more car at a factory

Question 6

sunk costs

Answer 6

costs already paid for, should not be considered when making next decision

Question 7

incentives

Answer 7

positive or negative, sways behavior by changing the trade-offs

Question 8

describe points on a PPF (production possibilities frontier)

Answer 8

a) on line = attainable and efficient
b) above line = unattainable
c) below line = attainable and inefficient

Question 9

slope of PPF = ?

Answer 9

opportunity cost of y axis

Question 10

invisible hand

Answer 10

global production/trade is a natural result of self-interested individuals trying to improve their lives

Question 11

economic growth

Answer 11

ability of economy to increase production/expand PPF

Question 12

absolute advantage

Answer 12

ability to produce more goods using same resources

Question 13

comparative advantage

Answer 13

good can be produced there at a lower opportunity cost than anywhere else

Question 14

specialization

Answer 14

each country has their own comparative advantage, specialization allows for trade

Question 15

markets

Answer 15

individuals and businesses decide production and allocation

Question 16

demand

Answer 16

the more it costs, the fewer people want it

Question 17

four features of a competitive market

Answer 17

1) no transaction costs (no pay to compete)
2) standardized goods (doesn’t matter what you buy)
3) full info (quality, price)
4) price-taking participants (individuals cannot affect price)

Question 18

demand vs. quantity demanded

Answer 18

overall curve vs. point on curve at specific price

Question 19

ceteris paribus assumption

Answer 19

“all else held equal” - when variables other than price/quantity are held constant, demand decreases as price goes up

Question 20

income effect

Answer 20

price down, purchasing power up

Question 21

substitution effect

Answer 21

people will gravitate towards substitutes if they are cheaper

Question 22

if ANYTHING other than price changes ____ happens

Answer 22

the entire demand curve shifts

Question 23

if price changes ___ happens

Answer 23

shift down or up curve occurs

Question 24

normal good

Answer 24

income up, demand up (most goods)

Question 25

inferior good

Answer 25

income up, demand down (ramen noodles)

Question 26

substitutes

Answer 26

goods that can be used in place of one another (big mac and whopper)

Question 27

complements

Answer 27

bought together (peanut butter and jelly)

Question 28

law of supply

Answer 28

all else held equal, price up means supply up

Question 29

input

Answer 29

used in production of good or service. if price goes up, supply goes down bc less profitable for company

Question 30

technological changes

Answer 30

increase supply as they increase productivity

Question 31

more firms in a market means...

Answer 31

more goods supplied

Question 32

excess supply (glut)

Answer 32

supply outweighs demand

Question 33

excess demand

Answer 33

more demand exists than supply of good

Question 34

market equilibrium

Answer 34

point where quantity demanded = quantity supplied

Question 35

predictions based on shifts in supply and demand

Answer 35

1) same direction shift = predict quantity change, not price 2) opposite direction shift = predict price change, not quantity

Question 36

elasticity

Answer 36

way to measure responsiveness of buyers to changes in prices

Question 37

elasticity is always _____ (number sign)

Answer 37

negative

Question 38

PED (price elasticity of demand) >1

Answer 38

good is price elastic

Question 39

PED < 1

Answer 39

good is inelastic

Question 40

PED = 1

Answer 40

good is unit elastic

Question 41

vertical demand/supply curve

Answer 41

perfectly inelastic, price up, quantity demanded stays the same (water, air)

Question 42

horizontal demand/supply curve

Answer 42

perfectly elastic, price up or down, quantity demanded goes to 0 (diamonds, gold)

Question 43

midpoint formula

Answer 43

solves for elasticity, (Q2-Q1/midpoint Q)/(P2-P1/midpoint P)

Question 44

determinants of elasticity

Answer 44

1) availability of close substitutes (more subs, more elastic demand) 2) passage of time (goods are more elastic long term) 3) luxuries vs. necessities (luxuries very elastic, necessities very inelastic) 4) definition of market (widely defined market = more inelastic) 5) share of good in budget (good is low cost to consumer, price is mostly indifferent)

Question 45

revenue

Answer 45

price x quantity sold

Question 46

when quantity effect > price effect

Answer 46

demand is elastic (PED>1)

Question 47

when price effect > quantity effect

Answer 47

demand inelastic

Question 48

where is revenue highest?

Answer 48

where elasticity = 1

Question 49

price elasticity of supply (PES)

Answer 49

measures producers response in quantity to a change in price, also determined by midpoint formula

Question 50

PES is always ____ (number sign)

Answer 50

positive

Question 51

cross-price elasticity of demand

Answer 51

how quantity demanded of one good changes when price of another changes. Concerns substitutes and complements, e.g if peanut butter goes up in price, what happens to quantity demanded of jelly?

Question 52

income elasticity of demand

Answer 52

quantity response to income of consumer, if elasticity >1 it is a luxury good

Question 53

efficiency

Answer 53

1) is society better off in a measureable way because of this? marginal benefit of trade outweighs marginal costs 2) market maximizes consumer and producer surpluses

Question 54

surplus

Answer 54

remains above what is used or needed

Question 55

consumer surplus

Answer 55

maximum price willing to pay for good vs. actual price of good, any discrepancy is this surplus area BELOW demand curve, ABOVE price line

Question 56

Willingness to Pay/Willingness to Sell (WTP/WTS)

Answer 56

maximum amount consumer is willing to pay for a good/minimum amount producer will sell a good for

Question 57

producer surplus

Answer 57

any marginal benefit at or above the cost of a good area ABOVE supply curve, UNDER price line

Question 58

total surplus

Answer 58

consumer surplus + producer surplus

Question 59

deadweight loss (DWL)

Answer 59

amount of inefficiency in a market, caused by lacks in supply or demand or price caps, etc. 0 at competitive equilibrium calculated by area of triangle, 1/2bh

Question 60

taxes

Answer 60

supply and demand curves shift left, both surpluses decrease government takes revenue

Question 61

subsidies

Answer 61

supply and demand curves shift right, surpluses increase government pays

Question 62

price floor

Answer 62

legal minimum price instilled to pay for a good; creates surplus (think milk price floor for dairy farmers, govt. must buy up surplus)

Question 63

price ceiling

Answer 63

legal maximum price for a good, think rent control, gas price caps, etc. creates shortage