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Economics > Midterm > Flashcards

Midterm Flashcards

1
Q

Economics

A

The study of how society manages its scarce resources

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2
Q

Scarcity

A

In relation to wants, existing resources are inadequate

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3
Q

Choice

A

One alternative is selected over another

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4
Q

Opportunity cost

A

Cost of something in terms of what is given up

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5
Q

Resources and 3 types of resources

A 
Inputs, factors of production
1) land (natural resources)
2) labour (human resources)
3) capital (created resources)
Human capital: skill set you've acquired for yourself
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6
Q

Decision makers

A

1) households (consumers)
- living under one roof who are subject to joint financial decisions
- make consistent decisions
- maximize well being
- principal owners of resources
2) firms (producers) units that employ resources to produce commodities
- make consistent decisions, maximize profit, principal users of resources
3) government (all officials or agencies under direct control of federal, provincial or municipal governments)
- make inconsistent decisions, different agendas

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7
Q

Decisions made at margin

A

Decisions are made at the margin- economic agents compare marginal benefits to marginal costs

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8
Q

Market

A

Area in which buyers and sellers negotiate the exchange of a commodity
A) product markets
B) resource (factor) markets

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9
Q

Evolution of market economies

A

A) subsistence economies
B) agricultural revolution/permanent settlement
C) possibility of exchange enchanted by
-introduction of money, population increases, transportation and communication improvements
D) expansion of markets encourages specialization
E) division of labour
F) differences between economies
-private vs public ownership
-market vs command system
G) people respond to incentives

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10
Q

Invisible hand

A

Adam smith 1700’s
Market system tends to coordinate individual decisions
Laissez-faire economics

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11
Q

Microeconomics

A

Study of the behaviors of individual agents and markets

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12
Q

Macroeconomics

A

Focuses on broad aggregates such as overall production, employment, prices, etc

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13
Q

Efficiency

A

Society is getting the most it can from scare resources

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14
Q

Equity

A

Distributing income fairly among members of society

Market system better at ensuring efficiency vs equity

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15
Q

Market failure

A

Free functioning, market fails to allocate resources efficiently

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16
Q

Externality

A

Impact of persons actions on a bystander

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17
Q

Market power

A

The ability of an economic agent to have a substantial influence on market prices

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18
Q

Positive statements

A

Testable statements (right or wrong)

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19
Q

Normative statements

A

Opinions, value, judgements

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20
Q

Endogenous variables

A

Induced, dependent, variables explained within a theory

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21
Q

Exogenous variables

A

Autonomous, independent, outside factors

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22
Q

Positive vs negative correlation and direct vs inverse relationship
A) demand
B) supply

A

A) as price increases, quantity decreases: inverse relationship, negative correlation
B) as price increases, quantity increases: direct relationship, positive correlation

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23
Q

Production possibilities frontier (PPF) definition

A

Graph showing all combinations of output that the economy can produce given the available resources and technology

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24
Q

PPF assumptions

A

1) economy produces 2 goods: consumer goods (for immediate consumption), capital goods (permit production of other goods)
2) fixed resources
3) fixed technology
4) efficiency (economy is operating at full employment and achieving full production)
- full employment does not mean 0% unemployment rate
- full production=situation where you can’t get something for nothing

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25
Q

PPF characteristics

A

A) downward sloping
B) concave to the origin (bowed out) -law of increasing costs in order to get equal extra amounts of one good, society must sacrifice ever increasing amounts of another good
C) points inside PPF represent unemployment and or inefficiency
D) points outside PPF are unattainable

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26
Q

PPF’s illustrate

A

A) scarcity: unattainable combinations
B) choice: different points on PPF
C) opportunity costs: downward slope

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27
Q

Changes in PPF
A) Technological change affecting both sectors equally
B) Affective one sector more
C) resource base changes

A

A) increases on both x and y axis
B) increases on only one axis
C) natural population increases/decrease, immigration/emigration, natural resources discoveries/depletion

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28
Q

Gains from trade

A

A) trade allows specialization and encourages efficiency

B) in smaller economies it allows development of economies of scale

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29
Q

Absolute advantage

A

Region holds AA over another in the production of commodity X if it requires a smaller amount of inputs to produce a unit of X

The comparison among producers of a good according to their productivity (smaller quantity of inputs has the advantage)

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30
Q

Comparative advantage

A

The comparison among producers of a good according to their opportunity cost (smaller opportunity cost had the advantage)

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31
Q

Terms of trade

A

A) quantity of imported goods per unit of exported goods

B) if the TOT is between the opportunity costs of production for the 2 countries, both will benefit from trade

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32
Q

Demand

A

The relationship between the price of a product and quantity that consumers are willing and able to purchase during some specified time period

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33
Q

Demand law

A

The lower the price of a commodity, the greater the quantity demanded, all other things equal

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34
Q

Factors affecting demand

A

A) endogenous factor-own price
B) exogenous factors
-price of related goods (substitutes/complements)
-income (normal goods/ inferior goods)
-tastes and preferences
-number of buyers
-consumer expectations (income and price)

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35
Q

Demand schedule

A

Table showing relationship between price and quantity demanded

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36
Q

Demand curve

A

Graph of the demand curve (X axis=quantity) (y axis=price)

37
Q

Changes in quantity demanded

A

Caused by change in product price

1) increase in price / decrease in quantity

38
Q

Changes in demand

A

Occurs when at each and every price level, a consumer is willing and able to buy more (less) of a good

1) increase in demand (rightward shift)
2) decrease in demand (leftward shift)

39
Q

Market demand curve

A

Horizontal summation of individual demand curves

-addition of all quantities

40
Q

Engel curve

A

Shows relationship between income and quantity demanded

1) curve going up=normal
2) curve going down=inferior

41
Q

Supply

A

The relationship between the price of a product and the quantity that firms are willing and able to produce/sell during some specified time period

42
Q

Supply law

A

For many commodities, the higher the price, the greater the quantity supplied, all other things equal

43
Q

Factors affecting supply

A 
A) endogenous factor- price
B) exogenous factors
-input costs
-technology
-taxes and subsidies
-number of sellers
-producer expectations
44
Q

Supply schedule

A

Table showing relationship between price and quantity supplied

45
Q

Supply curve

A

Graph of supply schedule

Goes from 0 up

46
Q

Change in quantity supplied

A 
Movement along S caused by price change 
A) increase in quantity supplied 
-price increase=quantity increase 
B) decrease in quantity supplied
-price decrease=quantity decrease
47
Q

Change in supply

A

Occurs when, at each and every price level, a producer is willing and able to sell more (less) of a good

1) increase in supply: rightward shift
2) decrease in supply: leftward shift

48
Q

Market supply curve

A

Horizontal summation of individual supply curves

49
Q

Equilibrium

A

A situation in which the price has reached the level where quantity demanded equals quantity supplied (occurs at intersection between supply and demand curves)

50
Q

Equilibrium price

A

The price where Qd and Qs equalize

51
Q

Equilibrium quantity

A

The Qd and Qs at the equilibrium

52
Q

Excess supply (Es or Surplus)

A

At any price above price equilibrium

Qs>Qd

53
Q

Excess demand (Ed or shortage)

A

At any price below price equilibrium price equilibrium

Qd>Qs

54
Q 
Comparative statics 
A) increase in demand
B) decrease in demand
C) increase in supply
D) decrease in supply
A 
Start from a position at equilibrium, introduce a change and compare the new equilibrium to the old equilibrium 
A) price increases/quantity increases
B) price decreases/quantity decreases
C) price decreases/quantity increases
D) price increases/quantity decreases
55
Q

Giffen good

A

Apparent refutation of demand law; allegedly as prices rise so does Qd (usually a situation of rapidly changing tastes)

56
Q

Double shifts

A

Change in either Pe or Qe will be ambiguous

  • price definitely falls
  • quantity change is indeterminate
57
Q

Ceiling price

A

A legal maximum on the price at which a good can be sold
A) designed to protect customers
B) CP’s above Pe are not binding (not effective)
C) CP’s below Pe are binding (effective)

58
Q

Rent control

A

Example of price ceiling: housing quality deteriorates over time, new construction stops, government must take over industry or subsidize construction and landlords

59
Q

Floor price

A

A legal minimum on the price at which a good can be sold
A) designed to protect producers
B) FP’s below Pe are not binding
C) FP’s above Pe are binding

60
Q

Minimum wage

A

Example of floor price

Effective MW creates unemployment, government pays social assistance

61
Q

Elasticity

A

Ratio of the % change in one variable to the % change in another variable

62
Q

Point elasticity

A

Measures elasticity at a particular point

Delta Q/ delta P • p1/Q1

63
Q

Midpoint (arc) elasticity

A

Measures elasticity along a segment of a curve

DeltaQ/deltaP • p1+p2/q1+q2

64
Q

Price elasticity of demand

A

Measure of the responsiveness of quantity demanded to price change

%changeQ/%changeP
(Refer to midpoint and point calculations)

65
Q

Price elasticity is always ____

1) perfectly inelastic
2) inelastic demand
3) unit elastic
4) elastic demand
5) perfectly elastic

A

Negative

1) Ed=0, vertical demand curve
2) Ed between 0 and -1, relatively steep demand
3) Ed=-1 (take absolute value)
4) Ed between -1,-infinity, relatively flat demand curve
5) Ed=-Infinity, horizontal demand curve

66
Q

Determinants of price elasticity of demand

A

Necessity
Narrowness of commodity definition
Timeframe
(Substitutability)

67
Q

More _____ more elastic demand

A

Expensive

68
Q

Total revenue

A

Price • Quantity

69
Q

Inelastic demand: what happens to price/revenue

A

Price increases causes revenue to increase and vice versa

70
Q

Elastic demand, what happens to price and revenue

A

Price increases causes revenue to decrease and vice versa

71
Q

Income elasticity of demand

A

Measure of responsiveness of quantity demanded to income changes

%changeQ/%changeI
Midpoint: deltaQ/deltaIncome • i1+i2/q1+q2

72
Q

Signs income elasticity of demand

A

Normal goods = positive
(01 : income elastic or luxury good)
Inferior goods =negative

73
Q

Determinants income elasticity of demand

A

Necessity, quality

74
Q

Cross price elasticity of demand

A

Measure of the responsiveness of quantity demanded of one good (a) to price changes in another good (b)
%change Qa/%change Pb
Midpoint: delta Qa/ delta Pb • Pb1 + Pb2/ Qa1+Qa2

75
Q

Signs cross price elasticity

A

Substitutes: positive
Complements: negative

76
Q

Price elasticity of supply

A

Measure of responsiveness of quantity supplied to price changes
%changeQ/%changeP

77
Q

Sign elasticity of supply

A

Zero or positive (by supply law)

78
Q

Ranges/graphs elasticity of supply

1) perfectly inelastic
2) inelastic supply
3) unit elastic
4) elastic supply
5) perfectly elastic

A

1) vertical supply Es=0
2) between 0 and 1, relatively steep supply
3) 1
4) between 1 and Infinity, relatively flat supply
5) horizontal supply

79
Q

Tax incidence

1) impact of sales tax

A

The manner in which the burden of a tax is shared among participants in a market
1) supply curve shifts up by T$ to S’
-new equilibrium at Pe’ Qe’
-Pe’ is price consumer pays
-Pth (price at intersection between new equilibrium and old supply curve) is price producer takes home after tax is turned to gov
2) consumers burden is Pe’-Pe
Producers burden is Pe-Pth

80
Q

Total burden

A

(Pe’-Pe) + (Pe-Pth) = Pe’-Pth = T

81
Q

Given the supply, the more inelastic the demand curve the greater the burden on who?

A

Consumers

82
Q

Given demand, the more inelastic the supply curve the greater the burden on who?

A

Producers

83
Q

In general the less flexible part bears ____ of a tax

A

Greater burden

84
Q

Consumers surplus

A

The difference between what a consumer is willing to pay and the amount the consumer actually pays

Area under demand curve and above price line

85
Q

Producers surplus

A

The difference what a producer takes home and the price it is willing to supply at

Area under the relevant price line and above the supply curve

86
Q

Total surplus

A

Benefits to society

TS= CS + PS

87
Q

Efficiency

A

An allocation of resources that maximizes TS in society

88
Q

Deadweight loss

A

The loss of efficiency or TS that results from a market distortion

Triangle area from the intersection point to the taxes box

89
Q

Taxes box on graph

A

In between the CS and PS, goes until it touches both the supply and demand curves

Economics (2 decks)

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