Midterm

Question 1

10 principles of economics

Answer 1

1. people face tradeoffs (e.g. between efficiency and equality)
2. cost is what is given up to recieve something
3. rational people think at the margin
4. people respond to incentives
5. trade can make everyone better off (allows specialization and greater variety of goods)
6. markets usually good way to organise economy
7. country’s standard of living depends on ability to produce goods/services
8. prices rise when government prints too much money
9. SR trade off between inflation and unemployment (Philips’ curve)
10. governments can improve market outcomes

Question 2

economics

Answer 2

study of

• how society manages scarce resources
• how people make decisions
• how people interact with each other
• forces/trends that affect economy as a whole

Question 3

efficiency

Answer 3

property of society getting the most it can from resources

Question 4

equality

Answer 4

property of distributing economic prosperity among members of society

Question 5

opportunity cost

Answer 5

whatever must be given up in order to obtain an item

Question 6

market economy

Answer 6

economy that allocates resources through decentralised decisions of firms and households based on price and self-interest

Question 7

market failure

Answer 7

situation in which market on its own fails to produce efficient allocation of resources

Question 8

externality

Answer 8

impact of someone’s actions on well-being of bystander

Question 9

market power

Answer 9

ability of single economic actor to have substantial influence on market prices

Question 10

productivity

Answer 10

quantity of g/s produced from each unit of labor input

Question 11

inflation

Answer 11

increase in overall price levels in an economy

Question 12

macroeconomics

Answer 12

study of economy-wide phenomena (e.g. inflation, unemployment)

Question 13

microeconomics

Answer 13

study of how individual households/firms make decisions and how they interact in markets

Question 14

postive statements

Answer 14

claims that attempt to describe world as it is

Question 15

normative statements

Answer 15

claims that attempt to prescribe how the world should be

Question 16

circular flow model

Answer 16

photo

Question 17

law of demand

Answer 17

decrease in price increases quantity demanded

Question 18

normal good

Answer 18

good for which, ceteris paribus, an increase in income leads to an increase in demand

Question 19

inferior good

Answer 19

good for which, ceteris paribus, an increase in income leads to a decrease in demand

Question 20

substitutes

Answer 20

2 goods for which an increase in the price of one leads to an increase in the demand for another

Question 21

complements

Answer 21

2 goods for which an increase in the price of one good leads to a decrease in demand for the other

Question 22

law of supply

Answer 22

increase in price increases quantity supplied

Question 23

non price determinants of demand and supply

Answer 23

demand

• taste
• expectations
• number of buyers

supply

• input prices (F of P)
• technology
• expectations
• number of sellers

Question 24

equilibrium

Answer 24

situation in which the market price has reached level at which Qs equals Qd

Question 25

graph showing surplus, shortage, equilibrium

Answer 25

Question 26

PED

Answer 26

measure of how much Qd of a good responds to change in price of that good

Question 27

PED equation

Answer 27

((Qn-Qo)Po)/((Pn-Po)Qo)

Question 28

determinants of PED

Answer 28

* availability of close substitutes (without close stubstitute demand less elastic) * necessities (inelastic) vs. luxuries (elastic) * SR (inelastic) vs. LR (more elastic)

Question 29

elastic vs. inelastic PED

Answer 29

* |PED| \> 1 elastic * |PED| \< 1 inelastic

Question 30

perfectly inelastic demand

Answer 30

|PED| = 0 vertical demand curve

Question 31

unit elastic demand

Answer 31

|PED| = 1

Question 32

infinitely elastic demand

Answer 32

|PED| = infinity horizontal demand curve

Question 33

PES equation

Answer 33

((Qn-Qo)Po)/((Pn-Po)Qo)

Question 34

perfectly inelastic supply

Answer 34

PES = 0 vertical supply curve

Question 35

unit elastic supply

Answer 35

PES = 1

Question 36

infinitely elastic supply

Answer 36

PES = infinity horizontal supply curve

Question 37

elastic vs. inelastic PES

Answer 37

* PES \> 1 elastic * PES \< 1 inelastic

Question 38

price ceiling

Answer 38

legal maximum on price at which a good can be sold

Question 39

price ceiling graph

Answer 39

Question 40

price ceiling example

Answer 40

* both demand and supply inelastic * in LR, demand and supply increasingly elastic * D-side: Qd for apartments increases * S-side: no incentive to build new housing and don't maintain old houses * ration housing, lower quality housing

Question 41

price floor

Answer 41

legal minimum on price at which good can be sold

Question 42

price floor graph

Answer 42

Question 43

price floor example

Answer 43

minimum wage --\> labor surplus

Question 44

tax levied on sellers graph

Answer 44

Question 45

tax levied on buyers graph

Answer 45

Question 46

tax burden: elastic supply, inelastic demand

Answer 46

greater burden on consumers

Question 47

tax burden: elastic supply, elastic demand

Answer 47

consumers and producers share tax

Question 48

tax burden: inelastic supply, elastic demand

Answer 48

greater burden on producers

Question 49

willingness to pay

Answer 49

maximum amount that a buyer will pay for a good

Question 50

consumer surplus

Answer 50

difference between amount a buyer is willing to pay for a good and amount actually paid

Question 51

consumer surplus graph

Answer 51

Question 52

producer surplus

Answer 52

area below price and above supply curve

Question 53

total surplus

Answer 53

* value to buyers - cost to sellers * consumers + producer surplus

Question 54

why does taxation lead to DWL?

Answer 54

prevent buyers/sellers from realising some gains of trade

Question 55

determinants of DWL

Answer 55

* inelastic supply/demand --\> increased DWL * elastic supply/demand --\> decreased DWL