Midterm Review

Question 1

Economics

Answer 1

The study of how to best allocate scarce resources & help find our optimal allocation

Question 2

Microeconomics

Answer 2

The study of decision making at the individual level

Question 3

Macroeconomics

Answer 3

The study of overall performance of an economy

Question 4

Fundamental Concept of Economics

Answer 4

Resources are scarce relative to our wants and needs (scarcity)

Question 5

Opportunity Cost

Answer 5

The cost of pursuing a given choice

Question 6

Ceteris Paribus

Answer 6

“other things being equal”

Question 7

Total Utility (TU)

Answer 7

an inidividual’s total satisfaction

Sum of Marginal Utility

Question 8

Marginal Utility (MU)

Answer 8

change in TU resulting from a change in quantity

MU=∆TU/∆Q

Question 9

Marginal Product (MP)

Answer 9

change in output (Q) due to each additional unit of a resource
(MP=∆Q/∆N)

Question 10

Value of the Marginal Product (V): ∆TU/∆N

With just one option and assuming no scarcity

Answer 10

Continue until reach bliss point where MU = 0

Question 11

Value of the Marginal Product (V): ∆TU/∆N

With N options and no scarcity

Answer 11

Reach bliss point

MU1 = MU2 = ……. = MUn = 0

Question 12

Value of the Marginal Product (V): ∆TU/∆N

With N options and scarcity

Answer 12

Continue until utilities are equal across all options (Cannot reach bliss point)
MU1 = MU2 = …………. = MUn = X (where X>0)

Question 13

Value of the Marginal Product (V): ∆TU/∆N

With several options for using productive resources and faces scarcity

Answer 13

Value of the Marginal Products are equal across all options

V1= V2 = ……=Vn= X (where X>0)

Question 14

What role do assumptions play in economic models?

Answer 14

Models are based on assumptions and used to make predictions

Question 15

Absolute Advantage

Answer 15

the ability to produce more of a good than others using the same amount of resources

Question 16

Comparative Advantage

Answer 16

the ability to produce more of a good at a lower opportunity cost than another
(Necessary for trade to be beneficial)

Question 17

Barter

Answer 17

the exchange of goods and services for others of similar value (flawed system)

Question 18

General Equivalent

Answer 18

one commodity that is generally accepted for all others (best method)

Question 19

Medium of Exchange

Three Roles of Money

Answer 19

facilitates the exchange of goods and services

Question 20

Unit of Account

Three Roles of Money

Answer 20

provides a common way to measure value of holdings

Question 21

Store of Value

Three Roles of Money

Answer 21

holds value over time and can be used later

Question 22

Demand

Answer 22

shows the quantity (Q) of a good buyers are willing and able to purchase at various prices (P)

Question 23

Supply

Answer 23

shows the qantity (Q) of a good suppliers are willing and able to produce and sell at various prices (P)

Question 24

Excess Supply

Answer 24

Market Price is too HIGH (Qs > Qd)

Price adjusts downward until it reaches equilibrium

Question 25

Price Elasticity of Demand

Answer 25

Measures the responsiveness of QD to a change in P

Question 26

Determinants of Inelastic Demand

Answer 26

- Necessity - Number of Substitutes - Broadly Defined Market - Small Change Relative to Income - Short Run

Question 27

Determinants of Elastic Demand

Answer 27

- Luxury - Quality of Substitutes - Narrowly Defined Market - Large Change Relative to Income - Long Run

Question 28

Excise Tax on a Good: Elastic Demand

Answer 28

Sellers bear the tax burden

Question 29

Excise Tax on a Good: Inelastic Demand

Answer 29

Buyers bear the tax burden

Question 30

Cross-price elasticity | ε1x2

Answer 30

Measures the effect of a price change of one good on the demand for another good

Question 31

Income elasticity | εI

Answer 31

Measures the effect of an income change on the demand for a good

Question 32

Shift Variables of Demand

Answer 32

1. Taste/Preference 2. Price of Related Goods 3. Consumer Income (Number of buyers only shifts the market demand)

Question 33

Shift Variables of Supply

Answer 33

1. Price of inputs into production 2. Level of technology 3. Environment of production (Number of firms only shifts the market supply)

Question 34

Characteristics of Competitive Markets

Answer 34

- Large number of buyers and sellers - Same quality good across sellers - Free entry into or exit out of industry - Perfect information across firms

Question 35

Complements

Answer 35

Demand decreases as price for other good increases. Negative | ε1x2

Question 36

Substitutes

Answer 36

Demand increases as price for other good increases | ε1x2 > 0 (Positive Sign)

Question 37

Normal Goods

Answer 37

Necessary; Demand increases as income increases | εI > 0 (Positive Sign)

Question 38

Inferior Goods

Answer 38

Luxury; Demand decreases as income increases. Negative | εI

Question 39

Risk

Answer 39

events that may affect one's decision

Question 40

Discount Rate

Answer 40

measures one's willingness to wait for future utility

Question 41

Present Value

Answer 41

value of future utility put into today's value

Question 42

Uncertainties

Answer 42

might affect our plans but we do not see them coming

Question 43

Positive Extranalities

Answer 43

positive effect on bystander (flu shot) | Government Solution: subsidize firms

Question 44

Negative Extranalities

Answer 44

negative effect on bystander (smoking) | Government Solution: tax firms

Question 45

"internalize the externality"

Answer 45

implement change so that Lp = Ls again

Question 46

Shift Variables of Labor Demand

Answer 46

Wage Price of Good (P) Price of Other Inputs

Question 47

Shift Variables of Labor Supply

Answer 47

``` Wage Wealth Preferences/Attitudes of Workers Other Opportunities # of Workers ```

Question 48

Why is labor supply upward sloping?

Answer 48

Opportunity cost of work is the value of leisure (increasing opportunity cost with hours worked)

Question 49

Why is labor demand downward sloping?

Answer 49

Due to diminishing value of marginal product. | As a result, a firm will hire additional units of labor as wage decreases.

Question 50

Labor Demand

Answer 50

the amount of labor that firms are willing to hire

Question 51

Labor Supply

Answer 51

the quantity of labor that workers are willing/able to provide