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1P91 ECON - Microeconomics > Part 1 > Flashcards

Flashcards in Part 1 Deck (113):
1

What logical fallacy assumes that since Y event follows X event, that X event must cause Y?

Post hoc ergo propter hoc Correlation is not causation

2

What logical fallacy rebuts an argument not through addressing the argument, but instead by deflecting, calling names, or attacking the motives or character of the person making the argument?

Argumentum ad hominen

3

What logical fallacy assumes that something must be true because many believe it?

Argumentum ad populum (appeal to popularity)

4

Other than the latin named types, name 4 logical fallacies and explain

Overgeneralisation - from the few expanding to the whole Appeal to emotion - using emotional response to justify an argument Appeal to experts - using uncited references > experts can be wrong Straw man - Taking an aspect of an argument and expanding it into a larger insinuation/proposition that can be easily torn down. Ie. Tearing down an argument that was not original but instead designed.

5

What are two types of thinking? Briefly explain each

Deduction and induction. Deduction utilizes universal truths and narrows to the particular in a logical manner. Induction will go from the specific to the general (common is stats where samples must be used.

6

What was the most recent economic revolution? Who was the big thinker? What is the big idea?

Game Theory. John Nash, Reinhard Selten, John Harsanyi. Study of strategic interactions as games.

7

Who is responsible for the Mathematical Revolution? What was his book? What scientific theory was used?

Paul Samuelson. Foundations of Economic Analysis (1947). Grounded economics in mathematical optimization. Used Thermodynamics.

8

In what period did the marginal revolution occur? Who were the big thinkers? What was the big idea?

Occurred in the late 19th century. William Stanley Jevons: A general mathematical theory of political economy(1862) . Alfred Marshall: Principles of Economics (1890) Investigated supply and demand - the time and use effect on value.

9

What was the hallmark of Adam Smith's An inquiry into the nature and causes of the wealth of nations (1776)?

Division of labour is a main driver of economic growth

10

In what period did the enlightenment happen? What people and events are associated with the enlightenment? What was enlightenment thought?

Period: 1715 - 1789 People and events: Voltaire was a major person. Events were the French and American Revolutions. People: Adam Smith: Writes the first work in economic theory: An inquiry into the nature and causes of the wealth of nations (1776) Thought: Society based on idea that all men are created equal, reason, and natural law. Economically, call for enlightened self interest > greed is not good > furtherance of others to further yourself.

11

What were the 5 economic revolutions? What period did they take place?

1st revolution: The enlightenment - 18th century 2nd revolution: The marginal - 19th Century 3rd Revolution: The Mathematical - 20th Century 4th Revolution: The Game Theoretic - 20th Century 5th Revolution: now - name ???

12

What is opportunity Cost? Give an example.

The opportunity cost of an action is the best alternative to that action. For example: you have a choice between 3 options: 1) facebook, 2)reading a book, 3) watching star wars. You don't like reading so your opportunity cost of facebook is watching star wars Everything has a price

13

How is the trade off between production goods within an economy illustrated? What is the slope of this diagram called?

The tradeoff is illustrated in a diagram called the Production Possibilities Frontiers (PPF). The slope of the PPF is called the marginal rate of transformation (MRT)

14

What are reasons that a PPF may shift?

• Reasons for the shift may be: ○ Natural events - disasters etc. ○ Technology change ○ Population change - manpower ○ Capital accumulation - of stuff and human capital ○ Trade ○ Political and economic institutions As argued by economist Acemoglu

15

What is the law of Demand?

Law of Demand: As the price of a good or service goes down, quantity demanded goes up

16

What factors can cause change in demand?

Ø Income levels will influence demand ○ Normal goods will increase in demand when income goes up ○ Inferior goods will decrease in demand when income goes up

Ø Population will influence demand ○ For example: a rising amount of seniors in a population will increase demand for prescription drugs.

Ø A change in the price of substitutes will influence demand ○ Example: in 1910 prostitution was a very profitable occupation. Now it is not. Reason: prostitution was a substitute for casual sex. As casual sex became more common, demand for prostitution decreased. ○ Example: If the price of coffee goes up, the demand for tea (a substitute for coffee) will go up Ø A change in the price of complements will influence demand ○ Example: Coffee and sugar: if the price of coffee goes up, the demand for sugar will go down.

Ø Expectations will influence demand ○ Example: In the expectation of a hurricane the demand for plywood goes up ○ Example: The expectation of a particularly bad winter will increase demand for shovels or snow blowers

Ø Tastes will influence demand ○ The more people decide that they want something the more the price goes up Example: Chinese consumers develop a taste for Nova Scotia lobster - increases demand and price for Nova Scotia lobster

17

What is consumer surplus? What is the calculation?

Consumer Surplus (CS) is a way to measure consumer benefit from buying a good or service. CS = WTP (max price willing to pay) - Price

18

In general terms, how is the consumer surplus calculated on a demand curve?

By calculating the area of a triangle. (Height)(length) / 2. For example: if the max price for a good is $100. and the market price is $50 which meets a demand for 10 units. Then Length = 10, height = 100-50 = 50 . 50 * 10 / 2 = $250 CS

19

What can change supply?

○ Technology/innovation

○ Taxes/subsidies

○ Expectations

○ Entry and exit of producers

○ Changes in opportunity cost

○ State of nature Eg. Drought causes a lower supply of wheat

20

What is the producer surplus?

○ Producer surplus (PS) ○ Difference between the price the producer gets on the market and the minimum price he will accept ○ The supply curve represents different producers min price ○ Example: You are a beer producer ○ Min price = $8 per pint ○ Actual price = $10 per pint PS = actual price - min price (2=10-8)

21

What is the law of supply

Law of supply states that when prices are higher, producers produce more quantity

22

Describe a supply and demand surplus situation. What should occur to correct this?

Supplier are attempting to sell goods at too high a price - the quantity demanded is low. Therefore there is a surplus of goods. To correct - the suppliers will reduce price to sell surplus. Then demand will increase as price lowers. This will return things to equilibrium

23

Describe a supply and demand shortage situation. What should occur to correct this?

The price suppliers are asking is lower than it should be - therefore the qty demanded is higher - creating a shortage. To correct - suppliers will increase there price as demand is high. As the price increases, demand will go down. Both price and supply will trend towards equilibrium

24

How can the supply and demand curve be applied to labour markets?

As there is a surplus or shortage of workers wages will rise and fall. Surplus workers = lower wages. Shortage of workers = higher wages

25

According to economics, what is the firms main objective?

 

To maximize profit


 

26

What is economic cost for firms? Defined

Accounting Costs plus opportunity cost

27

What is Absolute Advantage?

It is the ability to produce the same good using fewer inputs than another producer

 

28

What is a production possibilities frontier?

 

A PPF shows all the combinations of goods that a country can produce given its productivity and supply of inputs

29

What is comparative advantage?

A country has a comparative advantage in producing goods for which it has the lowest opportunity cost

30

What is the quantity demanded?

 

The quantity that buyers are willing to and able to buy at a particular price

31

What is consumer Surplus?

It is the consumers gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price

32

What is Total Consumer Surplus?

It is a measurement of the area beneath the demand curve and above the price

33

What is a normal good?

A good for which demand increases when income increases

34

What is an inferior good?

A good for which demand decreases when income increases

35

What does it mean if two goods are substitutes?

It means that a decrease in the price of one good leads to a decrease in demand for the other good.

36

What does it mean if two goods are compliments?

It means that a decrease in the price of one good leads to an increase in the demand for the other good.

37

What is the supply curve?

It is a function that shows the quantity supplied at different prices

38

What is the quantity supplied?

It is the amount of a good that sellers are willing and able to sell at a particular price

 

39

What is a producer Surplus?

It is the producers gain from exchange, or the market price and the minimum price at which a producer would be willing to sell a particular quantity

40

What is Total producer Surplus?

Is the measurement of the area above the supply curve and below the price

 

41

What is a Surplus?

A situation in which the quantity supplied is greater than the quantity demanded

42

What is a shortage?

 

A situation in which the quantity demanded is greater than the quantity supplied

43

What is equilibrium price?

The price at which the quantity demanded is equal to the quantity supplied

44

What is equilibrium quantity?

 

The quantity at which the quantity demanded is equal to the quantity supplied

45

What is elasticity of demand?

Measures how responsive the quantity demanded is to a change in price; more response equals more elastic

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46

What factors make demand more elastic?

More substitutes = more competition

More time (the long run) - prices will adjust more over time

Specific Brands - part of a category - subs are easy to find

Luxuries - can be done without if required

Large part of budget - a significant part of budget we pay attention to

47

What factors make demand less elastic?

Fewer substitutes = less competition

Less time (short run) - in the short term price may be hard to change

Categories of product - The whole category - ie. Subs are difficult to find

Necessities - we need them - need to pay $

Small part of budget - so small we may not worry too much about changes in $

48

How is elasticity of demand calculated?

The percent change in quantity demanded / percent change in price

 

Note: Drop the negative sign

49

What do elasticity values mean?

Elasticity Less than 1 = Inelastic - Price and revenue move together

Elasticity more than 1 = elastic - Price and revenue move in opposite directions

Elasticity = 1 = Unit elastic - when price changes, revenue stays the same

 

Note: any negative sign is dropped

50

What is elasticity of supply?

Measures how responsive the quantity supplied is to a change in price

Inelastic - not very sensitive

Elastic - quite sensitive

51

What factors make supply less elastic?

Difficult to increase production at constant unit cost (eg. Raw material needed still)

Large share of market of inputs - price is set by many

Global supply - price change involves many factors

Less time (short run) - it is difficult to alter process quickly

52

What factors make supply more elastic?

It is easy to increase production at constant unit cost (assembly line possibly)

Small share of market for inputs - not much competition for inputs

Local supply - price change of inputs can be affected easier

Long run - (more time) - over time is easier to alter process

53

How is elasticity of supply calculated?

The percent change in quantity supplied / percent change in price

 

Note: drop any negative sign

 

54

What is it meant to be perfectly elastic or inelastic? For supply and demand?

 

For Supply = perfectly elastic is flat, perfectly inelastic is straight up.

For Demand = perfectly elastic is flat, perfectly inelastic demand is straight up

 

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55

What is the formula for calculating elasticity of demand?

Ed = (1/slope) x (p/q)

56

How do taxes effect consumer surplus and producer surplus?

They will reduce them.

 

The triangle will shrink - government will make money, but there will be DWL

57

How is the deadweight loss of a tax calculated?

It is the triangle to the right of the tax gain. Tax the size of the tax as height. Take the qty lost by the tax as width. Multiply and divide by 2

58

How is tax burden calculated?

It is the rectangle with cost of the tax as height and the qty under tax as qty.

59

What effect does a subsidy have on market price and equilibriums?

There will be an artificial rise in quantity produced, also, consumer surplus and producer surplus will increase.

60

 

How do you calculate how much a subsidy effects taxpayers?

It is the p value of the subsidy multiplied by the qty under the subsidy.

61

What is a price ceiling?

 

A maximum price allowed by law

62

What is deadweight loss?

The total of lost consumer and producer surplus when not all mutually profitable gains are exploited

63

What is a price floor?

A minimum price allowed by law

64

What is protectionism?

The economic policy of restraining trade through quotas, tariffs, or other regulations that burden foreign producers but not domestic producers

 

65

What is a Tariff?

It is a tax on imports

66

What is a trade quota?

A restriction on the quantity of goods that can be imported: imports greater than the quota amount are forbidden or heavily taxed.

67

What is the long run?

The time after all exit or entry has occurred

68

What is the short run?

The period before exit or entry can occur

69

What is Total Revenue? TR

It is price times quantity sold

 

TR = P x Q

70

What is total cost? TC

The cost of producing a given quantity of output

 

TC = Fixed Costs (FC) + Variable Costs (VC)

71

What are fixed costs? Examples?

Costs that do not vary with output

72

What are variable costs? Examples?

Costs do vary with output

73

What is Marginal Revenue? MR

The change in total revenue from selling an additional unit

 

MR = change in Total Cost(TC) / change in quantity (Q)

74

What is marginal cost? How is it depicted on a diagram?

The change in total cost from producing an additional unit

 

The change in total costs / change in quantity produced

 

It is depicted as a check mark in a diagram

75

What is average total cost? How is it depicted on a diagram?

The total cost divided by the total output

TC / Q

If the marginal cost is greater than the average then the ATC goes up

If the marginal cost is less than the average then the ATC goes down

 

It is depicted as in a U like shape running through the marginal cost

76

What is average cost?

The average cost of production is the cost per barrel, that is, the total cost of producing Q barrels divided by Q

 

AC = TC / Q

77

 

What is a natural monopoly?

Exists when a single firm can supply the entire market at a lower cost than two or more firms.

78

In  a perfectly competitive market, how is the amount to produce determined?

The amount produced should be an attempt to meet equilibrium price and marginal cost.

79

At What point is profit maximized? How is profit calculated on a diagram?

If MR(Marginal Revenue) > MC(Marginal Cost) you should produce more to maximize profit

If MR < MC then you should produce less

When MR = MC you maximize profits

 

(picture MC as a ball sliding up and down the MC check mark. The goal of the ball is to be equal to MR (which is P and AR). If it is below the line...slide up....if it is above the line...make less)

80

What is a shutdown point?

Where marginal cost is below average variable cost

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81

What is Average Revenue?

Price x quantity / quantity

 

Note: Price is determined by supply and demand on the market. Ie...there is a diagram for q* representing the individual firm. And there is a diagram for Q* representing the greater market.

82

What is a dominant strategy?

Is a strategy that has a higher payoff than any other strategy no matter what the other player does

83

What is the Nash equilibrium?

 

A situation such that no player has an incentive to change strategy unilaterally

84

How do the different players behave in the Nash equilibrium?

The top player goes first, then the left if not defined. If defined then read the question. 

85

How is a Nash equilibrium depicted?

In a matrix. The equilibrium is where both players have a positive outcome

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86

Can there be two Nash equilibriums?

Yes there can be

87

What is a focal point?

Defined by Thomas Shelley: Strategy of Conflict

A solution people choose because it seems natural or salient to them. Ex. Eiffel tower at noon.

 

88

What is private cost?

The cost paid by the consumer to the producer

89

What is external cost?

The cost paid by people other than the consumer or the producer trading in the market

90

What is social cost?

The cost to everyone: the private cost plus the external cost

91

What are externalities?

 

 

The external costs or external benefits, that is, costs or benefits, respectively, that fall on bystanders

92

How are externalities depicted on a diagram?

There is a MSB - Marginal Social Benefit - for positive externalities

There is a MSC - Marginal social cost - for negative externalities

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93

What is Social Surplus?

The consumer surplus plus producer surplus plus everyone else's surplus

94

What is efficient equilibrium?

The price and quantity that maximizes social surplus

95

What is the efficient quantity?

The social quantity that maximizes social surplus

96

What is a Pigouvian tax?

A tax on a good with external costs

97

What is a Pigouvian Subsidy?

A subsidy on a good with external benefits

 

98

What is rational ignorance? Who can this favour?

Occurs when the benefits of being informed are less than the costs of being informed.

 

It can favour special interest groups who are rationally informed.

99

What is the Median Voter theorem?

It says that when voters vote for the policy that is closest to their ideal point on a line, then the ideal point of median voter will beat any other policy in a majority rule election

100

What is a Deontological ethical approach?

An approach where the morality of an action is based on pre-existing rules, the action, as well as its consequences matter.

101

What is a Consequentialist ethical approach?

Only, or mainly, the consequences of action matter.

102

What is the Harm principle? Who defined it?

The idea that the only purpose for which power can be rightfully exercised over any member of a civilized community against his will, is to prevent harm to others.

 

John Stuart Mill, on liberty (1859)

 

AKA: as long as you don't harm others, do what you want

103

Who wrote the righteous mind? What did the research demonstrate? What are possible reasons for this?

Jonathan Haidt. That disgust is prominent in moral reasoning

 

The idea of natural law, human goodness is endowed...and psychology

104

Who wrote the good rebel? What does it postulate?

Louis Groake. That freedom only happens after morality and goodness are achieved.

105

How does freedom affect the free market?

 

Free markets only work when individuals within them are rational and good. Otherwise greed, dishonesty prevail

 

Adam Smith and rational self-interest, not greed

106

What is a key economic assumption regarding what is good? What does this assumption beg?

 

That economic efficiency is good. It begs the question, what about equity?

107

What are Rawlsian Ethics?

That the government should, without violation of basic rights, maximize the benefits going to the most disadvantaged groups

108

What is Nozick's entitlement theory?

If people engage in free and fair exchange, without violating others' rights, then this perfectly fine. Ensuing income inequality does not matter.

109

Who used economics to study public choice and behaviour?

James Buchanan, 1986

110

What are the public choice goals of firms, politicians, bureaucrats, and voters?

Firms: maximize profits

 

Politicians: Maximize votes

 

Bureaucrats: maximize their budget

 

Voters: max public service while minimizing taxes

 

111

What is political equilibrium?

Occurs when the goals of voters politicians, firms and bureaucrats balance

112

What is allocative efficiency?

The point on the PPF that attains productive efficiency, while also reflecting

society’s preferences

113

 

Which of the following describes the tendency of governments to underprovide or

overprovide goods and services?

Negative externalities