Principles of Economics

Question 1

Says Law

Answer 1

Supply creates its own demand

Question 2

Elasticity of Demand

Answer 2

How sensitive market is to change in price

Ed = (% change Q)/ (% change P)
Ed = (dQ)/(dP) x (P/Q)

Question 3

Law of Demand

Answer 3

Price and quantity are related inversely

Question 4

Demand shifters

Answer 4

Consumer income, preferences/tastes, price substitutes/complements, expectations, # of buyers

Question 5

Supply shifters

Answer 5

Input prices, technology, prices of related goods, expectations, # of sellers

Question 6

Perfectly competitive markets

Answer 6

Large # of sellers and buyers trading identical goods

Firms and consumers are price takers

Question 7

Normal good

Answer 7

Ed > 0, consumption preferences increase when wealthier

Question 8

Inferior good

Answer 8

Ed < 0, consumption preferences decrease when income goes down

Question 9

Substitutes

Answer 9

If one price goes up, the other product will be consumed more; interchangeable goods

Question 10

Complements

Answer 10

If price of one product goes up, demand for the other goes down

Question 11

Demand elasticity short/long run

Answer 11

Short run: demand for oil is inelastic

Long run: people switch to fuel-efficient vehicles, making demand become more elastic

Question 12

Price elasticity of supply short/long run

Answer 12

Short run: firms cannot adjust quickly to production (inelastic)

Long run: firms invest in capital and new firms enter/exit the market (elastic)

Question 13

Voting systems (4 characteristics of Arrow’s Impossibility theorem)

Answer 13

1. Independent irrelevant alteration
2. Pareto efficient
3. Unrestricted domain
4. Non-dictatorship

Question 14

Consumer surplus

Answer 14

CS = ∑Vi-P
Difference between what consumers are willing to pay and what they pay

Question 15

Producer surplus

Answer 15

PS = ∑P - Cj
Difference between the market price and the minimum price producers accept

Question 16

Total Welfare

Answer 16

TW = CS + PS
TW = ∑Vi- Cj

Question 17

Price Ceilings

Answer 17

Set a maximum price, preventing transactions between agents at a higher price

Question 18

Price floors

Answer 18

Set a minimum price, providing a support to suppliers by guaranteeing a price

Question 19

Deadweight Loss (DWL)

Answer 19

Loss in welfare due to market distortions (taxes, subsidies, price controls); create wedge between prices and reduce trade and surplus

Question 20

First Welfare Theorem

Answer 20

With complete markets, the competitive equilibrium is pareto efficient

2 assumptions: no externalities, no market power

Question 21

Profits

Answer 21

Profits = TR - TC

Question 22

Profit maximizing condition

Answer 22

MR= MC

Question 23

Assumptions of perfectly competitive markets

Answer 23

• identical products
• many participants (sellers & buyers)
• free entry/exit, firms can leave market if it is no longer profitable
• no market power

Question 24

Production Function

Answer 24

Q = AK ^(α)L^(1−α)

0<a<1

Question 25

Marginal Product of Labor

Answer 25

MPL = change Q/ change L

Question 26

Diminishing marginal returns

Answer 26

Beyond some point, additional units oof a variable input yield smaller increments of output

Question 27

Total cost

Answer 27

TC = Fixed cost + variable cost

Question 28

Average costs

Answer 28

ATC = TC/Q AVC = VC/Q

Question 29

Marginal cost

Answer 29

The increase in total cost from producing one more unit of output MC = change TCE/ change Q

Question 30

Monopoly

Answer 30

Single seller of a product with no substitutes; barriers to entry

Question 31

Sources of monopoly power

Answer 31

1. Exclusive control of a resource 2. Government regulation (ex. patents, licenses) 3. Cost advantages or unique production processes

Question 32

Price discrimination

Answer 32

Attempts to charge different prices to different consumers through perfect discrimination, versioning or quantity discounts, and group-based

Question 33

GDP

Answer 33

Market value of all final goods and services produced within a country in a given period

Question 34

GDP formula

Answer 34

GDP = C + I + G + (X-M)

Question 35

Nominal GDP

Answer 35

Increases can result solely from higher prices even if production is unchanged

Question 36

Real GDP

Answer 36

Values current production at fixed (base-year) prices to isolate true output changes

Question 37

GDP deflator

Answer 37

GDP deflator = (nominal GDP/ real GDP) X 100 Isolates price changes by removing the effect of production of changes

Question 38

Inflation rate

Answer 38

Inflation = [(current deflator - previous deflator)/ previous deflator] X 100

Question 39

Consumer price index

Answer 39

Measure average price changes for good that consumers actually buy Inflation = (CPI new - CPI old)/ CPI old X 100

Question 40

Nominal interest rate

Answer 40

The percentage increase in number of dollars

Question 41

Real interest rate

Answer 41

The nominal rate adjusted for inflation

Question 42

Fischer Euation

Answer 42

Real = nominal - inflation r = i - π

Question 43

Taylor rule

Answer 43

it = r* + π t + 1/2 (π t - π *) + 1/2 (yt - y*)

Question 44

Determinants of productivity

Answer 44

Physical Capital per worker (K) Natural Resources per Worker (N) Human Capital per worker (H) Technology (A)

Question 45

Catch-up effect

Answer 45

Countries/economies starting at lower levels of capital and income can grow more quickly than rich counterparts once they adopt existing technologies